Pushing forward

Mexico’s energy reform has weathered both the storms of public scrutiny as well as the bad luck of launching during a global oil price downturn. Despite the challenges, Mexico has seen some modest success, but will it continue? Audrey Leon reports.

Pemex's Abkatun A Permanente Platform. Image: Pemex's Flickr.

The first real test of Mexico’s energy reform came in 2016 when the country carried out its first deepwater round, as well as selecting state-owned oil company Pemex’s first farm-out partner. With a successful deepwater bid round under its belt, the country is poised for future growth, but many outside factors could influence where the industry goes from here.

In 2013, Mexico’s President Enrique Peña Nieto and his political party PRI (Institutional Revolutionary Party) presided over an ambitious plan, teaming up with political rivals, including the center-right PAN (National Action Party), to secure enough votes in the country’s legislature to open Mexico’s oil and gas industry to private and foreign investment for the first time in seven decades.

In 2015, Mexican officials learned much from a disappointing Round One (in which only two of 14 areas were awarded), choosing to incorporate feedback from the oil and gas industry in order to make future rounds more attractive.

“The Mexican hydrocarbon authorities managed to tailor terms to what interested companies deemed encouraging, such as the minimum working program commitment and the size of the blocks,” says Adrian Lara, GlobalData’s senior upstream analyst covering the Americas.

“The exploratory terms offered are attractive based on the relatively large size of the areas and on their minimum work program,” he continues. “The exploration contract establishes the working program on a system of committed points that make it possible for the operator not to drill a single well in the first four-year exploration period, if these points are accumulated in other ways such as seismic acquisition.”

Local content

Last March, in preparation for December 2016’s deepwater round (1.4), Mexico’s Ministry of Economy lowered the local content requirements for deepwater leases. The rule, announced in Mexico’s official journal of the federation, requires oil and gas companies to use 8% local content in deep and ultra-deep waters by 2025.
December’s long-awaited Round 1.4 was broadcast live over the internet (like the previous three), reflecting the country’s desire for transparency. The round was largely a success with eight of 10 blocks awarded. The round offered four blocks in the much-coveted Perdido Fold Belt, covering 8218sq km, about 320km south of Texas, and 250km from Matamoros, Mexico.

The round’s success, in a way, also proved that Mexico’s regulators ultimately made the right call on their bid round strategy.
“To some extent [the success] allows the Mexican authorities [to believe] that they were right to be a bit slower than others had expected in auctioning these areas because they had to learn a little bit first,” says Francisco J. Monaldi, a fellow in Latin American Energy Policy for the Baker Institute at Rice University. “They significantly learned and adopted recommendations offered by the companies. Overall, they should be, and are, very happy.”

Perdido

The Perdido Fold Belt is of obvious interest to deepwater players, as it has been developed and studied from the US side of the transboundary line, and currently supermajor Shell operates there. In the 2016 Mexico Offshore Supplement, we reported that the deepwater Gulf of Mexico basin, including the Perdido Fold Belt, contains the greatest amount of undiscovered resources with of approximately 27.1 billion boe.

The big surprise of the ceremony was China National Offshore Oil Corp. (CNOOC) winning two blocks in the Perdido area; Blocks 1 and 4. Block 1 covers 1678sq km in 2515m water depth, and is estimated to hold 458 MMboe of super light oil resource. Block 4 covers 1877sq km in 1264m water depth, and is estimated to hold 408 MMboe resource.
While CNOOC has deepwater experience, its entry into Mexico’s deepwater sector has interesting geopolitical implications, Monaldi says. “CNOOC is geopolitically and strategically very interesting for the Mexicans,” he says. “After Donald Trump’s presidential election victory (in the US), the Mexican government is trying to improve its relationship with China.

“The relationship (with China) was relatively bad as [Mexico] saw them as a competitor. I do think that now the priorities have changed. And [Mexico] would like to hedge a bit, now that the US is opening a new era of not so friendly relations with Mexico,” he says.

Other winners in the Perdido Fold Belt were a consortium of Total and ExxonMobil (Block 2), and a consortium of Chevron, Pemex and Inpex (Block 3).

Six blocks in the Salina basin, in the southeastern Gulf of Mexico, were also offered during the deepwater round. A consortium of Statoil, BP and Total won Blocks 1 and 3, while Blocks 2 and 6 received no bids. A consortium comprising Petronas subsidiary PC Carigali and Sierra Oil & Gas took Block 4, while a consortium of Murphy Oil, Ophir, and PC Carigali won Block 5.

Farm-out first

In addition to the deepwater round winners being chosen in December, Pemex’s first-ever farm-out partner, BHP Billiton, was also chosen during a live ceremony for the deepwater Trion field. Following the deepwater round, Juan Carlos Zepeda, President Commissioner for Mexico’s National Hydrocarbons Commission (CNH), said that production could start at Trion by 2023.

