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2016


“Round One in general has been extremely successful, and it sends the message that Mexico is truly a ripe environment for investment” Edgar René Rangel Germán, Former Commissioner of CNH


Mexico is on its way to becoming one of the world’s most attractive upstream investment destinations as a result of the opening of the hydrocarbons market through the Energy Reform approved in 2013. Over the past year, the first three phases of Round One have overseen the allocation of 30 contractual areas, welcoming into the market many foreign players in addition to detonating a national onshore oil industry, a success achieved despite the low oil prices. At the same time, PEMEX has been transforming its structure and strategy to adjust to both of these new situations, undergoing everything from a change in Director General to a budget cut, all in the context of becoming a productive enterprise of the state.

As the Mexican oil and gas industry changes, PEMEX, private operators, suppliers, and service providers find themselves at a turning point, where success will depend on their ability to adapt to the workings and needs of an entirely new market, which is still being defined today. Mexico Oil & Gas Review 2016 provides readers with a in-depth understanding of the new industry settings, which are key to succeeding in the new environment and leveraging the multitude of emerging opportunities. The topics presented in this year’s edition are those that matter most to the key stakeholders driving the evolution of the industry from a political, regulatory, business, and technological perspective, making Mexico Oil & Gas Review 2016 not only an essential read, but also the ultimate industry reference.


ALL RIGHTS RESERVED Š Toguna, S. de R.L. de C.V., 2016. This annual publication contains material protected under International, United States and Mexican Laws and international Treaties. Any unauthorized reprint or use of this material is prohibited. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system without express written permission from Toguna S.A. de C.V. Mexico Oil & Gas Review is a registered trademark. The publisher has made all reasonable efforts to provide accurate information, and the information contained in this publication is derived from sources believed to be true and accurate. However, the information in this publication should not be considered to be complete or definitive, and may contain inaccuracies or typographical errors. The publisher accepts no responsibility regarding the accuracy of information and use of such information is at your own risk. The publisher will not be liable to any party for any direct, indirect, special or other consequential damages arising out of any use of information in this publication. The publisher provides no representations or warranties, express or implied, including any implied warranties of fitness for a particular purpose, merchantability or otherwise in relation to any information provided by the publisher in this publication.

ISBN: 978-0-9968026-2-8


TABLE OF CONTENTS

1

STATE OF THE INDUSTRY

8

ONSHORE & UNCONVENTIONAL RESOURCES

2

ROUND ONE

9

INDUSTRIAL SAFETY & ENVIRONMENTAL PERFORMANCE

3

EXPLORATION

4

DRILLING & WELL SERVICES

5

DEVELOPMENT & PRODUCTION

12

REFINING & PETROCHEMICALS

6

SHALLOW WATER

13

DOING BUSINESS & HUMAN CAPITAL

7

DEEPWATER

14

FUTURE OUTLOOK

10 11

TECHNOLOGY & NATIONAL CONTENT

NATURAL GAS & PIPELINES


1

STATE OF THE INDUSTRY

The past year marked the beginning of a new era for the Mexican oil and gas industry, initiated by the first licensing round that allowed private operators to enter Mexico. Over the course of the past twelve months, three licensing rounds have been completed, attracting the private investment, expertise, and technology that Mexico needs to reverse its 13-year decline in oil production. While administrating Round One, CNH has transformed itself into an effective industry regulator, creating a strong foundation for the countless challenges it is destined to face in the coming years. PEMEX has found itself in a perfect storm of low oil prices, a new operating framework, and the organizational transformation to become a productive enterprise of the state. After a change in leadership, the restructured national oil company is gearing up to play a central role in the competitive market that has been created through the Energy Reform.

This chapter presents analysis of the events, strategies, and ambitions that defined the development of the Mexican oil and gas industry through the eyes of Mexico’s political leaders, regulators, and industry executives. Collectively, these diverse perspectives offer a comprehensive insight into where the Mexican industry stands today, and where it will be heading in the months and years ahead.

5


| CHAPTER 1: STATE OF THE INDUSTRY 8

VIEW FROM THE TOP: Pedro Joaquín Coldwell, Minister of Energy

10

ANALYSIS: The Year in Review

13

IN MEMORIAM: Edgar Rangel Germán

15

VIEW FROM THE TOP: Edgar Rangel Germán, CNH

16

VIEW FROM THE TOP: Nestor Martínez, CNH

18

VIEW FROM THE TOP: Guillermo García Alcocer, Ministry of Energy

19

EXPERT INSIGHT: Pablo Medina, Wood Mackenzie

20

INSIGHT: Óscar González, ARHIP

21 INSIGHT: Mauricio Herrera Madariaga, Mexican Petroleum Fund 22

VIEW FROM THE TOP: Salvador Ugalde, Ministry of Finance

24

VIEW FROM THE TOP: José Antonio González Anaya, PEMEX

26

VIEW FROM THE TOP: Juan Pablo Newman, PEMEX

27

ANALYSIS: A Closer Look at PEMEX's 2015 Financial Performance

30

VIEW FROM THE TOP: David Enríquez, Goodrich, Riquelme y Asociados

31

ANALYSIS: Update of the Pension Scheme

32

VIEW FROM THE TOP: Gustavo Hernández, PEMEX E&P

35

VIEW FROM THE TOP: Raymundo Piñones, AMEXHI

37

VIEW FROM THE TOP: Alberto de la Fuente, Shell Mexico

38

VIEW FROM THE TOP: Ernesto Marcos Giacoman, AMESPAC

40

VIEW FROM THE TOP: Wallace Pescarini, Schlumberger

42

EXPERT OPINION: Tim Samples, University of Georgia

43

VIEW FROM THE TOP: Jesús Rodríguez Dávalos, Rodríguez Dávalos Abogados

7


| VIEW FROM THE TOP

A FRAMEWORK THAT ENDURES TURBULENT TIMES PEDRO JOAQUÍN COLDWELL Ministry of Energy

8

Q: What is the short and medium-term impact of the drop

satisfied with the results. Even during the current national

of the oil price on Mexico’s energy policy decision-making

and international oil market volatility, many national and

at this time, and how will this impact the implementation

foreign companies, alone or in partnerships, have shown

of the Energy Reform?

interest and have participated in the bidding proceedings,

A: While this new price scenario represents a challenge

confirming that blocks and fields offered in Mexico are

for Mexico, it should be noted that the Energy Reform has

attractive and competitive. As a result of these process, so

granted the country new tools and mechanisms to adapt

far we have awarded 30 contracts to 30 companies from

to the current circumstances and also take advantage

seven countries, including 20 Mexican players. The winning

of what these conditions present throughout the entire

proposals guarantee excellent conditions for Mexico, with

energy value chain. As a result of Energy Reform, Mexico

high profit margins above 70%.

has taken some important steps toward positioning itself as one of the most attractive countries to invest in exploration

Q: Which steps must be taken to ensure that PEMEX

and production activities. There are companies capable of

successfully

takings risks even in these economic conditions. Currently,

productive enterprise of the state that has the financial

these companies have significant financial strength and

and human resource needed to optimize value creation?

are the ones we are looking to attract with Mexico’s

A:

exploration and production bidding rounds. The most

accelerating its transformation to take better advantage

important thing for companies in this situation is to have a

of the opportunities brought by the Energy Reform, taking

solid institutional and regulatory framework, transparency,

environmental sustainability into account, and at the same

and contractual conditions that can provide legal certainty

time, achieving financial and production improvements

to investors in the long term. There are also attractive

during an international dip in oil prices. Efficiency and

business opportunities in other hydrocarbon areas, such

profitability are a priority in all the procedures in order to

as the transportation and storage of natural gas, pipeline

achieve international competitiveness. Therefore, PEMEX

construction, industrial transformation, and importation

is adjusting its cost structure, looking into its expenses

and commercialization of fuels, among others.

program, and strengthening its investment procedures

PEMEX

completes

is

facing

its

two

transformation

fundamental

into

a

challenges:

according to the new schemes of association and private The fall in oil prices requires us to make moderate

sector investment brought about by the Energy Reform.

adjustments to ensure public finances remain strong, but it also presents us with an opportunity to make this juncture

Q: What are the respective roles that PEMEX and private

a catalyst for the full implementation of our Energy Reform

operators should play in Mexico’s oil and gas industry?

and a new age for PEMEX as a more efficient productive

A: Mexico’s Energy Reform established a whole new legal

enterprise of the state.

and institutional framework, setting the basis for the development of open and competitive markets throughout

Q: What is your assessment of the success of Round

the energy sector. In the hydrocarbons sector, companies

One to date, and what are the main lessons learned and

can participate in upstream activities through competitive

actions taken to continuously improve the framework for

bidding rounds or in partnerships with PEMEX. In the natural

Mexico’s licensing rounds?

gas sector, companies can participate in the expansion of

A: The three tenders of Round One have been recognized

the natural gas network through competitive processes for

by experts around the world, as these have relied on the

the development of strategic or social interest pipelines,

highest transparency standards. These proceedings were

as well as participating in the development of merchant

public, transparent, open to national and international

pipelines at their own cost and risk when they deem supply

participation, and streamed live. We are thoroughly

and demand conditions favorable. As for the midstream


and downstream sectors, companies can participate in

in case the recommendations favor the establishment of

industrial transformation activities, transportation and

fair, competitive platforms. Some companies have emitted

storage, and commercialization and retail activities by

comments about R1-L04 which are being considered.

obtaining the corresponding permits. In terms of access

The Mexican government is committed to providing new

to infrastructure, it is worth highlighting that the new legal

and existing companies with competitive investment

framework establishes open access principles and the use

opportunities while guaranteeing maximum operational

of competitive service fees, established by the CRE.

standards and public safety.

The Mexican Energy Reform started from the premise that

Q: What should be the respective contributions of PEMEX,

it was essential to introduce competition and specialized

PEMEX farm-outs, COPS & CIEPS, and private operators

operators. This competitive environment will allow Mexico

toward achieving Mexico’s future production targets?

to attract the capital and specialized technology required

A: Mexico’s Energy Reform addresses, among other issues,

to boost upstream activities, as well as the development

the fact that after decade of continuous investment in

of much needed infrastructure and the provision of high-

E&P, oil and gas production continued to decline. Mexico’s

quality energy services. In this scenario, PEMEX, as a state-

new energy model allows for the participation of private

owned enterprise with the mission of creating value for

companies as well as PEMEX, now as a productive enterprise

Mexico, must focus on its key strengths to play a strategic

of the state, individually or in partnership with third parties,

role in the development of the new Mexican energy

in this strategic area. Through Round Zero, PEMEX was

industry.

granted 83% of Mexico’s 2P reserves and 21% of the nation’s prospective resources. Therefore, the company’s activities

Q: How is the Ministry of Energy optimizing the

will be the key to stabilizing and eventually increasing our

competitiveness of Mexico’s upcoming deepwater round

current oil and gas production levels. PEMEX will have to

in terms of resource availability, fiscal regime, operating

optimize its operations in order to maximize productivity

environment, and long-term investment protection?

in different locations and multiple types of fields. The

A: The Energy Reform set clear rules and proceedings

Energy Reform has granted PEMEX new tools, such as the

for the contract design and award process. It also

farm-outs, that will allow the company to build strategic

strengthened

established

partnerships. We see farm-outs as an excellent opportunity

clear interaction mechanisms, and accountability and

for PEMEX to access fresh capital and state-of-the-art

transparency standards throughout the process. The

technology as the company moves into frontier fields to

Ministry of Energy leads the design of the contracts,

address its productivity challenges. CIEPS and COPS can

establishing terms and conditions aimed at attractive top

also contribute to boosting the company’s productivity, but

companies for the development of deepwater fields. We

these are limited in number while farm-outs have a much

want to ensure that we are providing the most accurate

greater potential to bring the production numbers back

available data for companies to make the right decision,

up. The company must also enhance its own performance,

and also that companies can operate under the best

particularly in strategic fields.

the

regulatory

bodies,

operational and environmental standards. We also expect this bid to accelerate the technology transfer process

Private operators can choose between participating

while establishing national content requirements that the

individually, partnering up with PEMEX, or working in

Ministry of Economy will keep track of.

partnership with other companies in the bidding rounds organized by the state. So far, we have completed

Q: How is the dialogue between the Ministry of Energy and

Mexico’s first three E&P bidding rounds with positive

potential deepwater operators shaping the conditions of

results in terms of allocations, contract design, and

R1-L04?

transparency. In December 2016, we will complete the

A: To ensure the best possible long-term conditions

much anticipated fourth bidding round for exploration

for both the Mexican state and companies, we have

and production in deepwater blocks. We are also moving

maintained a constant dialogue with several industry

forward in the planning of the upcoming bidding rounds

associations through established mechanisms, enabling us

and have issued a Five Year E&P Plan outlining our plans

to offer flexible contractual conditions that are consistent

up to 2029. It is worth mentioning that different types of

with international best practice. Our objective is to design

projects will yield first oil at different times. In the mid and

and award competitive and sustainable contracts that are

long term, shallow water and deepwater resources will

attractive to the industry, but also aligned with Mexico’s

incorporate more barrels. We are working in the design

best interest in the longer term. Companies can provide

of upcoming bidding rounds, taking into account this

feedback through the Round One website. This information

difference in time and the conditions each field demands

is reviewed on a regular basis, discussed and incorporated

for its optimal productivity.

9


| ANALYSIS

THE YEAR IN REVIEW

10

The year 2015 marked a historic change in Mexico’s oil and

natural decline in Cantarell’s production, as well as an

gas industry, with the awarding of the first blocks in the

increase in the fractional water flow of its wells, led to an

newly open market. R1-L01, which tendered shallow water

8.9% drop in heavy crude production. Secondly, the country

exploration blocks, took place on 15 July 2015 and oversaw

experienced a 7.5% decrease in the production of extra-

the allocation of two out of 14 blocks. The two following

light crude as a result of an increase in the fractional water

bidding rounds, which respectively concerned shallow

flow at the Pijije, Sen, and Terra fields in the Samaria-Luna

water production blocks and onshore production blocks,

business unit, as well as a natural decline in production

each experienced an increase in the award rate, eventually

in the fields of the Bellota-Jujo and Macuspana-Muspac

reaching 100% for R1-L03. Not only was 2015 marked by

projects. Finally, the production of light crude oil was hit by

the opening of the country’s hydrocarbons market, but

a 3% drop due to delays in production that occurred as a

also by record-low oil prices. The year started with the

result of the Abkatún Alfa platform explosion in April 2015.

WTI crude oil spot price at US$52.69 and continued falling

In general, fields in Bellota-Jujo, Cantarell, and Litoral de

until February, when it hit a low of US$29.44/b, while the

Tabasco, as well as the Samaria field, experienced a natural

Mexican Mix, trading at a discount compared with WTI,

decline in production. The decrease in crude production

dropped below US$20 in early 2016. WTI has been crawling

was partially offset by a 36.6% increase in production

back up since then, with the Mexican Mix following this

at the Onel and Chuhuk fields of the Abkatún-Pol-Chuc

upward trajectory, reaching US$45.22/b at the end of April.

asset, the Tsimin, Xux, and Xanab, fields in the Litoral de

Although the industry does not expect to see it return to

Tabasco asset, the Kambesha field in Cantarell, and the

US$90-100/b, it does have its hopes set on US$50/b in the

Homol field in Abkatún-Pol-Chuc.

medium term. Throughout this period, Mexico has proved to remain an attractive investment destination, although

During the first quarter of 2016, total crude oil production

companies have been forced to rethink their strategy and

averaged 2.230 million b/d, a 3% decrease compared

priorities, with PEMEX being no exception.

to the same period in 2015. The variation was caused by a 4.1% decrease in heavy crude output resulting

In addition to a budget cut of US$5.52 billion, which

from a natural decline in production and an increase

represents 20.9% of the company’s 2016 budget, PEMEX

in the fractional water flow of wells in highly fractured

also announced a change in Director General. José Antonio

reservoirs in Cantarell. When excluding this field, heavy

González Anaya, former Director of IMSS, will be in charge

oil production remained stable based on the 850,000b/d

of deploying a sustainable strategy in order to strengthen

produced from Ku-Maloob-Zaap. Light oil production

the NOC’s financial position and help it reach its potential.

experienced a 4.5% decrease due a decline in the Tsimín field off the coast of Tabasco and in Ixtal in the Abkatún-

CRUDE OIL PRODUCTION

Pol-Chuc unit. Additionally, the Abkatún Alfa 2 incident

Crude oil production for 2015 totaled 2.267 million b/d,

led to production deferrals. This decrease was partially

which is 162,000b/d or 6.7% less than in 2014. Several

offset by a 42% increase in light crude oil production at

factors contributed to this production drop. Firstly, the

the Xanab, Chuhuk, and Onel fields. These fields reached

CRUDE b/d) (thousand b/d) CRUDEOIL OILPRODUCTION PRODUCTION(thousand PERFORMANCE 2,500

2,300

2,225

2,266

2,277

2,230

11.7%

12.5%

12.8%

12.9%

32.7%

35.8%

37%

37.4%

37.1%

50.6%

52.5%

50.4%

49.8%

50%

1Q15

2Q15

3Q15

4Q15

1Q16

11.8%

2,000 1,500 1,000 500 0

Extra-light extra-light

Source: PEMEX Source: PEMEX

Light

light

Heavy

heavy

78% offshore 78% offshore 22% onshore 22% onshore


an average production of 202,000b/d by the end of the

Mexican crude oil basket was at US$25.85/b in the first

first quarter of 2016. Production in the Xux field, which

quarter of 2016, a decrease from the US$45.38/b seen in

began production in June 2014, also helped offset the

same period in 2015.

production decline, contributing 63,000b/d.

CRUDE PROCESSING EXPLORATION Exploration

Crude oil processing totaled 1.06 million b/d in 2015, a 7.8%

activities

in

PEMEX

led

to

discoveries

decrease compared to 2014, due to scheduled maintenance

amounting to 1.1 billion boe during 2015. However, the low

and non-scheduled operations, as well as overhaul works.

oil price had a negative impact on deepwater resources

Operational issues resulting from the quality of the oil

due to their development costs. Approximately 400

supplied at the end of 2014 also contributed to the annual

million boe in deepwater resources were reclassified as

decrease. During the first quarter of 2016, total crude oil

contingent resources. On the bright side, the company

processing increased by 2.3%, amounting to 1.08mbd, due

drilled 30 exploration wells in 2015 with a 45% success

to an increase in light crude oil processing. The ratio of

rate. PEMEX’s work in shallow waters led to the discovery

heavy crude oil to total crude oil processed by the National

of six fields, which amount to 650 million boe. Some of the

Refining System decreased by 3.6 percentage points.

fields discovered in 2015 include Xikin-1, Batsil-1, Esah-1,

However, the ratio increased by 4.8 percentage points at

and Cheek-1 in shallow waters, which are estimated to have

the three revamped refineries, Minatitlán, Cadereyta, and

combined reserves of 350 million boe, while Cratos Hem

Madero, as part of an effort to take advantage of highly

were discovered in deepwaters. In January 1, 2015, Mexico’s

specialized equipment to convert residuals and maximize

1P reserves stood at 9.711 billion barrels of oil, 15.290tcf of

the output of middle distillates.

gas, and 13.017 billion boe. These figures decreased during the year, and on January 1, 2016, the country’s 1P reserves

NATURAL GAS PRODUCTION

were 7.640 billion barrels of oil, 12.651tcf of gas, and 10.242

Throughout 2015, the production of natural gas dropped by

billion boe.

2%, totaling 6.40mcf/d, mainly as a result of an 8% reduction in non-associated gas production due to scheduled

CRUDE OIL EXPORTS

reductions in drilling activities and in the completion

The volume of crude oil exports increased from 1.142

of wells in the Veracruz and Burgos business units. The

million b/d in 2014 to 1.172 million b/d in 2015, representing

latter decreased natural gas production in those areas by

an increase of 2.6%. Although the volume of export of

approximately 7.6%. The southern region experienced a

light oil decreased, Olmeca and Isthmus, both heavy

13.4% drop in production. As a portion of total production

crudes, saw respective increases in their export volumes

during 2015, associated gas production represented 75%.

of 36.2% and 45.1%. The latter two are PEMEX’s priciest

The production of associated gas remained relatively stable

crude exports, with values of US$51.36/b and US$48.78/b.

between 2014 and 2015, with respective production of

In the first quarter of 2016, revenues from crude oil exports

4.81mcf/d and 4.82mcf/d. Natural gas production decreased

totaled MX$69 billion, representing a 35% or MX$37 billion

by 10.1% during the first quarter of 2016, amounting to

decrease. The drop in total export sales was driven by

5.17bcf/d. This was due to a decrease in associated gas

low oil prices and a 28% reduction in export volumes. The

production caused by the natural decline in production of

NATURALGAS GASPRODUCTION PRODUCTION(million PERFORMANCE (MMcfd) NATURAL cf/d) 6,000 5,000

5,753 30.2%

5,399 29.8%

5,501 27.3%

5,369

5,174

27.1%

27.3%

72.7%

72.9%

72.7%

3Q15

4Q15

1Q16

4,000 3,000 2,000

69.8%

70.2%

1,000 0

1Q15

2Q15

Non-Associated non-associated

Source: PEMEX 1 Does not include nitrogen Source: PEMEX

Associated associated

54% onshore 54% onshore 46% offshore 46% offshore

11


crude oil and closing of wells with higher gas-oil ratios at the

production inputs due to preventive maintenance works at

Akal field in Cantarell. Production referrals in Abkatún-Pol-

the continuous catalytic regeneration plant in the Cangerjera

Chuc also had a toll in natural gas output levels. In addition,

complex. The ultra-low sulfur diesel and gasoline plants in

a natural decline in production in Burgos and Veracruz

the Cadereyta and Madero refineries strated operations in

negatively impacted non-associated gas production.

2015. Total petroleum products output decreased by 1.3% in the first quarter of 2016 compared the same period of 2015,

NATURAL GAS PROCESSING

which is explained by a decrease in production of natural gas

In 2015, natural gas processing decreased by 6.2% as

and thus lower LPG availability.

compared to the previous year. This reduction is attributed to a decreased availability of sweet and sour gas from the

PETROCHEMICALS PRODUCTION

offshore and southern region resulting from the Abktatún

The production of petrochemicals amounted to 4.5 million

incident in April 2015 and a natural decline in the output

tonnes in 2015, decreasing 14% compared to the 5.25

from mature fields. Dry gas production decreased by 6.7%,

million tonnes produced in 2014. This is explained by lower

242mcf/d, while natural gas liquids production decreased

availability of raw materials due to maintenance and overhaul

by 9.8%. The production of condensates experienced a

works in the Morelos ethylene plant and the Nohoch-

7.1% decrease explained by a reduction in the supply of

Ciudad PEMEX-Nuevo PEMEX sour gas transportation

sweet condensates in Burgos and sour condensates in

system. During the first quarter of 2016, the production of

the southern region. In the first quarter of 2016, natural

petrochemicals decreased by 9.2% compared to the same

gas processing saw a 10.5% decrease to 3.8bcf/d as a

period of 2015. Additionally, ethane supply was reduced and

consequence of the decreased availability of sour and

initial operations in Etileno XXI had a negative impact in the

sweet gas from the Burgos onshore and offshore assets.

production of high-density polyethylene and ethylene oxide.

