After some rough starts, Mexico’s energy future might be headed in the right direction. Mexico’s upcoming deepwater round and the state owned oil firm Pemex’s upcoming joint ventures were up for discussion at a recent event held by Rice University’s Baker Institute. Melissa Sustaita reports.
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Pablo Medina. Images from OE Staff. |
Expectations are high for Mexico’s first deepwater round to be held on 5 December. The next auction could see every block awarded thanks to Mexico’s efforts to improve its national bid rounds, according to a recent panel discussion on Mexico’s Energy Reform at Rice University’s Baker Institute.
“The government has done a good job overall of understanding what they've done wrong in the past and tried to correct those issues in subsequent phases,” says Pablo Medina, Latin America upstream research analyst, Wood Mackenzie.
Mexico’s disappointing Round One, phase one, held in July 2015, saw only two of 14 shallow water areas awarded. Much criticism of the round centered on Mexico keeping the minimum production share requirements a secret until the bidding took place.
Medina explains that following phase one’s results, the Mexican government realized that by not disclosing enough information and setting minimums too high, companies were deterred from bidding. However, changes were made, so that oil and gas companies would participate in upcoming bid rounds.
“It is very likely that every single block in deepwater could be awarded,” Medina says.
Medina says that every deepwater block has received at least two industry nominations; royalties are low, meaning that if a discovery were made, they could be potentially interesting; and companies that commit to Mexico’s deepwater blocks can enter the areas to try to reinterpret seismic without committing to drill a well.
Presenting the legal perspective, Luis Moreno, a partner at Haynes and Boone LLP, said that there was a lot of skepticism in the beginning due to the lack of experience by the Mexican authorities.
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Luis Moreno. |
“The question that most rounded our minds was whether the [Mexican] government was going to be able, or not, to offer transparency to the process itself, and offer investors the comfort in them knowing no corruption was going to play,” Moreno says.
Moreno applauds the government's efforts in providing transparency, which he feels is critical for the rounds to be successful; and for listening to oil and gas companies and investors and try to improve the process.
The panel also discussed joint operating agreements with Mexico’s state oil firm Pemex, in particular for the farm-out of the Trion deepwater field. Currently, there are 10 companies that have been pre-qualified for the Trion joint venture with Pemex, which is the company’s first-ever farm-out in its history.
Farm-outs and joint venture projects have been viewed as a key to boosting Mexico’s declining production and bolstering Pemex’s financial health. Whereas exploration could take 7-10 years to begin production, farm-outs could bring about production quicker in at least 5 years.
According to the farm-out’s terms, Pemex will have an automatic 45% in the joint operating agreement (JOA). The designated operator will have at least 30% and a maximum 45%; the second operator will have a minimum 10% and maximum of 25%; and the non-operator will have a maximum participation of 10%.
Medina said that if the Trion JOA does not change, Pemex will be lucky to have one bid, due to these conditions.
Moreno agrees, highlighting Pemex’s lack of deepwater experience and technical capabilities.
“If we want all of the potential that is in the Gulf of Mexico to be really exploited to its full extent and become the energy monster that we want to, [the government] needs to be humble and lower all of those requirements,” Moreno says. “Pemex has no money and Pemex in deepwater at least, has very little capacity.”
“What I've heard is that the JOA will be improved,” Moreno says. “JOAs with Pemex will as well evolve, develop, and improve as we have seen those in the bids themselves, along with time.”
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