Pemex’s farm-out process is a bit unusual. To gain a partner on a field, the company must go through a two-step process, says Jose Valera, Houston-based partner and co-head of law firm Mayer Brown’s oil and gas practice. Due to Mexico’s hydrocarbons law, Pemex must convert the assigned areas (assigned in Round Zero) into a contract, and select a partner through a competitive bid process, whereby regulators will choose the winner. “This is unusual and uncommon,” Valera says. “Typically, even NOCs (national oil companies) are able to pick their own partners when an area is adjudicated to them, but the [Hydrocarbons] law is what it is.”

Last November, Pemex rolled out its 2017-2021 business plan, where CEO José Antonio González Anaya presented the company’s aggressive farm-out plan, which includes five more projects for 2017, including two offshore: the shallow water complexes Ayín-Batsil and Ayatsil-Tekel-Utsil, both within the Bay of Campeche off the states of Tabasco and Veracruz.

Monaldi calls the farm-out plan, “ambitious.” “Clearly, [González] has a mandate,” he says. “My perception is that he wanted to focus the cash flow of the company in the most profitable areas where Pemex already has production.” Monaldi notes that in Round Zero, Pemex kept a lot of areas for itself, and if the firm doesn’t invest in them, then it must return the fields to the government. “It’s in [Pemex’s] best interest to partner, rather than wait,” he adds.

González has a reason to embrace an agressive farm-out strategy. President Peña Nieto replaced his predecessor Emilio Lozoya Austin in February 2016 for not moving fast enough to complete the partnerships necessary to help curb Pemex’s declining production numbers.

And, Pemex needs these farm-outs to be successful. “Clearly Pemex needs partners, not just for exploration and production, but for other assets, such as refinery assets, etc.,” Valera adds. “It behooves them to be a good company to work with. The financial plan of the company to reduce expenditures hinges on passing on costs and capital investments to partners. [Pemex] needs to be good a partner.”

Political implications

Peña Nieto

President Peña Nieto staked his legacy on the success of the country’s energy reform, but while it was a remarkable success in getting political adversaries to come together to pass changes to Mexico’s constitution, the speed of the roll out coupled with some missteps may tarnish that reputation.
The public’s perception of the energy reform is not overwhelming positive, especially due to the government roll-out of higher domestic gasoline prices in early January this year, which led to riots and protests.

“The recent riots and protests because of the gasoline price, will significantly damage the reputation of the energy reform,” Monaldi says. “Because for consumers, all this is abstract. The other thing they see is that production continues to decline. There is frustration that Mexico is soon to have a negative balance of payment in liquid hydrocarbons.” He adds: “For the wider public, this is not going to be a winning issue.”

And for those reasons, Monaldi believes it is unlikely Peña Nieto’s PRI will win the next presidential election in 2018. Currently, leftist candidate Andrés Manuel López Obrador (of the MORENA party) is ahead in polls in the country. López Obrador, a former mayor of Mexico City, first ran for president in 2006, losing to PAN candidate Felipe Calderón. He then ran again in 2012, losing to Peña Nieto. When he runs again in 2018, López Obrador will face former president Calderón’s wife Margarita Zavala (PAN), current Mexico City Mayor Miguel Angel Mancera (PRD), and Peña Nieto’s current Secretary of the Interior Miguel Angel Osorio Chong (PRI).

In a 31 January poll published by El Financiero, López Obrador polled 6% over Zavala with 33% of the polled voters saying if the election was held then, they would vote for the leftist candidate. And any failure related to implementation of the energy reform could give López Obrador a political flag, Monaldi says. And if he wins, the leftist candidate could decide to appoint officials who will slow future efforts related to the reform.

So what does the price of gasoline have to do with upstream? Monaldi says the gasoline prices not only creates tension with the general public with respect to the reform, but it affects Pemex in the end.

“Depending on how things play out, it might have some negative implications (i.e. people asking for heads to roll),” Monaldi says. “On the other hand, it is important that they do the downstream opening, even for upstream, because if Pemex continues to be the only supplier of refined products in the market, Pemex cannot use more of its cash flow to roll into upstream. That could create bigger cash problems, and produce more farm-outs. It’s a problem if Pemex is in bad shape.”

The future

We’re starting to see some movement from winners of the second shallow water round. In September 2015, during Round 1.2, Italian explorer Eni won Block 1, which includes the Amoca, Miztón and Tecoalli oil fields. Last year, CNH approved Eni’s plans to drill the Amoca 2 well, which was scheduled to begin in December and end in March 2017.
“These three fields (Amoca, Mitzon and Teocalli) were highly valued given their nearness to shore, the shallow depth and the amount of estimated resources,” Lara says, adding that Eni is also interested in participating in the upcoming round 2.1, which is set for 19 June.

Round 2.1 will offer 15 shallow water areas in the Gulf of Mexico in Tampico-Misantla, Veracruz and Cuencas del Sureste Basins.