This also led to a 9.5% decrease in the production of

The decrease in production of petrochemical products was

dry gas and a 12.3% decrease in the case of natural gas

partially offset by a 79,000-tonne output increase in the

liquid. The insufficient supply of sweet gas condensates

aromatics and derivatives chain due to an increment in the

from Burgos also affected the processing of condensates,

production of high octane hydrocarbons resulting from

which saw a 5.6% reduction during the first quarter of

higher demand from the Minatitlán refinery.

2016, as compared to the same period of 2015.

PEMEX FINANCIAL PERFORMANCE PETROLEUM PRODUCTS

PEMEX has taken important structural measures to adapt

The total production of petroleum products decreased by

its financial strategy and operational priorities to the

8.8% in 2015 compared to 2014, mainly due to non-scheduled

current price environment, planning its budget based on

maintenance and inspection operations, operational issues

a US$25/b oil price. In addition to the February 6, 2016,

resulting from the quality of the oil supplied in the last

budget cut of US$5.6 billion, PEMEX will also benefit from

quarter of 2014, and a decrease in the supply of gasoline

the Federal Government Support Plan, which includes a cash flow injection of US$4 billion and a Fiscal Regime Improvement representing US$2.8 billion in permanent

PEMEX TOTAL REVENUES (US$ billion) TOTAL REVENUES (US$ BILLION) 150 120 83.5 0.4

52.6

55.2

45.7

55.3

55.7

66.6

billion as compared to a net loss of US$15.4 billion in 2014. 107.8 0.8

42.8

69.6

BUDGET ADJUSTMENT ADJUSTMENT PLAN PLAN (MX$ (MX$ billion) billion) BUDGET 81.5 1.0

500

29.2

400 300

64.2

51.3

Exports salesDomestic domestic sales exports Source: PEMEX Source: PEMEX

LTM 3Q15

2014

2013

Services services revenuesTotal Revenues

478.3 100

Adjustment Plan

329.1 100

200 100

2012

0

123.0 0.8

tax relief. In 2015, PEMEX recorded a net loss of US$30.3

37.4

2010

30

126.6 0.6

59.4 48.0

60

111.4 0.4

2011

90

103.8 0.4

2009

12

378.3 229.1

0 (149)

-100 -200

Income from operations

Source: PEMEX Source: PEMEX

Allocated expenses

Financial balance


| IN MEMORIAM

EDGAR RENÉ RANGEL GERMÁN

13

Q: Why was CNH established, and which role did you play

acted as the president of the board of PEMEX. This helped

in the process?

in training us how to establish regulations, how to avoid

A: The National Hydrocarbons Commission (CNH) started as

overregulation or abuse, and how to comply with certain

a sort of back office of the Ministry of Energy, let us call it CNH

rules. CNH 2.0, which exists since December 2013, is the real

beta, and I wrote the first charter of this commission in 2005

one, the independent, autonomous, technical agency.

under the title Consejo Tecnico de Producción y Extracción de Hirocarburos, which was one of my first assignments at

Since I had been working on the creation of CNH for

the Ministry of Energy. The idea was to strengthen the Energy

many years, I wanted to be a Commissioner. The first

Regulatory Commission (CRE) and create a new regulatory

regulation that we issued focused on gas flaring, followed

agency for upstream to participate in strategic parts of

by project sanctioning. We were very few, with only five

the 2008 Energy Reforms such as the opening of refining,

Commissioners and a staff of five people, and we were

deepwater, and transborder fields. At that time, Francisco

growing very slowly because we were part of the Ministry

Salazar was President of CRE, and he provided a great deal

of Energy. After we had our first meeting, we received

of support in working with the legislative powers. Having

correspondence from various organizations, including

been involved since its inception, I feel like the godfather of

the Senate and PEMEX board members to request advice

this organization and am very proud that it is now maturing.

on topics ranging from Chicontepec and deepwater to PEMEX’s exploratory strategy. We started creating

The first real manifestation of CNH, CNH 1.0, emerged

documents that were very uncomfortable, which is why

following the 2008 Energy Reform. In my humble opinion

we were constrained since it became apparent that if we

with respect to other ideas, the creation of CNH was the only

were given more money and more people we would be

aspect of the 2008 Energy Reform that created real value

reporting on more problems. Nowadays, the situation is

for the country. Initially, CNH’s operations consisted of a type

very different, and we are a different entity. We are creating

of simulation, with CNH regulating PEMEX, both of us being

important units dedicated to exploration, extraction, the

part of the Federal Government and reporting to the Ministry

administration of entitlements and contracts, and the

of Energy, while the Ministry of Energy simultaneously

National Center of Hydrocarbons Information (CNIH).

Dr. Edgar René Rangel Germán passed away on March 23, 2016, leaving an impressive legacy in the country’s energy sector in the short time that he was given. Before graduating with a Ph.D. in Petroleum Engineering from Stanford University, he became the only student to score a perfect 10 in UNAM’s Petroleum Engineering program. After returning to Mexico, Dr. Edgar René Rangel Germán subsequently worked at PEMEX, the Ministry of Energy, and the Ministry of Finance and Public Credit before becoming a Founding Commissioner of CNH. He took great pride in being its second employee, and was an exceptional ambassador of the Energy Reform, as well as the CNH’s technical center of gravity. His passionate contribution to the development of the Mexican oil and gas industry was greater than the recognition he received, and his legacy is destined to transform the country he loved.


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| VIEW FROM THE TOP

THE CHALLENGE OF CREATING A WORLD-CLASS REGULATOR IN RECORD TIME EDGAR RENÉ RANGEL GERMÁN Former Commissioner of CNH

15

Q: What are the main challenges facing CNH today?

Q: How would you ensure that, in the case of a conflict

A: One of our main challenges today is hiring the best

with a foreign company, the participation of a foreign CNH

people because it is difficult to find excellent people who

representative would not create a conflict of interest?

are willing to work as tough regulators, while salaries

A: We have considered this issue, and we realize that

are not fantastic. It is difficult to find committed people

we need to find a balance between internal employees,

who are willing to sacrifice future prospects of working

consultants,

in PEMEX and accept a cut in salary compared to private

companies. Ultimately, board members must be highly

sector standards. It seems to me that we are leaving the

qualified, as there is a mandate to serve the needs of the

technical part of operations and are moving more toward

country. There is no objection to recruiting board members

an administrative office, in which we receive and approve

from other parts of the world, as long as assurances are

wells, exploration plans, and development plans. This is

made that potential conflicts of interest will not arise. We

some of the risk that I see today, and this might bite us

also must place emphasis on training in order to create

eventually as we move forward. There are 20 operators

experts.

and

outsourcing

through

independent

right now, but by the end of this administration, we will have between 30 and 40 operators in the country. Until

Q: What are the main constraints that prevent CNH from

now, we have only seen the nice, kind, gentle face of these

functioning optimally?

companies that want to invest in Mexico. Due to probability

A: The technical strength is a point of concern, and

alone, we will be facing problems or disagreements with two

there is a risk that CNH may become an administrative

or three if we are working with over 30, PEMEX included.

body, a rubber stamper, due to lack of understanding

Without the technical and legal strength when confronted

of the technical details that we may face or due to tight

by the ugly face of an operator for the first time, then CNH

deadlines. This is holding us back from being an optimal

may not be in a position to contend with these players.

organization. Ultra-deepwater is an example of more

For instance, in the event of a deepwater discussion with

technical and advanced problems that we may not be

billions of dollars at stake, these big operators are not going

able to optimally address. In terms of processes, we have

to bring two lawyers, they are going to bring the entire legal

learned a lot from our membership of entities such as the

department to ensure that they win, as they do all over the

International Regulators Forum, and we have specialized

world. We have to plan to face these kinds of problems.

staff that are well-versed in the protocols.

Q: How are you able to plan for such situations, given that

We have not yet received all relevant information that

you cannot build the world’s best legal team in-house?

PEMEX is supposed to transfer as part of the Energy

A: First of all, we have to plan how we are going to grow,

Reform, we do not have the necessary technical capability

define what capabilities will be most relevant, and gauge

in terms of people, and we have neither the hardware

whether we have the required talent in Mexico. For instance,

nor the software required. When requesting information

there are very few experts in E&P contracts in Mexico,

from the National Center of Hydrocarbons Information,

because this was not necessary in the country. When PEMEX

sometimes the response is that this information is not

began to oversee the CEIPs, only a small department was

available and the request is placed in a queue that can take

required and small contracts were tendered. However, there

months. This lack of access to information is a weakness

are Mexican people who have been carrying out this kind of

of the agency. At the moment we have to still request

work in other parts of the world, and there is no requirement

information from PEMEX to prepare the data rooms on a

to hire exclusively Mexicans. We need to develop a human

case by case basis. This is not the way this should be done

resources strategy that allows us to hire experts from around

and we should have access to all the information to create

the world.

a strong position for the Mexican state.


| VIEW FROM THE TOP

MAXIMIZING VALUE FOR THE MEXICAN ECONOMY NESTOR MARTÍNEZ Commissioner of CNH

16

Q: What is the most effective way in which the State can

strategies. This means that each field must have a plan for

maximize the value created from hydrocarbon reserves?

optimal production that allows the hydrocarbons’ potential

A: Hydrocarbon reserves have to be managed in a way

to maximize revenues in the long term. Poorly planned

that creates prosperity for the Mexican people, and there

hydrocarbon exploitation can generate losses in the future.

are several mechanisms to make this happen. Firstly, local content has to be used to its full extent, and the law

Q: How can the hydrocarbons sector create direct value

clearly states minimum percentages. Therefore, a natural

for the Mexican economy?

progression would be for Mexico to create goods that

A: The hydrocarbons sector plays a crucial part in tax

are internationally competitive so that operators will use

collection, so the sector’s growth will create jobs and foster

Mexican equipment, materials, and employees, generating

employment synergies because taxes are used to pay for

wealth and jobs for the country. The requirements are

health and other services that also create jobs, industries,

adequate given the sector’s development conditions.

and infrastructure. In this sense, adjacent industries can also

Norway’s oil and gas industry is an excellent example of

grow alongside the oil and gas sector, such as the food,

best practices in capturing oil revenues, and if we compare

cement, and barite industries. This sort of collective growth

Norway to countries like the UK with whom the North Sea

creates value for the nation. It is often said that the shale

reservoirs were shared proportionally, we will see that the

industry is not profitable, but the industries surrounding

former has accumulated about 50% more than the latter.

shale operations are strong and contribute greatly to the

In this sense, the local content rules established for Mexico

states where these operations take place. The key is to find

are appropriate, as the country cannot ask for a higher

the growth synergies in the oil and gas industry.

percentage given that it does not yet have the necessary competencies. A second element to take into account

Competitiveness is an essential component, especially

is the fact that exploration and production plans have to

considering the fact that operators seek to maximize value.

maximize value in the long term. Maximizing value in terms

In this sense, competitiveness among operators will be

of hydrocarbon reserves does not only mean incorporating

crucial so that these players can capture different markets.

new reserves, but also includes well-considered production

This situation entails materials, talent, and infrastructure, so

United States Mexico

Existing CSEM New Acquisition

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the government has to invest in the development of high-

Q: What are some fiscal implications of PEMEX turning

quality talent, which is lacking in Mexico and the rest of the

into a productive enterprise of the State?

world. There are several initiatives at the government level

A: In order for PEMEX to create value, it has to operate

to foster competitiveness in the sector, many of which

in a competitive environment where the same rules apply

involve scholarships. CONACYT is the main party involved,

to the NOC as to other operators. Those rules are already

and this entity also funds the development of technologies,

established, and there is a transition period, which should

as competitiveness entails the use of the best technologies

be as short as possible. PEMEX has autonomy that enables

in hydrocarbon production and exploration activities. CNH

the NOC to draft policies aimed at creating value, and

is involved in validating exploration and production plans,

despite any issues the company might be facing at the

so it is well-positioned to make suggestions regarding the

moment, this is possible in the short and medium term.

use of certain technologies to companies, thus improving

During the transition period, PEMEX will continue paying

their competitiveness.

a fiscal contribution that is much larger than that of

17

most NOCs. This is why the transition must be as swift Q: How is Mexico faring in maximizing hydrocarbon

as possible, as it will relieve PEMEX of its fiscal burden,

reserves with a long-term approach?

allowing it to reinvest its resources. Although PEMEX is

A: As a country, it is important to increase reserves

experiencing financial complications, the government

because this creates a pipeline for project development

has thoroughly discussed ways to provide the NOC with

and future production, and because reserve replacement

a platform that will enable it to be profitable in the long

will ultimately have an impact on the job market and the

term. These are the types of actions and interventions

economy. So far investment has been restricted, so reserves

needed to help PEMEX become the productive company

have not been replaced at the pace that technology allows

contemplated in the Energy Reform.

in other countries. However, with the Energy Reform, the entry of more operators, and the willingness of financial

Q: How do Mexican upstream opportunities compare with

institutions, we will certainly see an increase in the level

other options operators have around the world?

of reserves. Every guideline CNH has developed has

A: The main obstacles companies encounter globally

been crafted in a way that makes it the least invasive for

are burdensome bureaucracy for field development and

operators in order to enable an efficient development of

a lack of coordination and common objectives between

operations. In addition to the issuing of guidelines, we are

governments and regulatory agencies. Other countries have

currently working with PEMEX on the migration of many

had a clear vision of the way operators and governments

fields that the NOC might want to develop in partnerships,

should coordinate, because these will ultimately become

either technological or financial. CNH’s role is to be

partners seeking value. Mexico possesses these traits,

efficient, that is, to reduce the amount of procedures

as evidenced by the strong relationships between CNH,

and paperwork to the largest possible extent in order to

ASEA, the Ministry of Finance, and the Ministry of Energy,

assign these processes and allow the companies to begin

and operators are aware of this. However, operators also

operations promptly. Previously, CNH was overseeing one

notice other situations, such as the country’s social and

operator, PEMEX, which is now changing and this forces us

security issues. When balancing all the elements, Mexico

to think more openly.

becomes a location in which operators want to invest.

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| VIEW FROM THE TOP

ADJUSTING ENERGY POLICY TO NEW OPEN MARKET CONDITIONS GUILLERMO GARCÍA ALCOCER Former Chief of the Unit of Exploration and Production Policies at the Ministry of Energy

18

Q: Has the drop in oil prices affected the Ministry of

enthusiastic and planning to offer contract areas with

Energy’s approach to upstream policy, and what does this

3,200m of water depth, and we were promptly advised

mean for the Mexican oil and gas industry?

by companies that only two or three of them would

A: The global hydrocarbons market has been affected

be capable of working at such depths. Therefore, if we

by several structural changes in the last few years, thus

included those kinds of areas in the round, there would

impacting in the entire industry. When we launched the

be a very limited number of possible participants, so we

first phase of Round One, the oil prices were around

introduced more shallow deepwater sites of just over

US$80/b but have dropped significantly since then. In

500m and left the ultra-deepwater fields for future bids

spite of this fact, companies and investors are still seeing

in order to attract a larger number of companies. Due

Mexico as an interesting playing field. Many companies

to this feedback and ongoing dialogue with the industry,

have established offices in the country and technical

blocks changed before the tenders were launched, and

teams are for the first time carrying out massive geological

we remain open to adjusting our offering according to

studies in our country’s side of the Gulf of Mexico, which

the industry’s reasonable requests.

is still relatively underexplored. For many companies, Mexico holds a strategic long-term importance, which

Q: What is the impact of the drop in PEMEX’s production

is good news for us, as some companies are bound to

on Mexico’s federal budget and the country’s ability to

be extremely selective about the countries in which they

meet its medium and long term production targets?

will invest and the kind of fields they intend to explore

A: A high percentage of our federal budget comes from

and develop due to the shift in prices. Mexico has an

the petroleum industry, but this has decreased sharply

extremely attractive and diversified offering in this

over the last few years. Ten years ago, 40% of the budget

regard. In seismic studies that are currently being carried

came from oil income, whereas today it is about 19%. Our

out with an investment of almost US$2.5 billion, almost

income dependency is now lower due to the Fiscal Reform

all of the Gulf of Mexico is being covered, and that is a

that was implemented in 2013, and this is important

solid way to gauge the interests that companies have in

because, although oil production is a substantial part of

Mexico.

Mexico’s federal income, we have also diversified into other sources of financing.

Q: What types of market incentives is the Ministry of Energy introducing to guide energy policy, and how is

We estimate that first oil from the phases of Round

this process advancing?

One will be coming on stream in 2017, and from then

A: We presented our first version of our Five Year Plan in

onwards production from the ongoing bidding rounds

July, and afterward, we opened a forum for nominations,

will start to pick up. In the midterm, this new production

a process in which companies approached the Ministry of

will begin to compensate the drop in production from

Energy to present feedback on the outline. After a careful

PEMEX. As for PEMEX, we must remember that through

look at what companies brought forward, when feasible

Round Zero, the productive enterprise of the State was

and convenient for the state, we adjusted the Five Year

awarded substantial reserves that allows it to sustain an

Plan issuing the definitive version in October. The process

important production platform for over 20 years without

will be carried out each year, with a revised version to

considering future discoveries and participation in the

be published after the yearly nomination process. This

public bidding rounds. In an open market, like the one we

interaction proved to the companies that the Ministry is

now have in Mexico, it is not possible to establish fixed

not only willing to listen to their input but within law and

production targets, and much less intervene directly in

reason, implement changes for the benefit of all parties

order to achieve them. Long-term production depends on

involved. For example, in the first plan, we were extremely

a series of external and internal factors, most of which are


I EXPERT INSIGHT: WOOD MACKENZIE not under the control of any modern government. Current

The past 12 months in the Mexican oil and gas industry were quite

and

breakthroughs,

dynamic, to say the least, given the closing of the first three bidding

abundance or lack of geological information, as well

expected

prices,

technological

rounds and the launch of the deepwater round. “Although the first

as changes in fiscal, technical, safety, or environmental

bidding round gave way to mixed results, those that followed

regulation profoundly affect production targets. The

were successful,” Pablo Medina, Latin America Upstream Research

Ministry of Energy can foster an environment that is as

Analyst at Wood Mackenzie, claims. He believes this success was

friendly and predictable as possible in order to attract

driven in part by the government's willingness to incorporate

investments in E&P. In this regard, we have conducted

industry feedback into its propositions and to amend terms based

three bidding rounds within Round One with very good

on observed results. According to Medina, “The undisclosed

results. Thirty new companies have been awarded

minimum acceptable profit share splits in the first bidding round

exploration and production areas, and the first private-

were one of the reasons why only two of the 14 blocks were

produced oil will soon enter the market. Nonetheless, the

awarded. However, I believe that the government’s disclosure of

increase in private production will be a slow process and

these figures just two weeks before the second bidding round is

thus, significant results will only be seen in the medium

part of the reason why the majority of the areas were awarded.”

to long term. The past year has also seen a new Director General taking the lead PEMEX is in the midst of a profound restructuring that we

at PEMEX, with the aspiration to make the corporate structure

hope will only affect short-term production due to budget

more agile and streamlined. Medina believes that González

cuts and the implementation of a new strategy. PEMEX

Anaya can bring a fresh perspective to the NOC and achieve

will have to focus on low-risk fields in shallow waters and

a similar success to the one he achieved in his previous role as

look for farm-outs for other kinds of fields that will allow

Director General of the Mexican Social Security Institute (IMSS).

for the participation of companies with the capital and

“González Anaya’s new job requires a double focus,” Medina

technology necessary to develop these resources in the

explains. “Internally, he will focus on cutting costs, optimizing

most efficient way possible. We are committed to offering

processes, and reducing the pension liability, and externally he

competitive contracting schemes, attractive bidding

will take care of partnerships with other companies in order to

blocks both onshore and offshore, and long-term certainty

gain access to capital, technology, and expertise.” Medina also

so that PEMEX and private companies invest heavily in

credits the new Director General’s solid working relationships with

these kinds of projects.

key government officials in securing the financial aid package for PEMEX announced by the Federal Government.

Q: What is your view on PEMEX’s recently announced adjustment plans? A: With the comprehensive and sweeping reform that was carried out in 2013, PEMEX is no longer solely responsible for every activity in the value chain. In this new scenario, PEMEX can concentrate activities on the most profitable areas, and leave the rest of the market to specialized private entities. For instance, any authorized company may freely import petroleum products from April 2016 onwards, as well as build storage facilities and pipelines. With this fundamental change, PEMEX can now leave those markets to companies that are more efficient and specialized, and thus concentrate on its core upstream business. PEMEX will concentrate its resources on shallow water and onshore fields, the areas in which Mexico’s NOC is a world champion. PEMEX will postpone some activities, for instance in deepwater, and these can be revisited when it can find a suitable partner through the bidding process the law allows. Although PEMEX has experience in deepwater exploration,

the

next

stage

in

its

current

areas,

development and production, requires a completely separate set of skills that are not available to the NOC at the present time.


| INSIGHT

A TRIPLE-HELIX STRATEGY TO ENSURE THE INDUSTRY’S FUTURE various companies in our organization, keeping sensitive data private. AON Consulting holds the confidentiality information, and directly provides clients with deliverables,” he reassures. The opening of Mexico’s oil and gas sector 20

ÓSCAR GONZÁLEZ

has led ARHIP to invite international players, such as

President of ARHIP

Shell, BP, and Schlumberger into its association. González reports that this has been somewhat challenging because certain concepts had to be tropicalized, such as variable

Mexico’s energy market has placed emphasis on addressing

compensation.

various disparities, the most impacting of which may be the gap between the oil and gas industry’s needs in terms of

In order to smooth the transition to a new oil and gas

human capital, the pool and pipeline of avasilable talent,

industry for its members, ARHIP also works with educational

and government and industry initiatives to solve this

institutions, governments, and the private sector to create

challenge. “Certain universities have failed to grasp the

a triple helix synergy. “The triple helix synergy involves the

importance of soft skills in the new market, for instance,”

tripartite participation of the government, the educational

says Óscar González, President of the Association of Human

institutions, and companies in the industry, and the general

Resources for the Petroleum Industry (ARHIP), adding that

aim is to create a cluster between these so they can work

this is exactly the challenge that his association is tackling.

together,” González expounds. He gives the example of

ARHIP came into being in 2010 and was specifically

the new technological innovation centers in Tabasco,

created after the founders observed a lack of regulation in

which came into existence through cooperation between

the compensation area of Mexico’s energy market, which

the local government, the Ministry of Energy, and private

González claims was a result of PEMEX’s position as the

companies. “Our aim is to support the industry and to

industry’s main client. “The NOC’s different business lines

provide companies with any tools they may need. To do

did not have a common homologated tabulator for the

so, ARHIP also looks to take advantage of the resources of

private industry, leading to disparities in salaries. Our aim

countries that have open, developed, and successful energy

was to homogenize and regulate this aspect,” he states. The

markets, and brings them to Mexico. Recently, we were

Association’s main success so far has been the completion

invited by the Ministry of Energy to an initiative in Canada

of an inquiry with over 236 positions, divided by business

where we were able to exchange online courses with the

lines, and the fact that it has taken care to match profiles

University of Calgary in Alberta,” González discloses. “We

properly. “To do so,” González reports, “we mainly worked

also work with more than 30 local universities involved in

with international firms, including AON Consulting, in

the oil and gas industries, such as the National Polytechnic

order to gain credibility. We worked together to collect the

Institute, UNAM, and UNACAR. We are pushing for

required information and to carry out individual matching

educational institutes to renovate their teaching programs

by company. The use of a third party allowed us to avoid

so they are in line with current market needs. This also

having to transfer and filter information between the

involves an upgrade of their facilities and equipment, as well as installing simulators and well schools.”

