Houston, March 21, 2017 MEI Report No. 840 HOUSTON ROADSHOW FOR MEXICO’S ROUND TWO Many process improvements M EXICO’S ROUND ONE OF HYDROCARBON LEASES was a success as measured by the number and diversity of oil companies and investors from around the world that qualified as bidders. In four auctions in 2015‐16, 39 contracts were awarded. Of the 55 areas that were offered in the auctions, 71% are now under contract. Speaking to an audience of some 200 persons at the new Hyatt Regency Galleria, three government presenters from Mexico City offered fresh ideas about how to conduct Mexico’s upstream oil business. The speakers also clarified nagging questions that other federal officials had not been able to answer with confidence. Of these, the most far‐reaching concerned the ability of CNH contractors to freely dispose of their share of oil or gas, as by direct, bilateral negotiations with potential buyers in Mexico or direct sales to foreign buyers. Of the fresh ideas, the most unexpected concerned the Hydrocarbon Information Center’s new policy that would grant a license to interested parties to access a century of subsurface data that, previously, had been classified by Pemex as “Confidential.” The initial speaker, Juan Carlos Zepeda, CNH’s founding president from 2009, opened the program by inviting the audience to raise questions as he went through his presentation. In this report, we examine the process improvements that were described, noting also where there are investor concerns and disincentives. Table 1 compares 28 features of the Gulf of Mexico oil regimes of the United States and Mexico, noting correspondence in just a third of those listed. MEXICO ENERGY INTELLIGENCE® ISSN 2380-6400
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Houston, March 21, 2017 MEI Report No. 840 MEXICO ENERGY INTELLIGENCE® ISSN 2380-6400
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Houston, March 21, 2017 MEI Report No. 840 HOUSTON ROADSHOW FOR MEXICO’S ROUND TWO Many process improvements INTRODUCTION A COMPARISON OF A LIST OF THE FEATURES of two of the three hydrocarbon regimes in the Gulf of Mexico (Table 1) shows that the process improvements that Mexico’s Hydrocarbon Commission (CNH) is proposing for Round 2 of lease auctions brings the two regimes in closer alignment; yet, of 28 features, only nine of these match each other. The others, amounting to 68%, do not. In round numbers, Mexico’s hydrocarbon regime is a third like that of the U.S., and two‐thirds different. Not all those mismatches of regime features are of equal importance. Of these, the most far reaching is the existence of Pemex as an unincorporated, state entity that operates as an oil company. Pemex is important for Mexico’s hydrocarbon regime for diverse reasons: 1) Most of the data that is in the hands of the government was generated by Pemex. 2) Pemex’s technical staff has four decades of experience in the exploration and development of reservoirs in the Mexican portion of the Gulf of Mexico. There is an important asymmetry in relation to technical and operational knowledge between Pemex and (other) government agencies. 3) In Round Zero in 2015, the government assigned Pemex most of the acreage and 80+% of 2P reserves. 4) Almost all of existing infrastructure in the Mexican Gulf was installed under a Pemex contract. 5) The Mexican oilfield service industry is oriented to serving Pemex. 6) Much of the workforce available in Mexico to new‐to‐market oil and service companies consists of former Pemex employees. 7) A strong, nationalist narrative supports Pemex’s iconic status in Mexico’s political culture. The government’s efforts, led by CNH, to entice investor interest in lease acreage in the Mexican portion of the Gulf of Mexico amount to inviting outsiders to crash Pemex’s party. The government tells the story as one of new investment opportunities; but there is a segment of the Mexican population that wants things to continue to be run by Pemex. This segment does not trust the wisdom of the government’s overturning of a half‐century of oil policy. Fully conscious of this counter‐current, the government has moved cautiously, waiting two years (and after three bid rounds) before offering acreage of potential interest to major MEXICO ENERGY INTELLIGENCE® ISSN 2380-6400
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Houston, March 21, 2017 MEI Report No. 840 There are not yet presidenciables among independent candidates, and observers like political scientist Samuel Schmidt believe that independents would have little or no chance to win a general election. CONCLUSIONS T HE REFURBISHED VISION OF ROUND TWO, as described on March 9 by the speakers from CNH and SHCP, is an improvement over the earlier, narrower vision. It is commendable that CNH wants to make Mexico “predictable” (or, as we put it, “boring”). Measures such as setting a regular schedule for the types of lease auctions, standardizing block sizes, including in each auction the complete geological column and making Pemex’s archive of subsurface data widely available will strengthen investor confidence. There’s a lot more of Mexico’s hydrocarbon regime that’s outside the range of predictability, however, such as the biddable variable, the royalty rates and the selection and design of polygonal blocks. And, as seen in the items market in red in Table 1, there are disincentives built into the Mexican hydrocarbon regime, such as the weirdness in the configuration of the polygon blocks and inability of a CNH contractor to negotiate a farmout agreement for a portion of its block. The fixed, outer term limit in a CNH contract reflects the Peña administration’s ideological accommodation to a popular, dark narrative about the legal figure of oil concession. A concession would allow the leaseholder’s rights to continue to the economic life of the field and would motivate the CNH contractor to continue to invest in new technology to allow for the recovery of an additional barrel.9 It is this kind of process improvement that the next administration in Mexico will have the opportunity to address. Meanwhile, the states of uncertainty in U.S.‐Mexico relations and in Mexico’s presidential cycle may blur the perception of CNH’s enhanced bidding framework. George Baker Publisher About this report This report drew on the presentations at the roadshow on March 9, and on off‐line conversations with attendees and industry sources afterwards. Sr. Limpiador suggested including a table to compare features, with color coding to show the significance of topics. He reviewed the text and offered keen edits regarding the language and topics of Table 1. 9
Wall Street Journal, March 21, 2017. “Shell Deploys Technology to Drive Down Costs of Deep Water Drilling”. Shell plans to apply new technology to old wells, a commitment motivated by the expectation of having its leases continue throughout the commercial life of a field.
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Houston, March 21, 2017 MEI Report No. 840 MEXICO ENERGY INTELLIGENCE® ISSN 2380-6400
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