“The triple helix synergy involves

ARHIP also seeks to have a close collaboration with

the tripartite participation of

students across the country’s universities that have

the government, the educational

prepare students to enter the labor market. “We like to

institutions, and companies in the

can learn how to sell themselves to the industry,” González

industry, and the general aim is to create a cluster between these so they can work together” Óscar González, President of ARHIP

courses related to the oil and gas industry, in order to call these personal branding sessions, because students mentions. “One of the skills that we believe to be crucial for success in today’s globalized oil and gas industry is the mastering of English, which is why we are pushing for universities to offer this as a basic course within all industry programs. Soft skills such as leadership, communication, and intra-personal capabilities are also becoming increasingly important.”


| INSIGHT

FUNDING MEXICO’S PRESENT AND FUTURE The Mexican Petroleum Fund, known as Fondo Mexicano del Petroleo (FMP), was created as an instrument derived

MAURICIO HERRERA MADARIAGA

from the Energy Reform to manage oil and gas revenues

Executive and Administrative

and wealth. This makes one wonder why Mexico had not

Coordinator of the Mexican

implemented such a mechanism before. Indeed, other oil-

Petroleum Fund

wealthy countries have had hydrocarbons funds for decades. “It is important to point out two things,” Mauricio Herrera, Executive and Administrative Coordinator of Fondo Mexicano

payments being made, the Ministry of Finance can audit the

del Petróleo interjects. “The FMP is not Mexico’s first and

information and instruct adjustments to the payments. For

only oil fund. The Stabilization Fund for Budgeted Income

this purpose, it can rely on SAT as the state auditor, or on

(Fondo de la Estabilización de los Ingresos Presupuestados),

a third party. Finally, SAT directly receives and supervises

and the Stabilization Fund for Federal Entity Revenues

the payment of any fiscal obligations. “All information

(Fondo de Estabilización de los Ingresos de Las Entidades

and documentation will be submitted electronically using

Federativas) preceded the FMP as hydrocarbon funds and

electronic signatures,” Herrera remarks. He notes that the

continue operations alongside it.” Should Mexico experience

information available on the platform will be accessible to

turbulent times, the first line of defense would be these

the Ministry of Finance, CNH, SAT, and the Ministry of Energy,

stabilization funds, and the funds from the FMP’s long-term

as well as the contractor, which is an important element of

reserve would only be available once all other resources

oversight and transparency, as the authorities are required to

have been depleted. “The Federal Government will only have

notify each other of any irregularities they detect.

access to the FMP’s long-term reserve provided there has been a decrease, in real terms, of federal revenues for at least

Having paid Mexico’s operators, the FMP makes transfers

two years in a row,” Herrera points out. “Secondly, the FMP

to the stabilization funds, as well as several funds that

is not an exact replica of the typical oil funds found across

promote research in the sector. Once these transfers

the world. Unlike these, the saving of hydrocarbon wealth

are made, the flow of resources is directed toward the

for future generations is not its sole purpose. It is also in

federal budget. Until the fund accumulates 3% of the GDP,

charge of receiving and administering the revenues arising

the government is granted discretion for its spending,

from Mexico’s hydrocarbons production, acting as a treasury

and after that threshold has been reached, the FMP is

within the oil scheme. The Mexican Petroleum Fund has the

entitled to make recommendations. The second limit

obligation to transfer the revenues it receives following an

is set at 4.7% of the GDP, subsequent to which the FMP

order that was established by law.” Practically speaking, the

will start to accumulate its long-term reserve to benefit

FMP has two modus operandi. Depending on the type of

future generations. “This commitment toward limiting

contract, it either receives all of an operator’s income and

the hydrocarbon revenues available to finance the

gives the latter back its share, or the operator sends the FMP

federal budget was made possible thanks to the efforts

only what it owes to the government.

of the current administration to reduce the government dependency on revenues from the oil and gas industry. different

The authorities accomplished this through a fiscal reform

governmental organisms and the operator, Herrera explains

that significantly increased tax revenues,” Herrera asserts.

Looking

at

the

interaction

between

the

that the Ministry of Energy establishes the technical qualifications for potential contractors and the Ministry

“The widespread belief among the industry seems to be

of Finance defines the economic terms and establishes

that the FMP has failed its objectives so far. This belief,

the economic variables that determine the winner of the

however, stems from a misunderstanding of the fund’s

bidding rounds. “Focusing on the financial aspects, the

operations,” Herrera insists. “At the start of each year, the

most important payments commence during the production

fund establishes a goal in the form of a certain percentage

phase,” Herrera tells. “The contract establishes a mechanism

of GDP that it expects to retain, based on the oil price

of monthly payments, and any adjustments will be reflected

at the time. At the end of the year, we then redo these

in the future stream of revenue. Every month contractors

calculations, using the historic oil price at the time of each

and CNH will submit the information the FMP requires

transaction. Given the sharp drop in oil prices that the

to calculate its payments using the fund’s technological

industry has been experiencing, it is normal that the final

platform.” He goes on to explain that subsequent to the

results do not match our initial intentions.”

21


| VIEW FROM THE TOP

FUNDAMENTALS OF OIL REVENUE SALVADOR UGALDE Director of the Income Unit of Hydrocarbons at the Ministry of Finance

22

Q: What role does the Ministry of Finance play in the oil

Q: What are the differences between the Ministry of

and gas sector?

Finance’s Income Unit and the Mexican Petroleum

A: The Ministry of Finance and Public Credit has a deeply

Fund, and what are their respective responsibilities and

relevant set of responsibilities, mainly on the side of

missions?

the hydrocarbon contracts and the way in which these

A: The Ministry of Finance is in charge of designing policies.

should be calibrated and measured when it comes to the

We look at how to tax each particular contract depending

secondary legislation, which were issued in August 2014.

on geophysical conditions, whether it is deepwater, shallow

These responsibilities are also related to the economic

water, tight oil, or shale gas. We have to carry out an extremely

and fiscal conditions of the bidding processes and the

technical analysis to decide upon the parameters involved

contracts themselves, and to following up on the execution

in the contracts, the minimum price to be implemented

of those contracts from the point of view of the payments

in the bidding rounds, and the formula to determine the

and their financial results.

winning parties. The latter allows us to promote not only the companies that offer the most competitive economic

Despite the Ministry of Finance’s long and intense

proposal, but also the ones that are most willing to provide

relationship with PEMEX, it lacked a unit with the specific

financing to back up their pledges. After doing this, we let

capabilities to execute its new attributes under the Energy

the contract run and monitor its execution.

Reform for the oil and gas industry. For this reason, the Hydrocarbons Income Unit was conceived and then

The Mexican Petroleum Fund, on the other hand, is in

established on November 1, 2014. The unit is in charge

charge of collecting the proceeds from the contracts,

of developing the fiscal and economic conditions for the

calculating each party’s revenue when necessary, and

contractual models. Those conditions are contained in four

informing the general public of the outcomes of each

specific annexes that the Ministry of Finance is in charge of

contract. This includes proceeds, payment instruments,

developing, which focus on the structure of the payments,

the composition of these collections, and the way in which

including the way in which companies will make payments,

they are spent. The MPF must also inform the public of how

the procurement of items, goods, and services, and the

much is channeled into each of the different stabilization

accounting procedures. The income unit is responsible for

funds, how much is directed into the general budget, and

creating that design, calibrating the contracts’ economic

what surplus is placed into the fund’s core. The latter fund

parameters, and then, once they are running, it must

is then invested in order to generate a long-term savings

monitor and review the results. Should anything unusual

account for the entire country. On a daily basis, we are

appear, we launch audits to determine what is happening.

the ones overseeing the fund’s operations, while the fund

The unit has also played an important role in the fiscal

carries out the day to day executions of the financial

structure, not only from the point of view of the contract,

aspects of the contract.

but also on the corporate income tax, VAT, and all aspects that are related to the operations of oil companies. In the

Q: How has the drop in oil prices influenced the whole

past, there was no need for us to do so because PEMEX

financial plan for the different phases of Round One?

was not subject to corporate income tax, and adhered to

A: When we started designing the contractual framework,

special rules when it came to VAT and import/export duties.

we strived to develop a contract that could work

We work in collaboration with SAT and other areas within

independently to the exogenous oil price factor. We

the Ministry of Finance and Public Credit to create this

put a system in place that is progressive in the sense

framework that would not only be applicable to PEMEX,

that whenever rent appears, we can collect it and the

but to the entire set of new participants, with the purpose

contract adapts to it. If such rent is somewhat lower

of generating certainty for the investments.

because the gap between costs and prices is narrow, we


allow the project to continue using to several contractual

level of 14%. We distinguish between condensates, natural

mechanisms. These are the result of the fiscal design of

gas, non-associated natural gas, and crude oil. One of the

the contract, or the bidding process itself. The contracts

most interesting things in our contracts is the possibility

have the flexibility to adapt to different circumstances

of integrating these differentiated royalty rates. By using

thanks to the mechanisms contained within them. This

the price of production that is effectively observed in a

system allowed us to receive solid results for R1-L01, with

particular contract, we are able to capture the implied

bids moderately higher than we expected, despite the

quality of oil, as higher quality will fetch higher prices.

fluctuations experienced by the price of oil between the date when the contracts were launched and awarded.

Q: Could you interpret PEMEX’s budget reduction plans from the Ministry of Finance’s perspective, and what does

Q: Given the fact that the design of the financial side

it mean in terms of PEMEX’s future ability to invest and

of the contracts was heavily influenced by international

meet its financial obligations?

best practices, in what areas has Mexico innovated and

A: The Ministry of Finance has carried out many analyses

created its own financial scheme?

of PEMEX’s fiscal regime, and on average, it looks solid,

A: We have innovated with regards to the progressiveness of

but this average contains a vast amount of extremely poor

basic royalties. Typical fiscal frameworks around the world

and extremely promising projects. The NOC has a variety

have a basic royalty tax, which is a percentage that must be

of cross-subsidies to optimize its costs, but over the past

applied to income. We built a small progressivity based on

few years, these have spiraled upward. One of the items

price into this basic royalty. Whenever prices are under a

that PEMEX can use to promote efficiency and adequate

certain level, royalties are fixed, but should they rise above

terms is the migration to the contractual framework. This

it, royalties start increasing as well. For example, when oil

can be requested at any time, meaning that if a certain

price is under US$48, the royalties are fixed at 7.5%, but

area is not economic because of a fiscal constraint, the

above that price, royalties start increasing, meaning that

NOC can request to migrate it to a contract with more

for a price of US$100, we would observe a royalty at the

adequate terms, and those new economic terms would be drafted by the Ministry of Finance. The best case scenario for us would be for the organization to eventually undergo

WHERE DOES OUR OIL REVENUE GO?

this process, which will provide not only enhanced transparency but also greater budget flexibility.

Money from oil and gas E&P

Q: To what extent will there be any kind of special fiscal treatment for local content, due to the fact that the objective of the Energy Reform is to create value for the nation? A: Mexico is subject to several treaties around the world, and we must abide by those first, before implementing

Contractors that

measures to support local content. That being said, if

participate in E&P

we were to input similar clauses as other countries into

activities Stabilization fund Funds that promote research in the sector

contracts, this would immediately trigger non-conformity warnings from a partner in another country. We are being careful and doing our best to avoid distorting the local market, as what has happened in other latitudes has shown this is a potential danger. We are developing

Federal Budget 4.7% of GDP

the competitiveness of companies in Mexico using other MPF Long-Term

instruments. The contracts foresee that, under matching

Reserve

conditions, firms have to give preferential treatment to

Source: Mexican Petroleum Fund

local content, but because that is difficult to enforce in practice, there are a few elements within the reform that encourage national companies to become competitive,

WHERE DOES OUR OIL REVENUE GO?

avoiding them from having to rely on preferential

The Mexican Petroleum Fund receives, manages

treatment. We participate in a group with the Ministry

and distributes income from Mexico’s assignments

of Economy in promoting these value chains, trying to

and contracts for the exploration and production of

transform small local companies into fully-grown service

hydrocarbons.

firms through training and credit support, among other instruments.

23


| VIEW FROM THE TOP

FRESH ENERGY AT THE HELM OF PEMEX JOSÉ ANTONIO GONZÁLEZ ANAYA Director General of PEMEX

24

Q: As the new Director General of PEMEX, in which direction

can take advantage of the tools provided by the Energy

will you take the company’s transformation process?

Reform, which allow PEMEX to form strategic alliances

A: PEMEX’s transformation is a necessary step to ensure

and access improved technologies while sharing risks.

the company’s viability and the generation of value for

PEMEX, as the main oil and gas company in Mexico, is

the country. Therefore, we are shaping a new stage in

the most attractive partner when it comes to investing

the NOC’s history. Our main objective is to become a

in the country due to its infrastructure and proven

profitable and highly competitive company that plays a

reserves, as well as the accumulated experience of its

key position in developing Mexico’s energy industry, while

engineers and technicians. These elements will be the

strengthening our role as a productive enterprise of the

basis to negotiating in a competitive fashion with players

state to consolidate PEMEX as one of the most important

that qualify as the best partners, striving to obtain the

oil companies in the world. The cultural shift in all PEMEX

best conditions for the country. In this way, PEMEX will

employees and the implementation of a new work

be able to attract a third party’s resources, share the

system, which is based on a more efficient use of assets

risks, and thus increase production levels. Costs will

and infrastructure, will translate into higher operational

be ultimately reduced by operating according to the

excellence. The ultimate objective is to generate more

highest international industrial standards that, under

revenues that will benefit the Mexican people from

shared schemes, will allow us to generate revenues and

production, processing, transportation, distribution, and

maximize the country’s resources.

commercialization activities.

In the short term, PEMEX

will have a flexible and agile organizational structure that,

Q: How is PEMEX facing the global downturn resulting

through corporate governance practices, will guarantee an

from low oil prices?

efficient and transparent management.

A: The global oil and gas industry is going through a difficult time, and PEMEX is not exempt from this.

Q: What is PEMEX’s production strategy, given the

Therefore, just like other companies in the sector,

company’s budget restrictions?

PEMEX had to adopt stringent measures to guarantee its

A: Taking the current oil price into account, the

viability. PEMEX’s financial priority is to consolidate its

exploration strategy consists of delaying or reevaluating

structure to ensure stability and credibility in the market.

certain investment projects, such as for deepwater

We have insisted on the fact that the NOC is facing a

developments and fields that are not profitable at the

liquidity issue, but this is not the case for the company’s

moment due to high production costs. In addition, we

solvency, so its viability is safe. Just like in other low

2016 BUDGET ADJUSTMENT Lines of Action MX$ billion

Corporate

Other SPEs

Industrial Transform.

Generate efficiencies and reduce costs to increase operational productivity and promote a rational use of resources

13.1

1.9

Defer / reassess investments minimizing the impact on future production based on profitability and availability of budgetary resources

0.0

Adjust CAPEX and OPEX from an average of 50 to 25 US$/b, channeling budgetary resources to profitable activities under a low hydrocarbons price scenario TOTAL Source: PEMEX

E&P

Total

0.8

13.1

28.9

2

35.4

27.5

64.9

0.0

0.0

0.0

6.2

6.2

13.1

3.9

36.2

46.8

100.0


oil price cycles, PEMEX is addressing a challenging scenario responsibly, adjusting the budgets for each one of its areas by MX$100 billion. This adjustment has been implemented in practice, as accounts for several anticipated programs have been shut. This, however, does not have a negative impact on the company in the long term. Most importantly, the adopted measurements will not affect the NOC’s employees and facilities. I would like to stress PEMEX’s commitment to our financial and work-related obligations.

25

Q: How is PEMEX adapting its operations to the financial adjustment plan? A: The adjustment, far from weakening the company, makes it stronger by forcing us to accelerate the necessary changes and restructure costs and efficiencies. PEMEX will take advantage of the flexibility it was offered by the Energy Reform, and implement instruments such as contract migrations and farm-outs, which will allow us to attract financial resources, technology, processes, and experience.

AVERAGE PERCENTAGE OF SAVINGS EXAMPLE OF AVERAGE PERCENTAGE OF SAVINGS IN KEY ACTIVITIES IN KEY ACTIVITIES Marine logistics Seismic acqusition Drilling services Drilling equipment Marine services Maintenance and operational

Q: What strategies has the government put in place to

20%

assist PEMEX in this challenging moments?

24%

A: The NOC received resources of MX$73 billion from the

20%

federal government, through the Ministry of Finance, in 30%

April of 2016 with the goal of helping the company face the challenging times the industry is facing. Considering

20%

Engineering

this significant capitalization, and with previous approval of its Board of Directors, PEMEX committed to clear and

18% 20%

normalized payments to suppliers and contractors in the short term, so that current liabilities can be aligned with the company’s operations. In order to carry on with this

Source: PEMEX && Total Investor Day Sept 2015 Source: PEMEX Total Investor Day Sept 2015

effort and adding to the request of credit lines for MX$15 billion with the development bank, PEMEX paid its 2015 As part of the measures that complement the budgetary

debt according to the schedule agreed on by its clients.

adjustment presented in February 2016, we are directing PEMEX to improve its financial indicators though concrete

Since

actions such as the saving strategies the company

strengthening of PEMEX’s assets, the NOC’s fiscal regime

implemented last year by changing its pension schemes.

has been modified, resulting in more cost deductions and

We are already generating efficiencies, as we have

lower taxes, which are estimated at MX$50 billion for the

reduced administrative costs through actions such as

2016 fiscal year. This will lead to higher liquidity indexes

merging three supporting areas in the Director General’s

by strengthening the cash balance, as well as an improved

office into one and eliminating two corporate divisions,

capital structure and debt track record for the rest of the

Human Resources and Technological Research and

year. All these measurements, paired with a lower amount

Development, which were reassigned to the Corporate

of debt, improve the company’s capital structure in order

Administrative Division and PEMEX E&P respectively.

to face the challenge of adjusting its costs and its business

In

expenditure

strategy to the current reality as quickly as possible.

and expenses related to personal services, travelling

PEMEX is seeking greater efficiency levels to consolidate

allowances, and general expenses, which alleviates the

itself as an attractive and reliable partner that will help

company’s liquidity.

develop the national energy sector.

addition,

we

have

reduced

overall

the

government’s

support

considers

the


| VIEW FROM THE TOP

ADJUSTING AND BALANCING TO SOLVE PEMEX'S LIQUIDITY CHALLENGE JUAN PABLO NEWMAN CFO of PEMEX

26

Q: What are your main priorities as the CFO of PEMEX?

throughout PEMEX to understand what is profitable at

A: The most important thing is to move forward, and

current prices and stopping anything that is not. Those

we are now a productive state company, which requires

investments will be delayed. This price environment gives

changes in all areas, the first of which is our corporate

us the opportunity to start incorporating the present and

culture. Secondly, we have to find efficiencies and be

future profitable investments into the budget.

more competitive with regards to the investment that new Energy Reform will foster. We must also be transparent

Q: What still needs to be done in order to overcome your

and become an international reference for the future as

liquidity challenge as fast as possible?

an oil company.

A: We have already carried out the adjustment, and now we have the support of the Federal Government. That

Q: What are the main changes to be carried out in order

comes in two parts. The first one is liquidity to pay our

to become a value-seeking company?

contractors and providers. We have an outstanding

A: Since we have to become more efficient, we must

debt that is quite high for the company’s dynamics, and

conduct a comprehensive analysis in terms of the value

US$4.29 billion will be used to decrease that debt up to a

that is created for the company. We will no longer be

functional balance. The second support mechanism gave

merely focusing on production, but this does not mean

us a floor for the cost cap. Following the Energy Reform,

we will produce less. On the contrary, we have to analyze

instead of being in nominal terms expressed in US dollars,

which of our investments are profitable in order to reach

it became relative to the price. When the reform was

the new expectations set for us by the Energy Reform.

approved, the oil price was over US$80/b, so we were

This means forming associations and alliances with private

allocated 10.5% of the price, which increased to 11.075%

partners, which will bring more value not just in terms of

this year. However, because the oil price is at US$20/b, we

investment and costs but also in terms of efficiencies.

actually have less than we used to. One of the measures of support was putting a floor, which is US$6.10/b for

Q: How are the low oil price environment and resulting

shallow water fields and US$8.30/b for onshore fields. This

budget cut impacting your strategic priorities?

fiscal relief of around US$2.92 billion, estimated at current

A: The adjustment that was implemented was not only a

price levels, will be used to decrease our financial needs

budget cut, but a redefinition of the company. We carried

and deficit with the end aim of improving the company’s

out a deep analysis with three objectives: cost reductions,

financial health. We will not use it to increase our budget.

finding new areas of focus, and adapting to the new

Our primary focus is on improving our current and future

low-price environment. When it comes to new areas of

health using the permanent support of the cost cap.

focus, there are two main components. The first one is the reconfiguration of refineries, for which PEMEX will

The Energy Reform instruments come next. We can

look for partnerships and alliances, as we no longer plan

migrate our fields, which might help us in fiscal terms. As

to invest in that area. The second area we are looking at

the rounds have come up, the cost cap is approximately

is deepwater, which is not yet in place, but for which we

60% of the price. Even though this currently stands at

expect to begin production in eight to ten years. Here, we

US$6 in a low price environment of around US$30/b,

will look for operational partnerships given the high level

60% is US$18, which means we can carry out three times

of risk involved. Unlike the refining area, which we can

more deductions. That does not come for free, however. In

operate, in deepwater we need technology and expertise,

order to achieve that, we need to improve our efficiency

as well as investment. As I mentioned before, we are also

and costs to reach an international benchmark. The

trying to adapt to the new low oil price environment,

government is able to give us that support because it

which is poised to stay. We are carrying out an analysis

would provide them with incremental production.


Q: What are the main financial benchmarks that you use

Q: What is your response to potential deepwater partners’

to compare PEMEX to NOCs or IOCs?

concerns about PEMEX’s liquidity challenge and its ability

A:

We

first

benchmark

against

other

state-owned

to make the agreed contributions to the development of

companies because we do not have equity, after which

the projects over time?

we compare to the major private companies. We want to

A: What we have done in the recent months has allowed

become one of the best Latin American oil companies. I

us to regain some trust, which has been reflected in the

think PEMEX has operated well for 70-80 years, and now

spread reduction that we have experienced lately. It is very

we have to learn to operate as a state-owned company

important for everyone to be confident in the fact that

and not a monopoly.

things are being taken care of. This year, our CEO made a commitment to outline and implement an analytical and

Q: To which extent will these changes be driven by the

reliable business plan. Investors are starting to see this

financial and operational angles?

new commitment that will give them the possibility to

A: PEMEX is not a financial company or a bank. We are

invest in PEMEX.

an oil company. We are going to focus on our business, which will improve our finances with solid management

Q: What should suppliers expect from PEMEX in 2016,

practices. We will look to become extremely efficient in the

and what sort of payment behavior will the NOC adopt

operational part and selective in the investments we make.

in the future? A: This is an ongoing process, and PEMEX is paying off

Q: Which areas will be the core business of PEMEX and

its 2015 debt to suppliers. The important thing is the

will receive capital investment, and which areas can be

net balance. Being a large company, we have payment

operated in partnerships or be divested completely?

processes that are naturally delayed. This creates a natural

A: We will continue investment in the upstream sector as it

amount of debt with which we function. In a couple of

is our main focus. PEMEX has done great work in shallow

months, all of the 2015 debt will be covered. Our more

waters so far, and although we are used to exploiting very

recent payment behavior has been much more typical for

large fields, the small ones pose certain challenges that

the new contractors we are hiring, and we expect to pay

could be solved through partnerships. In onshore fields,

them in October-November. 180 days is the timeframe

we will do the same. In deepwater, we want operational

that is naturally implemented. As for 2016, we are going to

partners. We do not just want them to bring investment,

start working with this process so that no one is affected.

but also to operate so that we can learn and improve our

Lately, however, we have been delaying more than the

capacities.

natural process requires.

| ANALYSIS

A CLOSER LOOK AT PEMEX'S 2015 FINANCIAL PERFORMANCE Mexico was not exempt from the crisis resulting from the

by the end of the first quarter of 2015 to MX$17.40/US$1

precipitated drop in the oil price, and in 2016 the average

in April 2016.

price of the Mexican crude basket stood at US$25.92/b, almost half the price budgeted by the government for that

PEMEX was forced to lower its expectations in terms

same year, and 43% less than a year previously. Gasoline

of revenues and revise the forecast to a more realistic

prices evidenced the impact of the oil price soon after,

figure of US$25/b, which was chosen because it was

as these tumbled down 30% in the northern coast of the

thought to suit a conservative scenario in terms of current

US Gulf of Mexico during the first quarter of 2016. The

expectations in the industry. This revision led to a cut in

average price of gas based on the Henry Hub also suffered

revenue of approximately US$5.6 billion.

a decrease, as it was down by 32% compared to the same period in the previous year. However, this is attributed to

MEASURES TO ADJUST TO A NEW ENVIRONMENT

different causes, such as an increase in inventory buildups

On February 26, 2016, the Board of Directors of PEMEX

and warmer than average temperatures in Japan, Europe,

decided that in order to comply with the maximum deficit of

and the US. In addition to dropping commodity prices,

US$8.3 billion established by the Federal Revenue Law and

the industry was also hit by a depreciation of the Mexican

meet the financial balance goal set for the year, the company

peso against the US dollar, which went from MX$15/US$1

would have to enforce a Budget Adjustment Plan that

27


would cut over US$5.6 billion to its allocated expenditures.

attributed to a reduction in export volumes. Domestic

The NOC understands that there is no other way to adapt

sales, on the other hand, decreased by US$900 million

to the new unfavorable price environment and is following

or 10% mainly as a result of a decline in the international

the footsteps of its competitors with the budget cut and

reference price of gasoline and diesel, and to a lesser

its redefinition as a company that prioritizes profitability,

extent by a decrease in the sales volume of LPG.

stability, and sustainability. In line with these new objectives,

28

the Adjustment Plan also requires the deferral or cancellation

COST OF SALES

of projects that do not add value at current prices and the

The cost of sales decreased by 21% in majority because

implementation of efficiencies in several expenditure items.

of a reduction in the “other” item, which englobes

In addition to the aforementioned internal changes, PEMEX

depreciation, amortization, impairment, net cost for

is seeking to use the figures and mechanisms offered by the

the period of employee benefits, preservation and

Energy Reform. “We will strive to strategically collaborate

maintenance, exploration expenses, non-successful wells,

with third parties to diversify sources of working capital

inventory variation, and subsidiary entities consolidation

and share risks, monetize assets to increase our financial

net effect. The ones that impacted the cost of sales most

flexibility, and migrate assignment contracts to the new

during the first quarter of 2016 were inventory variation,

exploration and extraction contracts that offer more

which suffered a US$800 million decrease due to the

attractive fiscal conditions. The new business model will

lower value of products in different periods, as well as

maximize value creation by focusing on profitable projects

depreciation and amortization, down US$600 million

to stabilize production,” Juan Pablo Newman, CFO of

because of a lower calculation base that followed from

PEMEX, expounds.

declining prices, fixed asset impairment, which represented a US$300 million drop as a result of no-asset re-evaluation

The Federal Government announced two support measures

during the quarter and compared to certain assets’ re-

aimed at strengthening PEMEX. The first involves a capital

evaluation during the first quarter of 2015, and the net

increase of US$4.1 billion, comprised of an exchange of

cost of employee benefits that amounted to a decrease

US$2.6 billion in non-negotiable government certificates

of US$200 million for the period due to the modifications

received in December 2015 for negotiable ones, and

in the pension scheme. The gross income, calculated by

US$1.47 billion in an equity injection through certificates

deducting cost of sales from total sales, totaled US$3.5

of participation. In addition to this, the government put

billion, a US$600 million or 15% decrease compared to the

forth a decree on raising the tax-deductibility ceiling

first quarter of 2015. The reduction in cost of sales was the

applicable to the profit-sharing duty, setting minimums of

main reason in reverting the gross loss experienced at the

US$6.10/b and US$8.30/b respectively for shallow waters

end of 2015.

and onshore fields that could generate up to US$2.8 billion in savings, subject to the prices of hydrocarbons.

GENERAL EXPENSES

It is hoped that these measures will help reduce PEMEX’s

General expenses are broken down into distribution,

liquidity constraints, therefore reducing accounts payable

transportation

to suppliers and the financial debt, and eventually

expenses, and other expenses. In the first quarter of 2016,

guaranteeing the sustainability of the company. Moreover,

general expenses stood at US$1.7 billion, down US$300

the revision of PEMEX’s pension scheme is also having a

million or 15% from 2015. The drop is mainly attributed

positive impact on the company’s financial results.

to a 33% decrease in the distribution of expenses and a

and

sales

expenses,

administrative

6% decrease in administrative expenses, mainly related

SALES

to the variation in personal services from the reduction in

During the first quarter of 2016, total sales amounted

personnel that occurred throughout 2015. Consequently,

to US$12.5 billion dollars. Broken down, this equates to

operating income fell to US$1.7 billion, 16% less than in

US$3.8 billion in exports, US$8.5 billion in domestic sales,

2015. Newman reminds that the operating loss observed

and US$0.2 billion in revenues from services. The 19% or

at the end of 2015 was able to be reverted thanks to

US$3 billion decrease compared to the same period in

improvements in the gross income and a reduction in

2015 can be explained by a decline in the average sale

general expenses. Interest expenses went up by US$2

price of oil and its derivatives.

million following an increase in financing activities and the depreciation if the Mexican peso against the US dollar.

Looking into the individual causes, exports dropped 35%

Interest income grew by US$1 million mainly due to the

or US$2.1 billion due to a US$1.4 billion decrease in crude oil

investment in securities.

exports as well as US$600 million reduction in petroleum products exports. These lower prices accounted for 72%

Income from financial derivatives experienced a positive

of the decrease in total export sales, while the rest was

variation of US$1.4 billion, which represents an increase of


155% compared to the same period in 2015, largely thanks

total of US$13.3 billion that could be raised through the

to the appreciation of the US dollar against other currencies

communicating vessels mechanism.

in which PEMEX has entered into through cross currency swaps. Nonetheless, the NOC also recorded a foreign

To date, PEMEX has tapped both the local and international

exchange loss of US$1.1 billion, US$100 million more than in

markets, raising approximately 54% of total allocated

2015 due to the depreciation of the Mexican peso against

financing for the year. In January 2016, it accessed the

the US dollar. As a result, the difference between operating

local debt markets and entered into a bank loan for

income and net financial cost provides an income before

US$400 billion, and in March, the company issued Stock

taxes and duties of US$170 million, or 134% more than the

Certificates amounting to US$300 million and obtained

amount recorded during the first quarter of 2015.

US$800 million through three credit lines with Mexican development

banks.

The

company

already

tapped

Taxes and duties during the first quarter of 2016 added up

international debt markets in January 2016 and issued

to US$3.6 billion, which is US$1.5 billion or 29% less than

securities for an aggregate amount of US$5 billion in three

in the first quarter of 2015, a drop that can be attributed

tranches, maturing in 2019, 2021, and 2026. In February

to a combination of drop in the crude oil price and lower

it accessed the market for US$2.25 billion. In March, it

production, which lowers the tax base. Despite the new

raised US$2.6 billion in two tranches, maturing in 2019 and

fiscal regime to which PEMEX was subject as of 2015, the

2023, and in April, PEMEX entered into a bilateral loan for

company is still unable to deduct all of its operating costs

US$571.6 million due in seven years.

and expenses from its calculations of taxes and duties. In order to reduce this impact, on April 18, 2016, the Federal

Thanks to the support measures granted to PEMEX by

Government published a decree that grants certain tax

the Federal Government, financing needs are expected to

reliefs to assignment operators, which are expected

decrease, primarily benefitting the domestic market and

to reduce the payment on the profit-sharing duty and

giving the company more flexibility regarding operating

to improve the financial condition of the company. In

execution. The company expects to receive approximately

consequence, PEMEX recorded a net loss of US$3.4 billion,

US$2.8 billion from this scheme, which it will use to pay off

38% less than the one recorded last year, in majority due

US$200 million out of the US$1.7 billion it has to allocate

to the effect of prices and exchange rates discussed

for the year. These US$2.8 billion that PEMEX received

previously. The comprehensive loss, however, amounts to

were part of a pension reduction agreement drafted in

US$3.5 billion, 34% less than last year's as a result of the

2015 that amounted to US$10.4 billion, the rest of which is

conversion between the different currencies and PEMEX’s

still under revision by the Ministry of Finance. The company

functional currency, the Mexican peso.

might receive this latter amount in liquid form or under the form of securities that will help it reduce its pension

LIABILITIES

liability. Moreover, PEMEX hopes to access international

PEMEX’s financial debt went up by US$7.2 billion while

markets again in the next quarter to raise dollars, Swiss

the reserve for employee benefits increased by US$900

francs, or Japanese yen in order to diversify the sources of

billion. Moreover, the NOC recorded a US$2.3 billion or

funding. In the time period from February to April 27 2016,

26% decrease in supplier liabilities during the quarter, and

the spread between PEMEX’s financing costs in dollars

an increment in the remaining liabilities of US$600 million.

and the Mexican government bonds in dollars narrowed

As a result, total liabilities as of March 31, 2016 stood at

by 59 basis points, while the spread with the US Treasury

US$177 billion.

bills decreased by 116 basis points.

PEMEX and PMI’s total financial activities during the first quarter of 2016 added up to US$11.7 billion, with total debt

2016 FINANCING PROGRAM1 Sources of Funding

Allocated US$ billion

billion. The impact generated on the company’s debt

Domestic Markets

6.0 – 9.0

from exchange variation added up to US$900 million. The

International Markets

8.0 – 11.0

evolution of equity was subject to a decrease of US$3.5

Bank Loans

0.5 – 1.5

billion during the first quarter of 2016 as a result of a net

Export Credit Agencies

(ECAs) 1.0 – 2.0

loss of US$3.4 billion during the period.

Other

3.0 – 3.5

Total

21.1

According to the 2016 Federal Revenue Law that was

Debt Payments

5.4

approved by the Board, PEMEX has an internal net

Net Indebtedness

15.7

payments made during that period amounting to US$5.3

indebtedness ceiling of US$6.1 billion and an external net indebtedness ceiling of US$7.2 billion, amounting to a

Source: PEMEX 1 Estimated, based on 2016 Budget Proposal

29


| VIEW FROM THE TOP

THE FUTURE OF PEMEX LIES IN CAPITAL MARKETS DAVID ENRÍQUEZ Partner at Goodrich, Riquelme y Asociados

30

Q: Which factors have put PEMEX in the challenging

Congress to change the fiscal regime of the assignations,

position it finds itself today?

but this is an unlikely option. The second revision that

A: The reason PEMEX has reached such a low point is

should be made lies in the firm’s financial structure.

because the lack of preparation before the Energy Reform,

Although this is a sensitive topic, it is a perfect time to

and the drop in oil prices led PEMEX to crash in a short

bring it up given the fact that Saudi Arabia is breaking the

period. The accumulation of these situations has created

taboo of opening public national oil companies to financial

a perfect storm for the productive enterprise of the state.

markets. I have always said that PEMEX will eventually die

The exceptional talent that it holds is not enough to save

if it does not enter capital markets. PEMEX must avoid

the NOC, which urgently needs to undergo a culture shift.

sinking further into debt at all costs. Naturally, before it can

PEMEX must start working with partners and not only

consider floating a certain percentage of its shares, it must

contractors, and realize it will be just another player in

revitalize itself to make private investment an attractive

Mexico’s oil and gas industry. In addition to updating its

option. The first step toward this is to restructure the

culture to reflect the current industry structure, it also

company, after which the NOC can work toward making

needs to readjust two of its fundamental aspects.

its culture more partner-oriented and eliminating the assignations that are constraining it.

One of the flaws of the Energy Reform was the absence of consideration of a transitional tax regime for PEMEX,

Q: Under which circumstances could the Mexican

leaving the parastatal void of any incentives to continue

government consider floating PEMEX shares?

functioning

A:

efficiently.

The

fiscal

regime

for

the

We will see the impact of the Energy Reform in

assignations is deeply confiscatory, and it is destroying all

the medium and long term, as IOCs and independent

of the NOC’s competitiveness and value. I believe these

operators will eventually catch up and contribute the an

should be overturned, either through farm-outs or through

overall production increase. Only a certain percentage of

the migration of contracts. Another solution would be for

this production will come from the NOC, decreasing the

MEXICO LIFE EXPECTANCY

PEMEX PENSION OBLIGATIONS

In 1942, PEMEX's retirement conditions were established:

ACCRUED OBLIGATIONS (MX$ BILLION)

• 55 years of age MEXICO: LIFE EXPECTANCY • 25 years of work

• Up to 80% of wage

58

61

66

71

74

74

The life expectancy increase has had an

47 34

48% Cur pension

75

exponential effect on

39

Accrued obligations

MX$1,517 billion

the pension liability

48% current pensions

Source: PEMEX Source: PEMEX

2013

2010

2000

1990

1980

1970

1960

1950

1940

1930

Source: PEMEX

42% reform objectives 10% active employees

42% Ref

objectiv

10% Act employe


dependence of the federal budget on PEMEX. Once we

from Round One. If the NOC could at least raise capital

reach that point, the productive enterprise of the state will

on its own for these enterprises, it would become much

have become a more efficient competitor and the political

more attractive for IOCs, which would then contribute the

class will have more pragmatism. The concept of floating

experience lacked by PEMEX.

a percentage of PEMEX shares in the near future is not as drastic as the Energy Reform was back when it was

Q: How could corruption impact the Mexican oil and gas

announced. A capital intensive industry needs capital, and

industry, and what are its implications for the licensing

when capital cannot be accessed due to reasons such as

rounds?

debt, a company restructuring and a change in the fiscal

A: In the energy sector, the impact of corruption is mostly

regime is needed. Once PEMEX restructures and the fiscal

felt in public procurement by the state-owned enterprises.

burden is reduced, it will be attractive enough to float its

When it comes to the opening of the sector, I have to

shares. Such an action cannot come from desperation, but

recognize the authorities’ standards in Round One in terms

rather must be the result of a sound longitudinal exercise

of transparency and the perception of the round, which is a

that will take at least five to ten years. Going public will

positive signal because the tenders are the key component

be the next natural step for PEMEX, which is also positive

to the success of the Energy Reform. Nonetheless,

because the pressure imposed by investors will lead to

corruption in other areas is far more complex. Whenever

greater efficiency and transparency. It would be a disaster

there is a crisis there is room for corruption, and the

if PEMEX shares were floated right now, but it should

current woes of the oil and gas industry are no exception

happen in the near future, especially if the company

to this rule. People find a way to loot spoils when there is

manages to restructure successfully.

a vulnerable entity. I am afraid this could be happening or could happen if PEMEX and CFE and not careful in

Q: How could PEMEX best improve its access to capital?

their restructuring processes because the conditions for

A: PEMEX should float shares in the segments of the

corruption are there. We have different scenarios, such as

industry where it is most difficult to raise capital. The

the successful achievement of transparency seen in Round

market is open for all three segments of the oil and gas

One, and a negative scenario, in which certain people see

industry, and there are different financial vehicles for

a vulnerable PEMEX and want to take advantage of the

the hydrocarbons value chain. For instance, Fibra E was

situation. In the case where corruption were to take over

created for the midstream sector, as the availability of a

PEMEX, companies that are not directly interacting with

market, a transportation system, and off-takers make this a

the NOC would not be significantly affected, but it would

stable and sound business. For the upstream segment, the

be naïve to underestimate this statement. In the first few

natural course is to enter capital markets because PEMEX

years of the reform, all companies in the Mexican oil and

does not have much to offer in this regard. PEMEX can add

gas industry will be interacting with PEMEX because they

value in terms of human capital and experience in certain

will be using the NOC’s infrastructure, particularly the

assets, but it cannot contribute much in projects such as

winning companies from R1-L03 and the CIEP and COPF

deepwater operations, since it does not have any fields

contracts.

UPDATE OF THE PENSION SCHEME PEMEX has implemented drastic changes to its pension scheme as a part of its budget reduction plan, aimed at decreasing the US$90 billion debt it has accumulated to date. One of the most contested changes is the increase in retirement age for relatively new employees, a measure that was approved by the Union of Petroleum Workers of the Mexican Republic (STPRM) in November 2015. Indeed, pension payments represent a large part of PEMEX’s expenditure, but the modification of the pension plan is expected to result in an annual liability decrease from US$51.7 billion to US$17.1 billion between 2015 and 2021. Should PEMEX employees with less than 15 years of seniority want a pension equivalent to 100% of their salary, they will now have to stay until they reach an age of 60 instead of 55, in addition to ensuring at least 30 years of service. New employees will be under an individual accounts scheme, which includes certain advantages such as a complementary contribution from PEMEX, the possibility of transferring it to other accounts, and voluntary saving with fiscal benefits.

Based on the following conditions, the Federal Government will recognize with an amount equal to the savings achieved through the negotiation and amendment of the Collective Bargaining Agreement: • Individual account regime for new employees • Gradual adjustment of the retirement parameters of active employees

31


| VIEW FROM THE TOP

PEMEX TO BOOST PRODUCTION THROUGH PARTNERSHIPS GUSTAVO HERNÁNDEZ Director of Prospective Resources, Reserves, and Associations at PEMEX E&P

32

Q: What are your responsibilities of the Prospective

A: Some service contracts that were signed under a

Resources, Reserves, and Associations division at PEMEX,

bidding process prior to the reform can be transferred

and how do these differ from PEMEX Alliances & New

to E&P contracts under the new framework, and at the

Business?

moment there are 16 CIEPS and six COPS looking to be

A: PEMEX E&P was reorganized into three areas. One

migrated into the new scheme. Initially, we split these

division is dedicated to exploration, discovering new

contracts into two sets of 11. The first set of migrating

prospective resources. On the production side, one

contracts consisted of COPS that have existed since

division will manage the development of existing

2003-2004 and some CIEPS that were signed in 2011,

fields. However, a third area will focus on fields where

such as Santuario, Magallanes, Pánuco, Arenque, Altamira,

third parties are involved in the production process.

San Andrés, Ebano, Nejo, Misión, and Olmos. The second

The reason this third division was created is that the

set was composed of Tierra Blanca, Carrizo, and the last

E&P divisions have plenty of work on their plate, and

five Chicontepec blocks, Amatitlán, Miahuapan, Pitepec,

managing partnerships requires different skills and

Humapa, and Soledad, as well as other four COPS like

approaches than only working within PEMEX. That

Cuervito, Fronterizo, Monclova, and Pirineo. Although

being said, alliances, partnerships, and joint ventures fall

Miquetla belongs to the second set, it was included in the

under the responsibility of the Prospective Resources,

first due to a request from the company operating it.

Reserves, and Associations division, and the teams that work in fields under a JV will report to this division. While

There are 22 blocks and each entails a different learning

CNH will define our partners through a bidding process,

process. When we submitted the initial request to migrate

we have to decide who the operator will be. If PEMEX is

the contracts, there was a need to make some amendments

going to operate, then PEMEX E&P will be responsible for

to the entitlement blocks that were awarded to PEMEX in

the project because technical details and the allocation

Round Zero, such as modifying the entitlement to include

of CAPEX fall on the operator’s side.

the whole block. In other cases, some assigned areas overlapped, which we noticed when we began the process

The main difference between the Prospective Resources,

and had to request the correction. In the meantime, the

Reserves, and Associations division of PEMEX E&P and

Ministry of Energy and CNH issued new guidelines for

the corporate division Alliances and New Business is that

E&P plans that were not considered when the Round Zero

the latter is in charge of defining the alliances that will

fields were awarded.

maximize PEMEX’s performance, define the people who will be members of the board in a JV, and decide which role

To start the process, PEMEX had to sign a letter of consent

PEMEX people will play in each case. On the other hand,

with its future partners, and then undergo a financial

Prospective Resources, Reserves, and Associations will

assessment, as each party will have its own working

focus on technical aspects and on the actual production

interests, so we had to establish the shares. Also, changing

processes. In this sense, my area deals with associations

the type of contract entails demonstrating to the Ministry of

in existing contracts, such as the migration of CIEPS

Finance that the migration will improve government take,

and COPS, and future partnerships, such as farm-outs.

increase reserves, and increase production by decreasing

In addition, we are responsible for validating discovered

the fiscal obligations. Part of the negotiation process

volumes and certifying hydrocarbon reserves according to

included carefully defining reserves, area extension,

CNH’s guidelines and our internal procedures.

facilities, infrastructure, and royalties. For this purpose, we hired five international financial entities that used different

Q: What has been holding back the process of the

methodologies, which were aligned and standardized at

migration of CIEPS and COPS?

the end of the process. The next step was to summarize


the development and production plans, as well as the

in its 60 fields, while ATG (Chicontepec) produced 41,000 in

minimum work commitment that will be included in the

28 fields. The Veracruz asset yielded 14,000b/d, and Burgos

new E&P contracts. It was a long discussion because with

is not producing oil at the moment. In the group of fields

the cost recovery at 70% and sometimes 100% of eligible

with contracts awaiting migration, Ébano is the largest oil

costs. We went to the basics determining what eligibility

producer, with 11,000b/d, Santuario produces 5,000b/d,

meant and what was an eligible cost. After this learning

Arenque 4,000b/d, and 6,000b/d came from Ogarrio-

process, I can assure you that all the service contracts,

Sánchez Magallanes. In the case of offshore assets, Litoral

except for the ones in blocks with a pending amparo will

de Tabasco is responsible for 363,000b/d, including the

be migrated.

Tsimin-Xux field. Abtakún-Pol-Chuc produced 200,000b/d across 16 fields, and the eight fields in Ku-Maloob-Zaap

We started with Santuario operated by Petrofac, Misión

produced 860,000b/d. Cantarell produced 232,000b/d

operated by Techpetrol, Ébano, and Miquetla, operated by

with its ten fields. While some fields like Samaria Luna are

Grupo Diavaz. Companies have already submitted their

declining, other like Abkatún-Pol-Chuc, Litoral de Tabasco,

requests before the Ministry of Energy and ten contracts

and even Ku-Maloob-Zaap are yielding positive results.

have received a green light. Olmos, a COPF for a gas field

Highly productive new fields were discovered in Abkatún,

in the northern region, cannot be moved further because

such as Onel, Kuil, Homol, and Chuhuc, which are helping us

of an amparo from a mining company. We have talked

counter the decline rate. In the Cantarell complex, Ixtoc and

about this with Lewis Energy, the company requesting the

Kambesah produced 15,000b/d, Ek-Balam 46,000b/d, and

migration, who understands that not much can be done

Chac, Kutz, Nohoch, and Takin contributed with 27,000b/d.

at the moment. As for the rest of the blocks, we decided

Sihil had an output of 31,000b/d, but the most important

to move on different fronts but we found that all the

producer in Cantarell was Akal with 78,000b/d. If we only

players in the process, the Ministry of Energy, the Ministry

focus on the scope of the farm-outs, Cárdenas, Mora, and

of Finance, CNH, and PEMEX, needed to learn a new

Samaria produced 48,000b/d, Ek-Balam 46,000b/d, and

process. In the past, every actor tried to advance in the

Bolontiku-Sinan had an output of 43,000b/d. Ogarrio

best direction, and these were not always fully aligned, but

yielded 10,000b/d and Rodador 3,000b/d. Ayatsil-Tekel

now we have assembled a task force that includes a legal

produced 3,000b/d, which is not bad considering the asset

counsel, New Business, Associations, the finance area, and

has recently started production.

many others in order to align and streamline the process. Santuario is close to being successfully migrated, and all

Regarding gas production, the largest output came from

the CIEPS and COPS should be migrated before the end

Cantarell in the 2007-2008 period, which amounted to

of this year.

1bcf of formation gas. Cantarell now produces 10% of the total gas production. There are considerable natural gas

Q: What are the overall production trends, and what

producers, such as Ogarrio, which produced 33mcf/d.

context does this create for the attractiveness of COPS,

Rodador is not a gas producer, but it had an output of

CIEPS, and additional future partnerships?

5mcf/d of associated gas. Nejo is worth mentioning, as

A: PEMEX’s total production reached 3.383 million b/d

it produces 200mcf/d. Back in 2013, we began reporting

in 2004, but has dropped to 2.259 million b/d in 2016.

Nejo’s production as condensates, but now it is reporting

Since 2004, when production at Cantarell peaked at

liquids. Cuervito and Fornterizo have an output of

2.125 million b/d, an extended decline reduced this field’s

15mcf/d, and we are in talks with the operators, Grupo

production to 230,000b/d by March 2016. However,

Diavaz, Petrobras, and Teikoku because even though

the other fields in PEMEX’s portfolio have experienced

the production is significant, we want to make sure it is

an overall production increase as a result of our

profitable under the current regime. In the exclusive case

effective diversification strategy that compensated a

of CIEPS and COPS, the former produce 273mcf/d, a

substantial proportion of Cantarell’s production decline.

higher number than that of the COPS, which are natural

Compensating the production decline of a super-giant

gas producing assets and have an output of 147mcf/d.

field and increasing production by 60% is something no other company in the world has done. The challenge

At their peak in 2009, Monclova produced 1bcf, making

remains, but the numbers herald good news.

it an important asset. Burgos produced 90mcf/d, Nejo 80mcf/d, and Misión 1.1bcf/d. There are significant gas

In terms of annual averages, the 15 entitlements in Samaria

producers but it is important to take the Henry Hub

Luna contributed with 142,000b/d, Bellota-Jujo produced

price reference for future estimates. If we find a great

96,000b/d across 26 fields, Cinco Presidentes 88,000b/d

production potential, we could allocate CAPEX and get

in 21 fields, and Macuspana-Muspac produced57,000 b/d

some fields to the production levels they experienced

across 37 fields. Poza Rica was able to produce 57,000b/d

back in 2009-2011.

33


| VIEW FROM THE TOP

THE JOINT VOICE OF MEXICO'S NEW OPERATORS RAYMUNDO PIĂ‘ONES Director General of AMEXHI

Q: What type of representation and action does AMEXHI

A: The first three calls of Round One have demonstrated

strive to undertake on behalf of its members?

that the government is able to deliver a very ambitious

A: AMEXHI is the only association which gathers the upstream

program. Having said that, Round One will only be the first

players in the industry; that means the companies whose

step of this program, and we are already halfway there.

activities are only exploration and production. We currently

The successful implementation of the Energy Reform will

have 42 members, an excellent mix of nationalities and sizes

depend on the long-term creation of a new hydrocarbons

which gives us a global perspective, a large array of company

industry with a variety of players along the whole value

types, and also a capacity for technological advancement

chain. Seven of our members are or will soon be operators

and innovation. We have the major IOCs, large independents,

or are in a consortium with an operator. We have enabled

firms specialized in unconventional resources, NOCs, and

the sharing of a common vision, and that has been AMEXHI’s

eight new Mexican companies. AMEXHI is organized by

great delivery. We have been able to gather the opinion of

a general assembly, where all members are represented,

the upstream hydrocarbons industry giving one more voice

a board of directors that looks at daily decisions, four

to the government and different decision makers on which

committees that handle finance, technical issues, external

policies to adopt to turn this into a success. We will keep

affairs, and legal affairs, along with my position. All members

working and doing what we have been doing. I would not

are able to contribute through the committees in generating

say there is one specific challenge. Everything has a certain

the position of AMEXHI which is the one that eventually

degree of difficulty to it, given the amount of changes the

is shared with consultation councils and authorities, and

industry is experiencing.

it is through their opinion and technical expertise that the committees agree on a common voice of the industry which

Q: What are your priorities for the following years?

is then shared with the different authorities.

A: Since we are a new organization, we will work on continuing the institutionalization of AMEXHI, which means finding

At this point, AMEXHI is assisting different public and

the right connection mechanisms with other associations,

private entities in order to shape the new hydrocarbons

international entities, NGOs, and the government. More

industry, considering the challenges that will come

importantly, we will continue to gather the view of the

when companies start operating. At the moment, these

industry assisting the long term process of creating a new,

challenges are strictly theoretical until companies have

safe, sustainable, and responsible hydrocarbons industry. In

a local operation. Nonetheless, we are focusing on the

ten years, AMEXHI would also like to see Mexican companies

creation of a new sustainable and responsible hydrocarbons

becoming competitive globally; not only the upstream

industry. Although ensuring the attractiveness of Mexico

players, but also the Mexican service providers.

as an investment destination is not one of our direct objectives, we support the government through technical opinions in choosing the right policies to achieve this goal. We do that by sharing best practices and acting as the common voice of the industry to the authorities. We interact with authorities and the ministries through the formal consultation processes, for which we are part of their consultation committees, and work with them on most pieces of regulation they issue. Q: How have AMEXHI and its members contributed to the success of Round One so far?

35


Maximum Efficiency, Minimum Cost.

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contacto@grupohosto.com.mx


| VIEW FROM THE TOP

FROM SOURCING HUB TO STRATEGIC OPERATIONAL ENVIRONMENT ALBERTO DE LA FUENTE President and Director General of Shell Mexico

Q: What have been the highlights during your four years

were unenthused at the idea of sourcing from Mexico, as

as Shell Mexico’s Director General, and how different has

they were used to working with their own suppliers. Now,

this experience been from what you expected?

however, they have no choice, and that makes Mexico

A: Although I initially entered Mexico with prudent

much more competitive. This comes in addition to our

expectations in order to avoid frustration, I believed that

exceptional geographic location, as well as the quality

even if nothing were to happen in the energy sector, it

and the cost of our labor force. Another important factor

would still be a rewarding experience. As a matter of fact,

when it comes to having a sourcing office in Mexico is

it has turned out to be completely different to what I had

that it is now not only evaluating opportunities for export,

expected, with each year being notably different from the

but it would also provide significant savings should Shell

previous one. The main highlight for Shell was of course the

decide to undertake a project locally. So far, our sourcing

Constitutional Reform. Mexico had been waiting for this shift

office has been disseminating the market. The office has

for a long time, and when it happened, it left everyone with

become extremely relevant because it allows us to compete

a great feeling of satisfaction and with the assurance that

even more successfully with projects outside of Mexico,

the country was moving forward. The next highlight was

and it allows us to deepen our understanding of sourcing

the day when the government awarded the first exploration

opportunities for projects within the country.

contract. This was the manifestation of all the hard work

Shell has been present in Mexico since 1954,

that the country contributed to the constitutional and legal reforms. Finally, the announcement of the deepwater bidding round and a date by which offers must be placed was the third most significant event. Q: How competitive is Mexico in the context of Shell’s global portfolio of opportunities? A: Two aspects should be considered when attempting to rank the attractiveness of opportunities. The first one

when it began distributing, commercializing

petrochemicals and eventually lubricants

is materiality, which is the country endowment, without which little can be done. In this respect, PEMEX’s work

Q: What would you advise the Mexican government to

over the years has made Mexico an attractive location. Only

do today to make sure that the national content debate

now are we starting to look into the country’s seismic data,

makes sense in the future?

but we believe that there is materiality and a promising

A: It should apply the lessons learned from other industries,

source of hydrocarbons, which piqued our interest. The

such as the manufacturing sectors, be it automotive or

other aspect relates to a country’s terms and conditions

aerospace. I believe the government is already looking at

and its global competitiveness. Despite the attractiveness

them. Mexico is becoming increasingly open to global

of opportunities elsewhere, we believe that Mexico holds

markets, namely with the Trans-Pacific Partnership. This

several promising prospects.

is an opportunity for the government to look at the way in which these agreements affect other industries, and

Q: Which role does its global sourcing hub in Mexico play

apply the lessons learned the oil and gas sector, allowing

in Shell’s global and local strategy?

it to compete internationally. It is also important that

A: Our hub has reinforced the merits of strategic sourcing

local content requirements remain transparent in terms of

in Mexico. We have noticed that in times of high oil prices,

administration. This is in the best interest of all players, given

companies lack the incentive they now have in seeking

the number of people and processes involved. We must not

the most cost-efficient supplier. In those times, players

get lost in the bureaucracy of administering the system.

37


| VIEW FROM THE TOP

STRIVING TO KEEP SERVICE COMPANIES AFLOAT ERNESTO MARCOS GIACOMAN President of AMESPAC and Founding Partner of Marcos y Asociados

38

Q: What are the main priorities for AMESPAC at the

Q: What concrete actions is AMESPAC taking to help its

moment?

members to mitigate the effects of the industry’s current

A: The first and most urgent matter is the problem

financial reality and PEMEX’s overdue payments?

resulting from PEMEX’s liquidity constraints restraining its

A: The problem is not limited to companies not being

ability to pay its suppliers and contractors. AMESPAC has

paid for services provided a year ago; the real issue is

been deeply involved in addressing this problem, looking

that PEMEX no longer has the budget to operate as

for solutions, and approaching PEMEX to face this issue so

planned this year, so it is cancelling contracts. Some of

that the government can finally take actions. The first step

these are three-year contracts that PEMEX is cancelling

has been injecting capital so that the oil company can get

with less than 20% of the work being completed. Even

up to date with its overdue invoices that it has been unable

though the oil company had an assigned budget for those

to pay due to budget cuts, affecting jobs and services

contracts, it has no available resources. Companies that

that have been effectively provided. The second action

had such contracts with PEMEX have had to invest in

consists of organizing meetings with the new operators

obtaining certifications and preparing their staff, and now

that have being assigned contracts in Round One in

their contracts were cancelled without the possibility of

order to promote our associates’ services so that these

obtaining a new contract in the short term. Of course, this

can diversify their markets. We have already arranged

is greatly due to the low oil price, which has left the State’s

meetings with the winners of the first two phases, and our

oil company without liquidity. However, this is also the

members have presented their service offerings.

consequence of a structural issue that had a cumulative effect over the years, because an important part of the

Some of the other problems we are revising include the

NOC’s budget was spent on unrelated activities.

delay in migrating CIEP and COPF contracts. In the case of the latter, we want the migrations to happen as soon as

The current situation is deeply affecting companies in the

possible, because the companies that provide services to

sector, and even though AMESPAC members are large

PEMEX and are looking to become operators are members

companies that do not run the risk of disappearing, many

of AMESPAC. Farm-outs are also behind schedule,

of our service providers and suppliers are going through a

as PEMEX, the Ministry of Energy, and the Ministry of

difficult situation that sometimes forces them to shut down

Finance have not yet agreed on the financial and fiscal

operations. The association is working on helping the largest

terms related to the entry of private investment in fields

possible number of these smaller players to survive, but it

awarded in Round Zero. Finally, we are also developing

is not an easy task as the banks are also worried because

new project finance schemes, an area of expertise for

PEMEX is the only source of payment these companies

Marcos y Asociados, which is assisting in promoting

have, and therefore their financing guarantee.

private investment in the sector. In the light of this situation, AMESPAC is looking for We are seeking all sorts of modalities in which private

new financing schemes, for which we have approached

players can participate in the energy sector, both in oil

NAFIN, which has a supply chain program that finances

and gas and the electricity industries, within the new

contracts from large companies going through a rough

legal framework. Even though AMESPAC congregates

patch that hire service companies. NAFIN is offering

companies that work with PEMEX, we have some

factoring, so once PEMEX validates an invoice, this is sent

affiliates involved in electricity generation too. Therefore,

to NAFIN, or any commercial bank that obtains financing

the association is interested in promoting all kinds of

from NAFIN. The invoice is paid and the bank collects

direct participation of private investment in the energy

from PEMEX through NAFIN, which provides liquidity

industry.

to the NOC while commercial banks assume the risk.


It is worth commenting that the risk entailed in having

secondary market will emerge. I have met with all sorts of

PEMEX pay once the invoice is due, is a significant one,

players, from private equity funds to family offices, who

and even though PEMEX is now a productive enterprise,

want to invest in the oil industry, so there is an evident

the government will have to make sure that PEMEX does

appetite. However, an actual market is still missing, so

not fall behind on its payments.

investors cannot buy assets, for example.

We are also working on financing schemes so that the

Q: What are some initiatives the private sector is

private sector can approach PEMEX and operate, be it

undertaking in order to enhance its participation in the

through service contracts, associations, or farm-outs. In

energy sector?

other words, we are trying to find ways to inject private

A: A new milestone is the creation of the Mexican Energy

investment into PEMEX so that it can continue with its

Council (COMENER). AMESPAC was a key sponsor of

projects. In parallel, we are approaching the new operators

the creation of this entity, and the idea behind it is that

that are entering the market with concrete work programs.

there are several organizations and industry chambers

Back in 2014, PEMEX’s budget amounted to MX$300

across the energy industry, which includes oil, gas, and

billion, but there were budget cuts in 2015, and the NOC’s

electricity, that share common interests and concerns.

budget for 2016 is MX$216 billion, a 27% decrease. When

Many members of this organization belong to both

including overdue payments from past years, known as

AMESPAC and COPARMEX. In fact, Juan Acra, President

Due Payments from Previous Fiscal Exercises (ADEFAS),

of COPARMEX’s Energy Commission, was selected as the

and the recently announced budget cut, PEMEX is left

head of the Council. Another important matter relates

with little money to invest. Our only alternative is to look

to the TPP, as it will consolidate the changes that have

for private investment.

been made in the energy sector’s legislative framework and provide legal certainty to contracts signed with

Q: What can be done to keep the industry afloat until the

the government, both in the oil and gas and electricity

new operators begin operations, considering that PEMEX

industries. We have been working with experts who

is not in a position to drive growth?

were advisors to the business sector who are drafting

A: The Energy Reform was intended to create markets. The

some clauses in the TPP, so we feel optimistic about

electricity market is moving according to schedule and

the additional benefits this will bring to international

without major complications. The oil and gas market has

investments in Mexico’s energy industry. For the first

revolved around the blocks offered in Round One, but this

time, investments are being protected beyond the

is just a primary market. We also need secondary markets

companies, spanning all the way to contracts with the

with liquidity, and the only way to support this task is by

public sector. The TPP will also protect investments and

migrating the COPS and CIEPS, speeding up the farm-

contracts against future changes in the legislation, so

outs, and for PEMEX to find financing mechanism that

everything that has been achieved so far is irreversible,

will enable it to continue operating its fields regardless of

as these changes are valid before international treaties.

budget constraints, which can only be achieved through

The objective is to protect the Energy Reform beyond the

private investment. Once the conditions are provided, a

current presidential term.

39


| VIEW FROM THE TOP

ADJUSTING STRATEGY FOR THE MEXICAN MARKET WALLACE PESCARINI President Mexico & Central America of Schlumberger

40

Q: How are you planning to turn your arrival as President

that was initially expected when the new legislation was

of Schlumberger Mexico into an opportunity at such a

introduced.

challenging time? A: Positivity is crucial in times like these. I have a breadth of

We are also taking advantage of this crisis in order

experience operating in the Middle East, Europe, Africa, and

to accelerate our “transformation program”, which is

Latin America, and even though there is no strong country

driven by our CEO Paul Kibsgaard, and this involves

in which to be operating at the moment, Mexico is one of the

careful examination of our operations, and our methods

most solid options due to the positive future perspective. All

for generating business success. In 2011, when we

countries are suffering a great deal due to the low oil prices,

began to notice that the industry required a complete

especially those that are highly dependent on oil and gas,

transformation, we saw an opportunity to accelerate this

but the Energy Reform has generated great anticipation of

by improving efficiency and drilling performance, which is

the future changes. I worked in Mexico 15 years ago, and I

helping greatly to mitigate the effects of the low activity

was positively surprised by the impact that the government

level and the resulting pricing pressure. Simultaneously,

made with the Energy Reform in such a short period of

we are passing on these savings to our customers, as we

time. Last year, the bidding rounds were the key milestone

strive to become the best-run company in the oil and gas

of the Energy Reform, and due to their success, I strongly

industry.

believe that the future of Mexico’s energy industry is bright. Q: To what extent will Schlumberger’s structure and Q: How is Schlumberger modifying its global business

strategy have to be modified in order to operate

strategy in an environment characterized by low oil prices

effectively in the country, given the transformations in

and increasing price pressure on suppliers and service

PEMEX’s structure and the entrance of new operators?

providers, and how is the positioning of Mexico within

A: Schlumberger has always been able to adapt well

your global portfolio changing?

to local cultures, even though our transformation

A: Mexico has always played an important role in

program has been introduced at a global level. We

Schlumberger’s operations, both at a global level and

have customized many services to adhere to Mexican

within Latin America. A few years ago, we decided to

needs and, due to PEMEX’s importance in our global

separate Mexico and Central America from our Latin

vision, we have tried to align ourselves as closely as

American bracket in order to provide the appropriate

possible with the NOC’s changing structure. Lately, we

visibility merited by the strengths of both regions. In the

have participated in interactions with PEMEX wherein

context of the current business environment, Mexico is

both parties share details of restructuring plans in

suffering on the same scale as all other countries due to

order to find synergies and provide mutual support

the pressure imparted by the current low oil prices. PEMEX

in accelerating both transformations. Regarding the

faces challenges in terms of its budget restrictions, decline

newcomers to the market, we have a global presence,

in production, and the limited amount of additional debt

meaning that many potential partners are accustomed

that the NOC can adopt. Despite these challenging times,

to the way we work, so we are trying to localize the

Schlumberger is keen to negotiate this market, having

performance and efficiency levels to operate under

been operating in the country for 80 years. We have a

Mexican conditions. As a result, our global standard

deep understanding of operations in Mexico. As a result,

means we can provide the same experience whether

we have been gradually adjusting to the new environment,

working in the Gulf of Mexico, or in other countries like

limiting our activities somewhat, but constantly keeping

Brazil, and we can provide assurances that we use the

in mind the potential that the future holds, especially as

same state-of-the-art technology that we implement in

the Energy Reform begins to attract the level of activity

other countries around the world.


Q: To what extent do you expect other private companies

these factors will be vital to our continued success in the

to have the same appetite as PEMEX for integrated

country. This year, we are finalizing investment in a base

solutions?

in Villahermosa in order to provide support not only for

A: In my experience, even outside of Latin America,

onshore operations, but also for offshore. We are also

the tendency in the industry has always been to seek

expecting to complete the multi-client seismic program

integrated solutions, so our customers, regardless of

by mid-2016, and we are working with new customers

whether they are small independent players, IOCs, or

entering the market to guarantee a smooth transition.

NOCs, realize that the creation of synergies is conducive to generating savings. Another positive aspect of integrated

One important contributing factor to our success is

services is risk management, and if there is anything the

our diversity, and the fact that we do not only focus on

Macondo incident has taught the industry, it is the value

oil and gas but also on working closely with the local

in allowing the operator to focus on the well integrity

communities. We make concerted efforts to develop large

and the reservoir. I am confident that the new players

quantities of national content, and 90% of our employees

coming to Mexico will have an appetite for this kind of

are Mexican. In addition, more than 500 Mexicans work

approach, mainly due to the fact that they will not yet have

for Schlumberger in other parts of the world, and we

established the critical mass necessary in the country to

always make sure we maintain this quota. We have also

liaise with several suppliers. In this way, integrated service

been focused on social programs, such as Schlumberger

suppliers like Schlumberger can facilitate the establishing

Excellence in Education Development (SEED), a volunteer-

of operations in a new country, and we have already

based initiative designed to invest in education and is

witnessed this demand in places like Africa, for example.

focused on underserved communities where Schlumberger operates. The SEED action-learning methodology is

Q: What are your main priorities for 2016, and how are

based on science and technology experience through

you planning to achieve these?

our volunteers, to inspire teachers and students to seek

A: With a volatile market, there is the need to focus on

innovative ways, like robotics, to solve the world’s common

the aspects over which we have control, and it is difficult

problems, such as water scarcity, environmental issues and

to predict what oil price fluctuations may occur over

safety. To date 13 schools and more than 15,000 students

the next few months. In the last 12-18 months, erroneous

have benefited from this program. In summary, success in

predictions have been made regarding oil price recovery.

Mexico requires a multi-faceted approach, which includes

The foundations of our business are Health, Safety, and

a close collaboration with local communities in the vicinity

Environment (HSE), service quality, and investment, and

of the areas where we operate.

41


| EXPERT OPINION

CONFLICT BETWEEN THE CASH COW AND SACRED COW TIM SAMPLES

42

successful auctions and attract some quality bids. People

Assistant Professor of Legal

quickly forget previous efforts in Mexico to hold bidding

Studies at Terry College

rounds for oil projects, namely the integrated service

of Business, University of

contracts after the 2008 Energy Reform and the multiple

Georgia

service contracts before that, which failed to reach the expected outcome. One encouraging sign is that some early mistakes in the contracts and the bidding process

For years, the future of Mexico has been closely linked to

were corrected after regulators responded to market

the oil industry, and more specifically, to the state-owned

feedback. There is much work to be done, but there

oil company, PEMEX. That relationship is based on the

are some positive signs too. The upcoming and highly

government’s heavy reliance on the NOC for tax revenues.

anticipated deepwater auctions are a major test.

Historically, taxes from PEMEX accounted for about one third of the Mexican government’s income. However, changes

Any sovereign government setting out on this path faces

are afoot. Mexico has reduced reliance on oil revenues to

tradeoffs between maintaining sovereignty and attracting

below 20% of the tax base, but this reduction has not been

private investment on favorable terms. A similar game

entirely pre-planned and voluntary. While the government

of give and take occurs in trade negotiations between

deserves some credit for easing PEMEX’s tax burden, the

sovereign nations themselves. In that sense, Mexico’s

NOC also suffered over $30 billion in losses during 2015 and

current sovereignty tradeoffs are par for the course and

faces record levels of debt. The good news is that Mexico

approximate industry-standard international practices.

has increased non-oil tax revenues through a fiscal reform

That said, with more attractive price conditions, Mexico’s

and, as a percentage of Mexico’s gross domestic product,

regulators could certainly be more aggressive in setting

oil constitutes half of what it did a couple of decades ago.

the tone for auctions as far as fiscal terms, government

Manufacturing and other sectors are helping to fill the fiscal

take, and other bidding and contractual terms. Economic

gap that PEMEX left behind. Looking ahead, the government

conditions have impacted the standard for what constitutes

needs to build on these successes by consolidating the fiscal

“good enough” terms for the Mexican government, as well

reform and improving tax collection practices.

as for the private companies bidding on these projects. Today’s energy industry is certainly a bidder’s market.

In order to successfully attract necessary investment in the energy sector, Mexico needs to create (1) a clear framework

I characterize the historic role of PEMEX as simultaneously

for private investment with attractive economic terms, (2)

serving as a cash cow and a sacred cow in Mexico. As a

competent and independent regulatory authorities, and

cash cow, the NOC shouldered a disproportionate and

(3) an efficient bidding process with balanced contracts

unsustainable share of the government’s fiscal base. As a

and adequate transparency. Nevertheless, we have to

sacred cow, it has existed in a highly protective but stifling

evaluate the outcomes of Mexico’s Energy Reform in

legal environment. PEMEX was asked to do the impossible.

the context of the worldwide collapse in oil prices. It is

Responsible for covering all of Mexico’s needs, it was run

also worth remembering that the reform ventures into

much like a ministry of the government, while prohibited

uncharted territory for Mexico. What we are witnessing is

from forming partnerships with other energy companies.

certainly a historic landmark, but the practical implications

The weight of these dual roles was even heavier before the

are just as real. Relatively inexperienced regulatory

Energy Reform, which has eased some of the burdens on

agencies are navigating brand new legal frameworks while

PEMEX. Nevertheless, many questions about the future of

engaging the private sector on multiple fronts in unfamiliar

PEMEX remain unanswered. For instance, we have yet to

ways. The learning curves are steep and numerous. After

see how the farm-outs or joint ventures between the NOC

some early setbacks, the regulators have done relatively

and other energy companies will take shape. A significant

well so far, all things considered. Despite extraordinarily

amount of progress is needed before it can become an

difficult market conditions, Mexico has managed to hold

internationally competitive enterprise.

Tim Samples’ research is focused on sovereign debt and energy in international investment. His articles have been featured in several notable journals, including the Stanford Journal of Law, the Northwestern Journal of International Law and Business, and the Law and Business Review of the Americas


| VIEW FROM THE TOP

THE STEPS TOWARD BETTER CONTRACTING JESÚS RODRÍGUEZ DÁVALOS Founding Partner of Rodríguez Dávalos Abogados

Q: How would you rank the attractiveness of Mexico as an

Q: How successful has the government been in structuring

oil and gas investment destination?

and administering E&P contracts so far, and what learning

A: It is difficult to compare the current state of the Mexican

curve have you identified from R1-L01 to R1-L03?

oil and gas industry, which has very recently opened

A: CNH has restructured and adapted the model contract

up to private investment, and is still in the process of

several times to address the concerns of the industry

implementing all of the secondary and tertiary regulations

regarding several issues, such as the possibility of

of the Energy Reform, with other industries that have

superficial recognition and exploration data trading and

allowed private participation for decades. Nevertheless,

transfer. These changes have resulted in a more polished

Mexico’s legal regime applicable to oil and gas activities

contract model that has served and will serve as the

has been modified after studying and identifying the

basis for future tenders. Likewise, it has refined the bid

successes and failures of several types of regimes on

presentation event to include faster bid valuation methods

a global level, the best international practices, and the

that take into account electronic means, without sacrificing

particular circumstances and potential of our country.

the transparency in the process. As for the administration

Therefore, in general terms, the regime is designed to be

of the contracts, it is in its infancy since most, if not all, of

competitive and attract foreign investment.

the R1-L03 contracts have yet to be executed, and the R1L01 contracts will remain in exploration phase for at least

Q:

What

are

the

main

highlights

regarding

new

a few more years.

opportunities in the Mexican market? A: An example of some of the newest local opportunities

Q: What are the main advantages of Mexico’s upstream

would include the fact that, as laid out in President Peña

contracts for the private sector?

Nieto’s announcement in February, as of April 1, 2016, any

A: The advantages depend on the type of contract.

company that meets the applicable legal requirements

Production sharing contracts and license contracts give

may import gasoline and diesel, an activity previously

title and possession of the hydrocarbon production, as

reserved to PEMEX. Due to the price spread between

opposed to profit sharing and services contracts that

the national price of gasoline and diesel and that of

only grant economic interest in the production. In this

other countries, there could be an interesting business

sense, it is important to note that so far, only production

opportunity here if the traded volumes are high enough.

sharing and license contracts have been tendered and

Another thing to take into account is that practically all of

awarded. One concern regarding license contracts is that

the refined products storage and pipeline transportation

the main bidding variable is a percentage of additional

infrastructure in Mexico is owned by PEMEX, due to the

royalty over gross revenues instead of a percentage of

fact that prior to the Energy Reform, PEMEX was the

the operating profit. This is a variable that does not share

only user of these facilities. Much of this infrastructure

the risk of higher costs between the government and

dates a few decades back and has not received proper

the contractor, and therefore, it might not be considered

maintenance over the years. Furthermore, some of the

attractive for some investors. I would recommend that the

pipelines have a significant illegal tapping problem. All

government carefully select the type of contract for each

of these circumstances present a scenario of interesting

block, a responsibility of the Ministry of Energy, instead of

opportunities in which to improve and provide maintenance

changing the nature of contracts, which would require the

to existing infrastructure in Mexico.

legislators to modify the law.

Rodríguez Dávalos Abogados is a legal consultancy firm that provides both legal and business advisory to national and international clients in the Mexican oil and gas industry; another Q&A in the next chapter is dedicated to Jesús Rodríguez Dávalos perspective on Round One.

43


ROUND ONE

2

High hopes have been raised in Mexico’s Round One on the part of both the Mexican government and the nation, not to mention private investors. R1-L01 only succeeded in awarding two out of 14 exploration blocks, a setback that the authorities recognized as a learning opportunity. Following a successful revision of the contract terms, R1-L02 resulted in the allocation of three shallow water production fields out of five tendered. The third phase was a roaring success, with 100% of the 25 onshore contracts awarded to predominantly Mexican companies with the ambition to become operators. The next bidding round, and the one that has IOCs tingling, is the deepwater phase. This fourth bidding round will be concluded on December 5, 2016, and includes fields in both Perdido and Cuenca Salina. The final phase of Round One, which had been on standby, has now been put back on the table, and is expected to soon be launched to enable companies to bid for unconventionals.

This chapter offers insight into Round One, focusing on the activities of the authorities and regulators, as well as the undertakings of winners of the bidding rounds. It will also review the role of PEMEX, including upcoming farm-outs and potential joint ventures. In addition, it provides an overview of the fields included in each phase as well as their characteristics, and an analysis of each bidding round.

45


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| CHAPTER 2: ROUND ONE 48

VIEW FROM THE TOP: Lourdes Melgar, Ministry of Energy

49

VIEW FROM THE TOP: Sergio Pimentel, CNH

50

VIEW FROM THE TOP: Héctor Acosta, CNH

50

INSIGHT: Alberto de la Fuente, Shell Mexico

52

ANALYSIS: Round One in Brief

54

VIEW FROM THE TOP: Guillermo García Alcocer, Ministry of Energy

56

VIEW FROM THE TOP: Edgar Rangel Germán, CNH

58

MAP: Round One Overview

60

MAP: Round One Winners

62

MAP: Round One Winners

63

INSIGHT: Iván Sandrea, Sierra Oil & Gas

64

VIEW FROM THE TOP: Timothy Duncan, Talos Energy

66

VIEW FROM THE TOP: Mariano Hernández, Nuvoil

67

VIEW FROM THE TOP: Craig Steinke, Renaissance Oil

68

VIEW FROM THE TOP: David Enríquez, Goodrich, Riquelme y Asociados

69

INSIGHT: José Pablo Rinkenbach, AINDA Consultores

70

VIEW FROM THE TOP: Derek Woodhouse, Woodhouse Lorente Ludlow

71

VIEW FROM THE TOP: Benjamín Torres-Barrón, Baker & McKenzie

72

INSIGHT: Carlos Pascual, IHS Energy

73

VIEW FROM THE TOP: Jesús Rodríguez Dávalos, Rodríguez Dávalos Abogados

74

VIEW FROM THE TOP: Eckhard Hinrichsen, DNV GL - Oil and Gas

74

INSIGHT: Sebastián Aguayo, Marsh

75

 Rosa Morán, Marsh INSIGHT: Alberto Jones Tamayo, Moody’s  Rosa Maria Morales Cid, Moody’s

47


| VIEW FROM THE TOP

AUTHORITIES SUCCEED IN LURING NEW PLAYERS LOURDES MELGAR Undersecretary of Hydrocarbons at the Ministry of Energy 48

Q: How does the profile of the companies that won blocks

Q: What would happen if the companies in R1-L03 fail

in the first three phases of Round One compare to the

to make their operations profitable enough to pay the

type of companies you were hoping to attract?

government share they agreed on?

A: The prequalification requirements changed from one

A: It is important to point out that the Mexican government

round to the next, and these were drafted in a way that would

is not willing to renegotiate contracts, as some companies

attract the types of companies we thought we needed.

did with PEMEX in the past. If a company miscalculated

The Ministry was criticized at some point for the stringent

its proposal, it has two options. In the first, it can opt for

requirements for the shallow water blocks, but there are

not signing the contract, paying a penalty for doing so,

two important elements behind this decision. Firstly, we

and allow the second closest bidder to step in. The second

wanted to ensure that the companies that are going to work

option consist of the authorities revoking the contract. If

in the Gulf of Mexico had the knowledge, experience, and

we get a contract back, we would tender the area again.

capabilities needed to develop these areas and bring them

It is not the ideal scenario, but it will not be a serious blow

to production in a safe and sound manner. The requirements

to the production targets in the case of R1-L03. I would be

for the second tender, the shallow water extraction round,

concerned if something like this happened in the deepwater

were higher than those of R1-L01 because we wanted to

round, but the mature fields round was meant to create a

make sure that the participating companies had the ability to

new industry in Mexico, so it is part of a learning process.

produce a barrel in offshore setting. I find the shallow waters phase particularly important because I am convinced this is

Q:What are the challenges in moving the unconventional

where the fastest increase in production will come from.

resources round forward? A: R1-L05 is a difficult round. At first we decided to postpone

I am quite pleased with the results from the offshore

the tender due to current oil prices, especially because the

rounds, particularly in terms of benefits for the state. There

country has no experience in these types of fields nor the

was a lot of criticism in R1-L01 because we only awarded

needed infrastructure to develop them. However, my main

two contracts out of 14, but the consortium that won is

concern is the lack of appropriate regulations.

a serious company and is moving its activities forward according to schedule. In addition, a Mexican company

Unconventional resource development has specific needs

was created, which is always good news. In the case of R1-

that are indispensable, such as the right regulations for

L02, awarding a block to a company like ENI was a signal

the wells, water usage, disposal of waste materials, and

that our contracts are good enough for a major player.

even roads that have to be frequently repaired due to the constant back-and-forth transportation of materials.

The third phase was entirely different, and the contrast

We are working hard at full speed, and we have specific

with the other rounds can be seen because R1-L03 was

teams for each subject, ranging from technical matters

designed to be the seed for a new Mexican oil industry.

to communication strategies. The government should put

Our contracts do not discriminate, and even though a

more effort into approaching the communities and give

Canadian company won three contracts, the idea was

them the certainties they need to allow this activity to

for Mexican companies that had worked with PEMEX to

take place. If we can make the case that the development

demonstrate that they had the needed capabilities. The

of unconventional resources follows international best

government was surprised with the results of R1-L03, as

practices, that the authorities are sensitive toward issues of

25 contracts were awarded in spite of the low oil price. It

industrial safety and environmental protection, and that we

is safe to say we succeeded in attracting new companies

have a regulation and obligations stated in the contracts for

in, many of which had been PEMEX contractors for years

companies to deal with the waste that comes from these

and were aspiring to operate their own fields.

processes, then the whole round can move forward.


| VIEW FROM THE TOP

THE BALANCE BETWEEN LICENSES AND PROFIT-SHARING CONTRACTS SERGIO PIMENTEL Commissioner of CNH

49 49

Q: How do the conditions of Mexico’s bidding rounds fare

The main difference between the first two rounds and the

against those offered in other countries?

third is that the very nature of the contract model changed

A: The Energy Reform allowed competition in Mexico by

in the latter. The first two awarded production-sharing

opening exploration and production activities beyond

agreements, while R1-L03 offered licenses. All 25 blocks

PEMEX, but it also opened the door for Mexico to compete

were awarded in the third phase, but we have to keep in

in an international arena against countries that also offer

mind that these were smaller fields than the ones offered

hydrocarbon resources. The Mexican side of the Gulf of

in the shallow water rounds.

Mexico presents an attractive basin for international players mainly because it has not been thoroughly

Q: How can you balance the attractiveness of production-

explored. Superficial exploration has been carried out

sharing contracts with licenses?

recently, and the results suggest positive prospects

A: Both models can be equally attractive given the right

regarding the resources that could be extracted. It is

fiscal terms, the drafting of which falls under the Ministry

widely known that the Gulf of Mexico is a world-class

of Finance’s jurisdiction. We should look at profit-sharing

geological area that is rich in hydrocarbon resources, and

agreements and licenses alike and make both attractive for

Cantarell, the largest offshore discovery, is proof of the

participants. The distinctive difference with licenses is that

region’s wealth. The superficial exploration activities and

these entail a transfer of ownership of the hydrocarbons

production operations that will take place in the Gulf will

at the wellhead, which then belong to the contractor,

generate greater interest from international companies.

who pays the considerations established in the law. The profit-sharing scheme is more complex, as the contractor

Q: How have contracts evolved in the first three phases

will only own the percentage indicated in the contract.

of Round One?

Licenses were chosen in the third tender because this

A: The first phase comprised 14 exploration blocks in

entailed many contracts for smaller and mature fields,

shallow waters in the Gulf of Mexico. The element that

and licenses are easier to administer from the regulators’

drastically changed the results from R1-L01 to R1-L02

perspective. For instance, licenses do not deal with cost

was the fact that, for the exploration round, the Ministry

recovery matters, unlike profit-sharing agreements.

of Finance revealed the minimum share for the state the same day the participants’ offers were disclosed. For

Q: What are the main concerns of the private sector, and

the second tender the, Ministry of Finance decided to

how can these be addressed?

reveal the minimum share 15 days in advance, providing a

A: The industry has voiced concerns regarding the

significant advantage for the participants, who considered

possible reversal of the Energy Reform, but it is highly

this information and submitted proposals above the

unlikely that this would happen. An important aspect in

established value. In the first round, there were offers that

the Energy Reform is that its key premises were included

were only slightly below the established value. The first

in a Constitutional Amendment. Only three Constitutional

phase resulted in two out of the 14 blocks being awarded,

Articles were modified, but there is an extensive transitory

but if the information about minimum share had been

regime supporting the reform. The fact that the reform

revealed earlier, it is probable that six contracts would

was made in and through the Constitution makes it

have been awarded. The Ministry of Finance established

difficult to revert the changes that have been made.

appropriate fiscal terms, although we have to understand

There are additional instruments, such as the Trans-Pacific

that companies always want better conditions and the

Partnership, which has clear rules in terms of international

Ministry will always work to maximize value for the state.

arbitrage. Nonetheless, it would be quite difficult to

Achieving this balance is a significant challenge that the

once again reach the political climate that led to the

Ministry of Finance will face in every tender.

Constitutional Amendment.


| VIEW FROM THE TOP

ENERGY REFORM DEPENDS ON TRANSPARENT ROUNDS HÉCTOR ACOSTA Commissioner of CNH 50

Q: What have been the biggest and most important

the state interests that we are in charge of protecting.

successes of the Energy Reform to this date?

This balance allows us to reach a point where contracts

A: The Energy Reform’s biggest success was the time

are attractive for the private sector from an investment

taken for the implementation of Round Zero and Round

and utilitarian point of view, as well for the government

One. The year 2013 was characterized by the constitutional

in terms of revenue. In this regard, we have done well. I

reform, 2014 marked the year of the secondary reform and

recently conducted an evaluation of the benefits that the

Round Zero, and 2015 saw Round One and the allocation

state will receive through royalties and remunerations,

of the first contracts. That means that in just two years, the

which showed that R1-L01 contracts were in favor of the

legal reform took place, as did the allocation of the first

state with a majority of 62.49%. These contracts were for

contracts. Looking back, we waited 50 years before we

the exploration area and also included those for shared

were able to bring up the topic of private investment in the

production. R1-L02, which also involved production-

energy sector, after which we discussed it for 18 years. Yet,

sharing contracts, favored the state at a rate of 75.90%,

it only took two years to implement. The biggest success

and R1-L03, which awarded licenses, favored it at a rate of

is this implementation speed, which was enabled by the

55.27%. All of these percentages have been a result of bids

long period of discussion that preceded it.

from the private sector, but they hinge on process from governmental entities.

Q: How can you ensure effective dialogue between CNH, the Ministry of Energy, the Ministry of Finance, and the

Q: Many people believe R1-L01 did not meet the

private sector on the design of the contracts?

expectations. What were the main mistakes of this

A: When it comes to drafting contract models, we have

bidding round, and how did you learn from that?

many rules to follow, including the way we can incorporate

A:

recommendations from the private sector. We also

and the assessment must be carried out in relation to the

believe we have a duty to establish equilibrium between

entire process of Round One. However, I must admit that

the suggestions we receive from the private sector and

Round One should not have begun with exploration blocks,

Bidding phases cannot be evaluated independently,

| INSIGHT

AWAITING THE CROWN JEWEL ALBERTO DE LA FUENTE President and Director General of Shell Mexico

la Fuente, Director General of Shell Mexico. “We did not participate in the third mature onshore field bid phase, as it was never one of our considerations, but we will look into the unconventional resources phase and we

Shell is looking to develop a diversified upstream

are definitely interested in deepwater,” he explains. Shell

portfolio in Mexico, and to this end, the IOC bought the

is currently actively participating in the bidding round

data pack and pre-qualified for R1-L02, but has yet to

preparations for the deepwater phase and has moved to

move forward with a bid because it has not found the

the prequalification phase. “In addition, we continuously

materiality needed to invest, as reported by Alberto de

evaluate opportunities along the entire value chain. The


but rather with production blocks with proven reserves.

the social consequences resulting from the international

This was a strategic error, rather than a mistake related

community gaining knowledge of its participation in

to the content of the contractual areas or the contracts.

corrupt activities.

We have nonetheless made modifications that would render the contracts more flexible without diminishing state

protection.

R1-L02,

which

offered

production

blocks, was much more successful and gave insight into the discouragement observed in R1-L01. One of CNH’s greatest successes has been its quick reaction in making the needed changes after each tender. R1-L01 did not send

“We have to be relentless in the face of any deviation from proper ethical conduct” Héctor Acosta,

out the message we hoped it would, but this was rectified

Commissioner at CNH

by R1-L03. I believe that this wobbly start, which was more a strategical error than a failure, will stay in the records as

When it comes to CNH, the administrative sanctions

an anecdote. Fortunately, long-term results weight more

would correspond to the cancellation of the contracts

than anecdotes.

and possibly conventional sentences. The disqualification from public auctions would be executed by the Ministry

Q: What is the role of the country’s anti-corruption

of Civil Service. Moreover, the individuals involved

institutions in the implementation of the Energy Reform,

in these illegal activities could also be criminally

and how are they connected with the Ministry of Energy,

prosecuted. Members of CNH are legally prohibited

CNH, and CRE?

from liaising with bidding companies during the entire

A: The Mexican institution in charge of combatting

tendering process, and afterward, contact can only be

corruption from an administrative point of view is the

established through audiences where there must be at

Ministry of Civil Service. Its activities are transversal,

least two commissioners present in the CNH premises.

meaning it does not distinguish between topics related

The audience is videotaped and we draft an act of

to the Energy Reform or any others. Nonetheless, the

agreement, sign it, and make it public. We are the first

National Hydrocarbons Law established a few measures

Mexican agency to put together a declaration of interests.

to combat corruption and promote transparency, which

The government entity is consciously ensuring that the

cannot be found in any other Mexican regulation.

processes are carried out with full transparency, and we

Unlike many other measures, these are preventive.

are transferring this culture to all of our collaborators.

The Hydrocarbons Law is linked to the anti-corruption

It would be a shame for an act of corruption to tarnish

legislation in the public contracts area, which establishes

the Energy Reform, as it is a reform that was achieved

a series of sanctions and bans. The worst sanction for

amidst a divided public opinion. Allowing for such an

an operator engaging in acts of corruption would be

act to occur would provide validation to those who were

a prohibition to its continued participation in tender

opposed to it and would disappoint those who believed

auctions.

in it. We have to be relentless in the face of any deviation

In

addition

to

the

economic

sanctions,

depending on the incurred offense, IOCs would face

from proper ethical conduct.

oil prices have not changed our interest in Mexico,” de la

options could be part of most company’s strategy when

Fuente reassures. In addition to participating as operators

entering Mexico, timing must also be considered. Indeed,

on deepwater blocks, Shell is also interested in farm-outs in

if a company has a limited budget that only allows it to

the deepwater segment with PEMEX or private companies.

select one of the options, then farm-outs and licensing

“I do not think it is a choice between one or the other,

rounds will compete with each other.

but rather, they are different opportunities,” de la Fuente states. He discloses that Shell could be interesting in

De la Fuente has no preference between partnering with

working with PEMEX on certain fields in the Perdido area

the NOC or with private companies. “Shell has experience

because of the fact that these already have 2P reserves.

across the globe, to the extent that it is unlikely that there

“This means less uncertainty and faster development than

is a single company that we have not either partnered

the fields awarded through Round One. We believe that

or competed with. We are interested in partnering with

three to four years could be gained, but this is not to say

PEMEX, and in fact I believe we are the only IOC to date

that the Round One blocks would not prove interesting

to already have a partnership with the NOC, in Deer Park

and fruitful.” He goes on to clarify that, although both

Refinery, Texas,” he points out.

51


| ROUND ONE IN BRIEF

WHAT OUR INTERVIEWEES ARE SAYING "The bidding process was excellent. It was transparent and efficiently run." Iván Sandrea, CEO of Sierra Oil & Gas

52

R1-L01 SUCCESSES & LESSONS LEARNED: R1-L01 only saw two blocks out of 14 awarded. Most of the industry agrees on the reasons behind the substantial gap between expectations and reality. According to many players, the main reason was a strategic error, whereby the government should not have begun bidding rounds with exploration fields, which carry a great deal of uncertainty, but should have rather moved directly to production blocks. Indeed, the authorities had prepared the bidding rounds in a very different oil price context to that in which they were carried out. Another widely agreed-upon factor is

R1 - L01

the Ministry of Finance’s lateness in publishing information

14.3% fields a

related to the minimum values for the bidding variables. These were published on the same day as the proposals were presented. Industry experts and government officials

14.3%

both agree upon the fact that an award rate of at least 30% could have been reached had these figures been released

fields awarded

with more time in advance, making the round a success. In the midst of the industry turmoil created by this news, Enrique Peña Nieto, President of Mexico, hailed it as a learning experience.

R1 - L02 R1-L02

60% fields aw

SUCCESSES & LESSONS LEARNED: The biggest relief from R1-L02, apart from the higher success rate than R1-L01, was the industry’s realization that CNH listened to the potential new operators and took their concerns and suggestions into consideration in a fast and efficient manner. In the second bidding round, three blocks out of five were allocated. The two main reasons cited for this success seem to be the fact that these were production blocks with 2P reserves, which are more attractive in a low-oil price environment than exploration ones, but also the Ministry of Finance’s revelation of the minimum government take 15 days before the disclosure of participants’ offers. This allowed each bidder to take this figure into consideration in their proposals, increasing their chances of success. Although the industry expressed few complains, it did express its desire for improvements in the contract type, which remained similar to the productionsharing contracts awarded in R1-L01, particularly with regards to lack of flexibility.

60%

fields awarded


R1-L03 SUCCESSES & LESSONS LEARNED: R1-L03 was hailed as a resounding success, but it is important to consider the definition of success used in this widely-used statement among the industry. It was a great accomplishment not only in the sense that all of the 25 tendered blocks were awarded, but also because most of these fields were won by Mexican firms, achieving the government’s objectives of creating a national oil industry. It is worth noting, however, that only 19 of those contracts were signed, as a few companies failed to meet the requirements for their blocks. The industry believes that the success is closely related to the increased flexibility of the contracts. R1-L03 awarded licenses, which was extremely helpful in generating

R1 - L03

industry interest, as they entailed much less burdensome 100% fields awarded

administrative processes than the previously awarded production-sharing contracts, as well as a modification to the requirements relating to guarantees and collaterals. Not only was it the contract type that contributed to such

100%

a high award rate, but also the field characteristics. The release of the minimum share for the State in advance is

fields awarded

also believed to have contributed to the high award rate. The controversy surrounding the so-called success of R1L03 is related to the royalties bid by a grand majority of bidders, which certain experts claim to be uneconomic.

R1 - L04 ?% fields awarded

R1-L04 WHAT TO EXPECT: Although R1-L04 has only recently been announced, the industry has been building expectations and speculating

?

fields awarded

about its outcome for months. The blocks will be awarded on December 5, 2016, and the most commonly heard opinions revolve around a flood of investment that will enter Mexico’s deepwater reserves, believed to be of a similar quantity and quality as the ones found on the US side of the Gulf. Though many players in the industry expect a tremendous impact both on the industry and the economy, one factor threatens this perception. Mexico’s deepwater market will be mainly controlled by Houston, despite the national content element, and instead of direct investment, the country will receive money in the form of royalties for the Ministry of Finance. R1-L04 will certainly bring more investment into the country than R1L03, but the geographical location of the former blocks will not allow for as strong an impact on the economy as the public expects.

53


| VIEW FROM THE TOP

GOVERNMENT PREPARES THE INDUSTRY FOR ROUND TWO GUILLERMO GARCÍA ALCOCER Former Chief of the Unit of Exploration and Production Policies at the Ministry of Energy 54

Q: What initiatives does the government use to push the

These onshore projects have significantly lower costs

development of local operators in Mexico’s upstream

due to the fact that the reservoirs are onshore, enabling

segment?

them to benefit from existing infrastructure, and it would

A: The Ministry of Economy has created a fund in order

only be necessary to carry out drilling before connecting

to promote the Mexican oil industry. Nevertheless, the

production to a system based on a tariff that would be

strategy that has been most successful is the design of

set by CRE. We believe that the unconventional round will

attractive tenders for the national industry, as in the case

take place, but we are still measuring the most appropriate

of the third phase of Round One. This tender was designed

areas that are to be offered in the tenders. Chicontepec

to become the entry point by which new operators can

is still an option, but it must be tendered along with

begin working in Mexico and learn about the market as a

other fields. Regarding unconventionals, in addition to

whole. There will be more opportunities to participate in

the market conditions, we need ASEA and CNH to have

further phases of the bidding rounds.

established relevant regulations in order for the bid to be launched.

Q: How does the Ministry of Energy anticipate the role of onshore fields in meeting the national production

Q: How much of a direct impact do you expect the

targets?

deepwater round to have on the Mexican economy?

A: These fields are extremely attractive, and there are

A: There is a great need for ports to support these

several companies that are shifting their focus from shale

activities, and the closest port to the Perdido deepwater

gas areas in the US to onshore conventional oil in Mexico.

area is Matamoros, located adjacent to Brownsville, which

We believe that they can bring their experience in low-

is currently being developed to serve as a supplier hub for

cost production techniques, knowledge, infrastructure,

the area. The local content that we require in deepwater

and drilling equipment to establish a solid business in

bids is slightly low in comparison to the first three bids,

Mexico’s onshore fields. Given the market conditions at

but could be demanding according to the oil industry.

the moment, an opportunity to move into conventionals is

Nevertheless, we think that the 4% local content goal that

interesting for these companies, and when prices rise once

must increase to 10% over the course of the projects is

again, unconventionals will again be an option.

attainable, and the time schedule is designed to allow the local industry to build the capacity and capability that is

Q: What is the Ministry of Energy’s perspective on

needed for deepwater projects.

including tight oil formations in the unconventional resources round to counter the impact low oil and gas

Q: Which role will the Ministry of Energy play in evaluating

prices have on shale developments?

the potential fields that could be tendered as part of

A: The unconventionals tender is still a work in progress,

PEMEX farm-outs?

but we have heard from the industry that it would be

A: We have a small role in defining the areas that are to

attractive for them if we tender different resources that

be farmed out. PEMEX is evaluating its portfolio with a

share the same area within this bidding round, such as

clearly-defined strategy of carrying out the least costly

tight oil, conventional, and unconventional oil. It would

independent activities and looking for partners to

be a matter of testing the entire stratographic geological

provide technology, CAPEX, and expertise for the more

column and obtaining the right to produce, and depending

complex areas. In this process, the Ministry of Energy

on the market situation, the different stages of the project

receives the proposals for the areas in which PEMEX

could be initiated. When the market is fully recovered, we

intends to carry out farm-outs, and when authorized,

could then capitalize on unconventionals, or this can be

CNH is in charge of the bidding process for the partner

kept as a reserve while we capitalize on conventionals.

companies. There has been a significant amount of


learning in this process, and the external market effects

awarded on December 5, and we intend to launch R1-

have been an additional factor to contend with. We

L05, R2-L01, and R2-L02 in order to retain the interest

began the farm-out process with an oil price of US$80.

of industry in Mexico’s upstream activities. We stipulated

The drop in oil prices means that the areas identified may

in the Five Year Plan that R2-L01 would again include

not be as attractive to potential investors. For instance,

shallow water blocks. These tenders continue to provide

Chicontepec at US$18/b is not attractive. Internally, the

new opportunities for the industry, and that message has

difficulty lies in the fact that Mexico has never conducted

been heard by the private sector. For this reason, many

farm-outs before, and the main issue is the way in which

interested parties, even those who have so far failed to

costs and assets are distributed within the PEMEX areas

obtain contracts, are establishing offices in Mexico. They

to be farmed-out. PEMEX is an integrated company,

are beginning to understand and trust the process and

and the whole southeast region is managed as if it were

realize that if they do not win in the first bids, there are

an all-inclusive project. When farming out a subset of

further opportunities for which to prepare. At the Ministry

fields from this region, its current accounting methods

of Energy, we are open to understanding the industry’s

make it difficult to allocate the corresponding fraction

concerns

of the service contracts, the assets in the region, and

Government is committed to creating a win-win scenario

the maintenance expenditures for each field. Therefore,

both for companies and for the state.

PEMEX must adjust its accounting so that the relevant economic and legal elements are allocated within a given asset. This is something PEMEX is still working on, and although it is trying to speed up the process, there are

and

receiving

its

feedback.

The

Federal

“PEMEX must adjust its accounting so that the

complex variables at work.

relevant economic and legal

Q: What will the Ministry of Energy’s E&P unit be focusing

elements are allocated within

on for the remainder of 2016? A: We will be carrying out R1-L05 and have started planning for the first phase of Round Two, which

a given asset” Guillermo García Alcocer,

will probably be carried out at the same time as the

Former Chief of the Unit of Exploration and

aforementioned unconventionals phase. R1-L04 will be

Production Policies at the Ministry of Energy

55


| VIEW FROM THE TOP

PAVING THE PATH FOR PEMEX'S NEW ASSOCIATION SCHEMES EDGAR RENÉ RANGEL GERMÁN Former Commissioner of CNH 56

Q: Which role do you expect the farm-outs to play in the

resistance and, at some point in those discussions, PEMEX

development the Mexican oil and gas industry?

suggested following the Malaysian-Indonesian model

A: I would like to highlight the huge importance of farm-

that would allow the NOC full control over the tenders,

outs, as the silver bullet for PEMEX. I have been saying this

farm-outs, and all other factors. Thankfully, the legislator

for many months, and now people are starting to agree,

separated this responsibility and allocated it to CNH.

but we left too much in PEMEX’s hands during Round

Although this is purely speculation, I believe that PEMEX

Zero. Everyone wanted a smooth process, but now realize

resents the fact that CNH is overseeing the bidding for the

that PEMEX cannot handle this volume. We do not want

farm-outs.

to take this from PEMEX, but this year’s announcement of stringent budget cuts will imply a reduction in production

Q: What would be your recommendation for the new

and reserves. Therefore, the investment capital, expertise,

Director General of PEMEX in order to rectify these issues

and technology must be provided by partners. PEMEX has

and get the farm-out process back on track?

to come up with an aggressive farm-out strategy because,

A: I would advise the new Director General to allow CNH

despite the fact that the hydrocarbons volumes are there,

to support PEMEX. It is unthinkable that anyone from

they cannot be exploited for decades without the necessary

the government side would not want more reserves and

investment. Mexico has reserves until 2100, and it would be

higher production levels. Why would we not help PEMEX?

beneficial for the country to accelerate the exploitation of

It does not make sense that there is a lack of trust over

those reserves, which will require an increase the country’s

this issue, and it bothers me that some people criticize

execution capacity. This is why farm-outs are the key. PEMEX

the Ministry of Energy and CNH for the fact that the farm-

must decide which fields it can exploit independently and

outs have not advanced. We have the technical expertise

where it requires partners. The fields that PEMEX does not

necessary to manage the farm-outs, although PEMEX

need should be returned to the state to be included in the

has more accurate information due to the fact that the

tenders, but this is PEMEX’s decision. In my opinion, it would

information transfer has not been completed. Therefore,

be prudent for PEMEX to farm out the EOR of Cantarell or Ku-

I would like 2016 to see PEMEX and CNH collaborating to

Maloob-Zaap, because these reserves would go untapped in

finally launch a large number of farm-outs.

either case without the help of private investment, meaning that it can only create a value for PEMEX.

This is mere speculation, but I have seen that the old school establishment in PEMEX see the Minister of Energy,

Q: Why has it taken so long for PEMEX to launch its farm-

the Undersecretaries, and the Director General of PEMEX

outs, and how do you see this being resolved?

itself as temporary players within the sector. They are the

A: I attribute this to lack of capabilities and timidity.

owners, they are the petroleum engineers, and they have

There was the flurry of the reforms, after which PEMEX

been working at PEMEX for many years. They know that

announced it would carry out 12 farm-outs, but this was

we are leaving at the end of an administration, and this

over a year and a half ago and we still have not seen any

is one of the more pronounced problems. Changes must

progress. There was also no explanation of why these

be made, and the new Director General seems to intend

blocks were chosen, and I was surprised that so few were

to make considerable modifications. On the other hand,

offered when there was the opportunity to farm out 50

PEMEX is extremely militarized, which could be used to

fields, meaning the NOC would still have another 300 that

González Anaya’s favor by ensuring that this segment

it could operate independently. I suspect that this decision

is on board with the reform process. I have been in the

lay in the fear of managing so many contracts concurrently,

industry for 20 years, and I am witnessing a low level of

and the lack of knowledge and experience regarding the

motivation in PEMEX employees, with people losing their

entire farm-out process. The reform was met with a lot of

jobs and investment being reduced.


It is necessary to convert PEMEX into a more robust,

be coming to the country, with supermajors expected to

compact, efficient, productive state-owned company. The

participate in R1-L04, and smaller companies who recently

public needs to realize is that the NOC is not a branch of

established a presence in the country. Another major

the government or an employer, but a machine to generate

success of the energy reform is the boom in seismic surveys.

money for the country. For some reason, this is viewed as a

So many companies are investing their own money in

negative aspect, despite the fact that we have all received

multi-client seismic surveys because they believe they will

something from the NOC, whether that is scholarships,

be able to sell this information. One of these companies

infrastructure, or health care. I believe it will be necessary

has disclosed to us that they have 60 potential clients. The

for PEMEX to cut between one third and 50% of its

geographic location of Mexico is privileged. This is one

workforce in order to remain a viable company. Examples

of the most prolific, privileged geological basins, yet it is

can be drawn from the number of employees retained by

largely unexplored. A reservoir in Mexico can have exactly

similar oil companies, such as Saudi Aramco or Iran’s NOC,

the same geological conditions, volumes, and API gravity

as well as those of IOCs like Exxon, Shell, and Statoil.

as a reservoir in a more hostile country, and Mexico’s environment could make the difference between investors

Q: As opposed to the farm-out process, PEMEX does

deciding to devote their attention to the country. In general,

controls the migration of the COPS and the CIEPS and

these factors are accurate metrics of the commitment to

progress is slow in this area as well. How would you

invest. As of yet, I have not witnessed many failures, but

explain this?

the lack of speed of the farm-outs is certainly a negative

A: In my opinion, the economic benefits that could be

aspect of the reform. In R1-L01, there was a lot of room

brought by the contract migrations remain unclear, and

for improvement, but I would not call it a failure. However,

this reduces the urgency to implement the CIEPS. For

I am glad we started in this way, and that the fields from

PEMEX, the fiscal terms are more favorable, and new

R1-L02 were tendered in a more effective way and were

operators will be able to contribute to new technology,

not used as a learning experience. Ultimately, the reason

but for me, the added value in terms of production is

for the success of R1-L02 was because we made changes

not substantial enough to create an incentive for PEMEX.

based on the feedback received from R1-L01.

There is also uncertainty regarding the preferred operator, and in a recent presentation, it was suggested that the NOC is considering switching operators, since companies that can see the benefits the CIEPS present have since approached PEMEX with more favorable terms. I believe PEMEX is still assessing its options for the migrations, but I agree that the process should have moved slightly faster. Q: What do you consider to be the main successes and failures of Energy Reform to date, and why? A: In terms of successes, I would pinpoint R1-L02, not only because I was in charge of recommending the fields to the Ministry of Energy. This round showed the world that we listened to the industry’s feedback, making adjustments from R1-L01. We sent the message that we listened, and we attracted the operators that Mexico wanted for R1-L02. The winners are professional companies with solid reputations.

Q: Bids were won for 25 blocks in R1-L03. How many

This is extremely important, especially since they can

contracts from this round do you expect to be signed?

introduce new technologies and create a benchmark for

A: I believe that almost all of them will be signed, because

PEMEX. The tender was competitive, the bids were solid, and

we are in contact with the companies and most have their

R1-L02’s winners are already working with CNH to prepare

files almost complete in terms of the required paperwork.

their plans. R1-L03 was a fantastic demonstration of the

It may be the case that, eventually, the companies will try

presence of an appetite among Mexican industry to operate

to negotiate a pass into the second place of the tenders,

in the Mexican landscape. Eventually we will see these

but from what we see, the companies are all extremely

companies get their feet wet in shallow water.

willing to participate. We have been running some seminars to pass on information regarding the baseline

I believe that Round One in general has been extremely

and environmental studies, as well as other potentially

successful, and it sends the message that Mexico is truly

complicated aspects, so I predict that the majority of the

a ripe environment for investment. Large companies will

companies will ultimately sign those contracts.

57


| ROUND ONE OVERVIEW I ROUND ONE OVERVIEW

c

58

d

e

R1 - L1 awarded blocks R1 - L1 non-awarded blocks R1 - L2 awarded blocks R1 - L2 non-awarded blocks R1 - L3 awarded blocks R1 - L4 Round Zero fields and exploration areas awarded to PEMEX Hydrocarbon fields


59

a

b


I| ROUND ONE RESULTS WINNERSTO DATE R1-L01 took place on July 15, 2015, and was referred to as

that the 60% award rate effectively confirmed the

a learning experience by President Enrique Peña Nieto.

successful advancement of the Energy Reform. Most

Out of 14 shallow water exploration blocks, only two were

companies participated as part of a consortium in order to

awarded, leaving the authorities with a 14% success rate,

meet the bidding round’s stringent requirements.

well below the 30% threshold for success. The Mexican consortium between Sierra Oil and Gas, Talos Energy, and

R1-L03, which took place on December 15, 2015, was a

Premier Oil came out as the winner of this round.

resounding success as all of the 25 fields were awarded. Tenders were done in two phases, with the fields with most

60

On September 30, 2015, R1-L02 oversaw the allocation

reserves, known as type 2, allocated before the smaller type

of three out of five shallow water production blocks,

1 fields. Of these, however, only 19 were signed for, leaving

an achievement that Juan Carlos Zepeda, President

the six remaining ones open to the second bidders as a

Commissioner of CNH hailed as satisfactory. He claimed

result of certain companies’ inability to meet requirements.

R1 - L1

Company

Country of origin

Minimum added value

Added value offered

Increase over the minimum work program

L1 - 2

Sierra Oil and Gas Premier Oil Talos Energy

Mexico UK US

40%

55.99%

0%

L1 - 7

Sierra Oil and Gas Premier Oil Talos Energy

Mexico UK US

40%

68.99%

10%

Block

Field name

a

L2-3 L1-7

L2-2

L2-1 L1-2 R1 - L2 Block

Field name

Company

Country of origin

Minimum added value

Added value offered

Increase over the minimum work program

L2 - 1

Amoca Miztón Tecoalli

Eni International

Italy

34.80%

83.75%

0%

L2 - 2

Hokchi

Pan American Energy E&P Hidrocarburos y Servicios

Argentina ArgentinaMexico

35.90%

70.00%

100%

L2 - 4

Ichalkil Pokoch

Fieldwood Energy Petrobal

US Mexico

33.70%

74.00%

0%


R1 - L3 SOUTH REGION b

23 61

13 16

14

15

4

7

9 25

22 11 6

Block

Area name

23

Tajón

Company

Country of origin

Compañía Petrolera Perseus

Mexico

Minimum added value

Added value offered

Increase over the minimum work program

5%

60.88%

100%

1%

36.88%

100%

9

Fortuna Nacional

14

Moloacán

Canamex Dutch Perfolat de México American Oil Tools

Mexico Mexico Mexico

5%

85.69%

0%

7

Cuichapa Poniente

Servicios de Extracción Petrolera Lifting de México

Mexico

2.5%

60.82%

99%

25

Topén

10%

78.79%

25%

15

Mundo Nuevo

10%

80.69%

25%

11

Malva

4%

57.39%

100%

4

Calicanto

5%

81.36%

18%

13

Mayacaste

10%

60.36%

0%

6

Renaissance Oil Corp

Canada

Grupo Diarqco

Mexico

Catedral

Diavaz Offshore

Mexico

1%

63.90%

0%

16

Paraíso

Roma Energy Holdings Tubular Technology Gx Geoscience Corporation

US Mexico US

10%

35.99%

100%

22

Secadero

Grupo R Constructora y Arrendadora México

Mexico Mexico

1%

60.74%

100%


| ROUND ONE WINNERS R1 - L3 NORTH REGION c

20 18 5

62

12 21 8 2

3

Block

Area name

18

Peña Blanca

5

Carretas

12

Mareógrafo

3

Calibrador

2

Minimum added value

Added value offered

Increase over the minimum work program

5%

50.86%

100%

1%

50.86%

100%

4%

34.25%

100%

3%

41.77%

100%

Mexico Mexico Mexico

2.5%

40.07%

75%

Mexico

3%

20.08%

88%

Company

Country of origin

Strata Campos Maduros

Mexico

Consorcio Manufacturero Mexicano

Mexico

Benavides Primavera

Sistemas Integrales de Compresión Nuvoil Constructora Marusa

8

Duna

Construcciones y Servicios Industriales Globales

20

Ricos

Not assigned

21

San Bernardo

Not assigned

R1 - L3 CENTER REGION d

e

24 1

10 19

17

Block

Area name

Company

Country of origin

Minimum added value

Added value offered

Increase over the minimum work program

1

Barcodón

Diavaz Offshore

Mexico

1%

64.50%

100%

17

Paso de Oro

24

Tecolutla

19

Pontón

10

La Laja

Not assigned


| INSIGHT

ONE SMALL STEP FOR SIERRA, ONE GIANT LEAP FOR MEXICO The consortium formed by Sierra Oil & Gas (Sierra), Talos Energy, and Premier Oil emerged as the only winner of R1L01, being awarded Blocks 2 and 7. When it comes to the proceeds of this tender, Iván Sandrea, CEO of Sierra Oil &

IVÁN SANDREA

Gas has only praises. “The bidding process was excellent.

CEO of Sierra Oil & Gas 63

It was transparent and efficiently run,” he reports. He is also reassured in the choice of the consortium to bid on Block 7, as the amount of interest it attracted from world-

companies that have currently been awarded an exploration

class bidders corroborates its appeal. Sierra’s analysis had

or production block in Mexico. It excels in bringing discoveries

revealed that the two blocks won by the consortium were

into production in a fast, inexpensive, and responsible way,”

particularly promising in terms of resource materiality,

he applauds. Premier Oil, on the other hand, is a 90-year-

standing out from the rest of the blocks offered in R1-L01.

old independent with a global portfolio. It boasts the most

Sandrea believes that the bids placed by other companies

extensive experience of the three, and, despite its larger

were a powerful validator for Sierra’s geological analysis

scale, Sandrea emphasizes that it is also efficient and fast-

and business strategy.

paced. Sierra, in turn, has a strong and talented team that was hand-picked to ensure its specific focus on Mexico. “We

Despite the many complaints lodged by operators

are a young company,” he admits, “but we are certainly not

regarding the running of the R1-L01 tendering process,

new to Mexico or the oil and gas industry.” The company’s

Sierra

were

role in the consortium will be to focus on the Mexico-

certainly not alone,” Sandrea explains, “even despite the

specific aspects of the project, be it geology, commercial

contractual framework that had been established at the

understanding, or regulatory interpretation.

saw

a

considerable

opportunity.

“We

moment. Statoil, ENI, and Hunt, all world-class companies, competed with us for the opportunity. Undeterred by concerns regarding the contract’s administrative burdens and CNH’s levels of involvement, Sierra, along with its partners, bid for blocks in R1-L01, and it is now convinced that our analysis proved to be correct. Moreover, all initial angst concerning CNH has dissipated as it has proven to be an extremely professional and efficient agency.” When it comes to Sierra’s own bid, the CEO rests assured that

So far, the company has conducted an amplitude velocity analysis on the data on the seismic

surveys

the results were as positive as Sierra could have hoped for. “Not only did we emerge as the winners, but we did

After winning and signing the contract, Sierra started

so by placing a well-balanced bid, without either under- or

working on a new plan for the short and long term using

over-bidding, which has been of concern in other bidding

32 Terabytes of high quality data. So far, the company has

rounds,” he remarks. In his opinion, success was achieved

conducted an amplitude velocity analysis (AVO) on the

thanks to science-based decision making, as well as the

data on the seismic surveys. “This is helping us identify and

group’s strengths. “While most companies adopted a

calibrate direct hydrocarbon indicators and sweet spots,

conservative stance and decided to wait for later bidding

and we are currently mapping geological structures more

rounds, we trusted our deep understanding of the Mexican

accurately. Early results have been promising,” Sandrea

landscape and bid for a couple of blocks.”

asserts. After the AVO and seismic reprocessing, Sierra plans on carrying out further remapping and illumination collectively

studies, and it will eventually use this information to

accumulated years of experience working with world-class

optimize the locations of the consortium’s exploratory

companies. Despite some similarities, we are all different

wells. “Mitigating exploratory risks is a crucial component

companies,” the CEO clarifies. He explains that Talos Energy

of our business strategy,” Sandera adds. While it might

has a remarkable exploratory track record on the US-side

be slightly early to discuss the drilling process itself, he

of the Gulf of Mexico, where it has focused all its efforts so

believes that there is significant room for innovation using

far. “It is an efficient, well-run company, and perhaps the

new reservoir modeling through leading software. Sandrea

one with the lowest average production costs among the

is planning to begin drilling operations in 2017.

“Our

group’s

strengths

stem

from

its


| VIEW FROM THE TOP

PARTNERSHIP OPENS DOOR TO THE OTHER SIDE OF THE GULF TIMOTHY DUNCAN President and CEO of Talos Energy 64

Q: What motivated Talos Energy to be among the earliest

When we partnered with Sierra Oil & Gas, it was able

participants in Round One?

to provide us with a geological framework of the basin,

A: We have had quite a bit of success in the shallow

which saved us several months of work. We are extremely

waters of the US Gulf of Mexico so we were compelled by

comfortable working with geophysical data, making

the unique opportunity that was generated by the end of

inferences about the resource potential and geology,

PEMEX’s almost 80-year monopoly, during which shallow

defining the prospect and shaping this into an economic

water exploration and production has been such a rich

model. We are proud of our track record of building

part of its history. Our main objective was to understand

companies on the US side of the Gulf, but until this point

how large the resource potential was, and the territory

we had not branched out internationally. Premier Oil used

met all of our expectations, but we knew that early

its experience in projects around the word to confirm that

participation was going to be critical if we were going to

our ideas could compete with international projects. For

be successful. Everyone was still learning and the process

a smaller company like ours, this project could potentially

was brand new, with fewer players making bids due to

underpin the success of our company in Mexico, the US,

lack of clarity regarding the rules. We hoped limited

and other basins. Our initial term on the lease is four years,

participation would give us a better chance at being

but we anticipate being well ahead of this timeframe.

successful with our bid structures. The minimum bids

We expect to drill our first test in Block 7 in 2017, and

are helpful for the medium-sized prospects that cannot

subsequently in Block 2 in 2018.

handle a competitive cost-sharing bid, but the larger, more compelling blocks will always be more competitive,

Q: How did your path progress from exploratory expertise

and those on which we bid did not require a minimum

to operational expertise?

bid because of their attractiveness. The success of R1-

A: The common themes in every company we have built

L02 has helped to generate confidence in the popularity

are exceptional operational and technical teams, strong

of these bid rounds, and the achieved transparency

commercial acumen, and deep experience in brokering

is important for lending credibility to the investment

deals and partnerships. The only difference is scale, and

community regarding future projects.

each subsequent project has become more ambitious. Talos was our first company where we began to enter deepwater as well as shallow water, and we started to consider projects on an international scale rather than just locally. Our priorities are to continue to use the latest in seismic technology, employ a solid operating team that can compete with companies around the world regardless of size, and strengthen ourselves commercially in order to understand capital markets and form partnerships. This has been the common thread that has allowed us to become more ambitious and expand with each new

Blocks 2 and 7 are estimated to have 263 million boe and 341 millon boe respectively

project we undertake. Q: What is your approach to exploring shallow waters on the Mexican side of the Gulf? A: There are some subtleties in the geophysics between the US and the Mexican side of the Gulf, but generally they are more similar than they are different. We work in the


same age of rock, mainly Pliocene and Miocene sandstone rocks at a similar depth and pressure as those on the US side. In future opportunities, we will start evaluating deeper carbonate plays. We were initially working with the same data as all the bidders that purchased the data packs for Round One, but now that we have won the tender, we have the time to reprocess that seismic data, which is something that we simply did not have the time to do before entering the bidding round. On each of the blocks, we developed a geophysical model based on the data we had, knowing we expect to improve the geophysical model after we signed the PSC but before we drilled our first well. As much as we all prefer brand new seismic data, we have had significant success in reprocessing old seismic sets in the US side of the Gulf, which are similar to those shot by PEMEX. An example of what we are trying to accomplish with our reprocessing is to image the most accurate view of local salt bodies, which can provide the trapping mechanism for a productive oil accumulation. Rather than spending US$20 million on a new seismic shoot over a lease, we can spend US$2 million on reprocessing seismic data and, due to our techniques, this potential generates a similar result. If not, we will consider some new shoots and participate in industry shoots. We have built our strategy around focusing on reprocessing before reshooting, and in our previous company, Phoenix, we were able to take two old data sets from the mid-1990s that were shot by different companies and we merged the data sets together, reprocessed the data, and we ultimately found one of the largest discoveries in the last 20 years in Atchafalaya Bay, in shallow water offshore Louisiana. We therefore seek to reprocess old seismic data and attempt to improve the image before we think about shooting new seismic, and this will be no different in Mexico. Q: What are some innovative approaches to specialized drilling and completion techniques that you can bring to Mexico? A: We anticipate the use of relatively traditional methods, but I think where we excel is in our planning and execution. In terms of directional drilling and completion techniques, we are certainly using the most up-to-date methods on par with our colleagues on the US side of the Gulf of Mexico. In such a competitive basin as the US Gulf of Mexico, understanding and using the very latest techniques are essential in order to generate attractive returns in the current environment and continue to attract capital. When our private equity providers underwrote our management team, they were underwriting a highly technical group with a deep understanding of the geology and best operational practices of the US Gulf of Mexico. Therefore, requesting funding for a project to which our skillset could be transferred to the Mexico side of the Gulf proved an attractive financing option for the company.


| VIEW FROM THE TOP

EXPECTED PRODUCTION BOOST FOR BENAVIDES-PRIMAVERA MARIANO HERNÁNDEZ Director of Nuvoil 66

Q: What reasons drove you to establish a consortium to

The project’s timeframe has already been established by

participate in R1-L03?

CNH, and according to the agenda, we expect to sign

A: We feel that our company has great potential to learn

the contract on May 8 and take control of the field within

and grow in the new environment created by the Energy

the subsequent 90 days as laid out by the guidelines.

Reform. The size of our company complied with the

Afterward, we will have 120 days to deliver the evaluation

requirements established by the Mexican authorities for the

plan, and a further 240 days to begin the execution plan.

Round One auctions, and we presented a wise proposal, bidding for three gas fields and one oilfield. Fortunately,

Q: What are your expectations for the use of EOR

we were awarded the Benavides-Primavera field, which

methods in Mexico?

has already been in operation for 20 years. Despite the

A: Imagine that the oil field is a soccer ball filled with oil

field’s age, we are confident that our knowledge and

and gas. The gas keeps the ball pressurized, providing the

skills will make the operations profitable and that we will

energy needed to push the oil out. If the ball gets perforated,

acquire important expertise in exploration and drilling

the pressure of the gas and the density difference will

from this project, which will complement the expertise

remove the oil first. As the pressure decreases, so does

we already have in shallow waters. Constructora Marusa

the ball’s energy, which makes extracting oil from the

is a partner company with a strong focus on infrastructure

inside more difficult. At the beginning of the process,

development, a sector where it is a leading actor.

the product extracted is mostly oil, but the percentage of gas in the mix increments with time as the pressure

Q: What are the main challenges that you expect to face

decreases in the interior. Therefore, in well-exploited fields,

during the operation of the Benavides-Primavera field?

companies need to inject gas at the same pace they are

A: Firstly, we were already familiar with the field conditions

extracting oil to maintain the constant energy levels, and

as we have experience working in that region for more

this can be done by injecting gas in the field’s cap or the

than 20 years. This experience provides us with in-depth

oil column. Both techniques are included in the artificial

knowledge about the field’s challenges and strengths and

services that we provide to oil and gas fields. We believe

gives us the operational expertise required to operate

that EOR techniques will be crucial to boosting Mexico’s

the field successfully. For us, the challenge will not be

oil and gas industry, and we are already starting to observe

to maintain the current production rates, but rather to

an increased prevalence in the use of this method.

increase them by 25%. It is important to highlight that we are not an EPC company but an operator. Our core

Q: What is your flagship project, and what is your strategy

business is to handle oil in artificial lift equipment and gas

to become a leading operator in Mexico?

in compression systems, in both onshore and offshore

A: Currently, our most important project is the Agosto 12

facilities.

platform, a specially constructed jackup that is designed to support five gas turbocompressors with a capacity

We are certain that we will maintain the production rates.

of over 200mcf/d. The rig will contribute around 8.8bcf

However, in order to increase production, we will need

of gas to the Mexican oil and gas industry, which will be

to perform minor and major repairs in the following two

incorporated into the national gas distribution system.

to three years. We are planning to adopt the Jet Frac

Generally speaking, the most important projects are

technique, which consists of using a drilling system called

still in the pipeline, rather than the ones we are already

Abrasive Jet Cutter in an existing field to reach productive

undertaking. We are now looking to consolidate our

rocks that remain unexploited. We have never used this

company as an operator, and will continue offering our

technology before, but it has proven to be efficient and

services to PEMEX and private companies seeking to get

cost-effective in the other fields where it has been utilized.

the best out of their fields.


| VIEW FROM THE TOP

THE REBIRTH OF MEXICO’S ONSHORE INDUSTRY CRAIG STEINKE CEO of Renaissance Oil

67 67

Q: What prompted you to create a company focused on

Q: What challenges have impacted your entry to Mexico?

the Mexican upstream sector?

A: There is a lack of information in terms of logging of

A: Mexico has a world class hydrocarbons base, and

data. More developed hydrocarbon provinces tend to

the fact that this industry has been monopolized by an

have a more centralized database and greater access to

underfunded national oil company for many years creates

it and, in time, it is something that Mexico should strive

promising opportunities for foreign companies to work

to develop in order to help all operators. Indeed, the fact

with PEMEX and the government in order to help develop

that we do not have access to all of the existing data is

the resource base. We are structuring Renaissance to

problematic. I realize it is a process that takes time, where

be an operator in Mexico, and we are going to develop

the data is passed from PEMEX to CNH, and then CNH

the company into a significant player in the local oil and

makes it available to the industry, but this is an area where

gas sector in the next five years. We believe that our sole

there is room for improvement.

focus on this country will be an important success factor. The bidding round provided a solid opportunity for us

Q: What potential do you see in Mexico in terms of

to become an operator, learning the regulations as they

unconventional reserves, and to what extent are you

are being developed, and we are happy to influence the

planning on taking advantage of this?

regulations to benefit operators and the state. We bid on

A: Renaissance intends to participate in R1-L05 and has

the onshore round, for which we spent considerable time

carried out extensive evaluations in preparation for the

evaluating all blocks made available. We felt that those

opening of Mexico’s shale opportunities. The lead time

opportunities, mainly the mature fields, were in line with

for shale development is much longer than what is typical

the portfolio we intended to build in Mexico. The actual

for conventional onshore resources. A detailed study

process of the third phase was remarkably professional

of the geology and the rock characteristics is crucial to

and we were delighted with its execution.

identifying and exploiting a commercial unconventional oil and gas play, and this analysis requires a substantial

Q: What was the reason behind your decisions to

amount of time. We are reassured by the fact that Mexico

participate as a stand-alone company rather than with

will be moving forward soon with R1-L05, and expect

longstanding partners such as Halliburton?

these resources to be a major contributor to the nation’s

A: We think that it is important to have a domestic

petroleum production and a significant economic driver

partner in Mexico but we are in no hurry to establish that

for the country in the long term.

relationship. Although we are creating dialogues with various companies about potential partnerships, this is not a decision we want to rush into. We are fully capable of taking over operations, as we have the technical and financial capabilities to do so. We do not rule anything out when it comes to a possible partnership with Halliburton, our relationship with which has involved the use of its consultancy services. Halliburton has been established in Mexico for close to 70 years and has a great deal of empirical knowledge on the ground that a new company coming from another country usually lacks. We therefore felt that utilizing its services would allow Renaissance to hit the ground running in Mexico, enabling us to quickly negotiate the learning curve.


| VIEW FROM THE TOP

READJUSTING INFLATED EXPECTATIONS FOR R1-L04 DAVID ENRÍQUEZ Partner at Goodrich, Riquelme y Asociados 68

Q: What were the factors behind R1-L03’s 100% allocation

an atmosphere of frustration for many players within the

rate, and is this the best measure for success?

market, particularly the experienced operators. These had

A: Like in any other phase of Round One, success is

the level of sophistication and technology necessary to

multifactorial. The winning bidders of R1-L03 can be

efficiently control the awarded assets and create value

divided into three categories in terms of experience. There

for the country, but were not awarded any blocks at

are the operators of various nationalities with experience

this stage. This frustration does not negate the prospect

in different jurisdictions, who offered a 35-50% additional

of their participation in further rounds, and in fact, they

royalty rate and were able to leverage their economic

are the most appropriate companies to engage in the

propositions particularly well thanks to their experience.

production of heavy oil.

As for the remaining bidders, we can divide them into two further categories. There are the oilfield service companies,

Q: What should be done to ensure that companies

such as Diavaz, with decades of experience in the market

bidding in R1-L04 will create value for the economy and

that have partnered with funds and will be running non-

what impact should Mexico realistically expect?

sophisticated assets with a relatively low level of investment.

A: Bidding phases cannot be compared, as each of them

The 85-95% royalty rates should not hinder these firms from

is completely independent, and the success of one does

being successful in their undertakings as they know how

not guarantee the success of the others. Companies that

to be efficient in the way they structure their organization.

will participate in R1-L04 are robust companies with a

The final category of bidding companies, however, may

high level of sophistication, market share, and market

seem more unreasonable in submitting proposals, with

capitalization. Although the vast majority of participants

no prior experience in the fields they were awarded and

will be IOCs, a small amount of NOCs may enter the tender,

should thus be more cautious than the aforementioned

but the prequalification standards will be nowhere near as

companies when it comes to operations and controlling

low as those of R1-L03. The good news is that potential

their cost structure. A proposal of a 90% royalty rate added

participants will have sufficient time to review not only

to the rest of the fiscal obligations leaves the companies

the geophysical data but also to make comments on the

with payouts of over 100%, which makes no economic

various components of the tender.

sense. Unlike major NOCs or IOCs, these companies cannot subsidize this project or cover the losses using other, more

When it comes to the impact on the economy, there is

profitable undertakings. In all cases, the level of revenue that

a misconception as to the outcomes of R1-L04. Mexico’s

companies can generate from R1-L03 blocks is substantially

deepwater market will be mainly controlled by Houston,

low, and I am particularly skeptical when it comes to the

despite the national content element. Rather than direct

success of this latter category. I believe the winners will

investment into the country, it will bring money to the

be those that were awarded the larger blocks, as they

Ministry of Finance in the form of royalties, which will not

have experience as oilfield service providers and have the

impact the economy as a whole as much as the public

necessary knowledge to substantially reduce costs.

expects. The main factor causing this is the geographical location of these blocks. Whereas onshore fields are in

The economically unsound bids were made possible

direct interface with the Mexican economy, calling for

because of the absence of a maximum restriction as to

direct investment for the construction of roads, hotels,

the economic proposal. Bids were only required to be

restaurants, and other infrastructure, deepwater fields are

lower than 100%, as such a figure would be unrealistic.

offshore and require global procurement. The latter blocks

Companies were allowed to bid as long as they passed

will have semi-submergible rigs and vessels from different

the prequalification standards, which were much lower

jurisdictions around the world, but will be mainly controlled

in R1-L03 than in the previous phases. These results left

from Houston both in terms of the economic model and


business structure, and of the real implementation of the

its lifecycle, as has been the case with PEMEX’s COPS and

project. Despite these financial specificities, R1-L04 will

CIEPS. The authorities need to bring clarity in terms of how

bring considerably more investment into Mexico than

this should be done. Compared to any other country, and

R1-L03. In order to compensate for the relatively low

particularly Brazil, local content requirements in Mexico

direct impact of R1-L04 on the Mexican economy, the

are not a challenge. No IOC has expressed criticism toward

government will be tendering fields that have a direct

Mexico’s approach to local content, only toward a lack of

interface with the local economy, including heavy oil,

information when it comes to compliance methods.

onshore, and shallow water. Q: Why is it important for Mexico to carry out the Q: How will the local content requirement work on

unconventional resources round, and to develop this

69

a practical basis, and do you believe it will impact the

resource?

69

decision of IOCs to enter Mexico?

A: I am certain that Mexico’s unconventional resources

A: Local content requirements are divided into two main

will be developed at some point, but one has to take into

categories. The first category is for deepwater activity and

consideration the impact of the dramatic drop in oil prices,

is determined in the structure of the bid, and the second

as well as the way in which it will impact the country in

category will be applied to all other block types. Although

the long term. This latter consideration will be essential

this tertiary regulation indicates who has to comply with

to determining the occurrence and order of the remaining

it, and how it has to be reported, there is a need to further

phases. It would be disastrous if Mexico decided to go

develop the components of this requirement, as the

ahead with a phase and there were no bidders because of

industry does not yet understand its nuances. So far, it is

the oil prices. In this regard, it is important to be pragmatic,

clear that compliance does not necessarily have to be met

not dogmatic, and to consider each phase of Round One

from the beginning of the project, but rather throughout

separately, as each one is a planet in itself.

| INSIGHT

GEOLOGY, THE KEY TO SUCCESS

There is much speculation surrounding the incremental award rate that Mexico has experienced for the blocks tendered from the first to the third bidding round of Round

JOSÉ PABLO RINKENBACH Director of AINDA Consultores

One. José Pablo Rinkenbach, Director of AINDA Consultores, does not believe that this success is so much a part of the

country’s 50 production sharing contracts, but Mexico

government’s learning curve, but rather that it is related

only has 218,” he explains. While the third bidding round

to the geological risk of each type of block. He explains

was hailed as successful by the entire industry, Rinkenbach

that the first bidding round’s relatively low 14% award rate

warns that the success attributed to this phase depends on

can be explained by the fact that the fields awarded were

one’s definition of the word. “If considering the number of

exploratory ones, which generally present a probability of

blocks awarded, then it was successful,” he acknowledges

success that is lower than 20%.

before pointing out that one of the reasons for the higher award rate could be linked to the absence of the gold

The second bidding round, on the other hand, made

plating issue in licenses. He believes this contract model

available fields with proven reserves. “In this case, it was

to be technically more feasible, and administratively

no longer an exploration game that was involved, but a

cheaper, because the regulator does not have to

production one, and that is why it was more successful.

monitor profits. He considers this bidding round to have

However, it did not reach a success level of 100% because

experienced an extreme over-bidding in terms of royalties,

the fields awarded were offered under production sharing

which could complicate field development. “The same

contracts, which are administratively problematic and

occurred in Colombia, where although many fields were

provoke gold-plating,” Rinkenbach analyzes. Moreover,

awarded, very few were developed,” he recalls. However,

he believes that Mexico does not have the state structure

Rinkenbach admits that if one takes into consideration

to monitor and follow up on those contracts. “Indonesia

the government’s aim to develop an industry of national

has around 1,000 people in charge of administering the

operators, then R1-L03 has to be viewed as successful.


| VIEW FROM THE TOP

TESTING THE WATERS FOR R1-L04

DEREK WOODHOUSE Partner at Woodhouse Lorente Ludlow 70

Q: What makes the contracts drafted by the Mexican

the most out of the opportunities presented by the sector

authorities attractive for major oil companies?

while balancing the different interests involved in the

A: It seems that the Mexican authorities have used the

process. The participation of the different actors heralds

first three phases of Round One as an exercise to learn

the success that Mexico will achieve as it overcomes the

from trial and error and test the industry in preparation

challenges it currently faces.

for R1-L04. With this strategy, the government managed to obtain important feedback from IOCs that helped in

Q: The basis for R1-L03 resulted in the allocation of 100%

restructuring the legal framework used for the bidding

of the fields. To what factor do you attribute this success?

rounds. This is why the license agreements were chosen

A: The success of R1-L03 was the result of the trial-

for R1-L04. The government has assimilated the lessons

anderror strategy the government implemented, as the

learned from the past rounds and put together legal

basis for this phase was built on the experience from the

documents that are attractive to large oil companies,

previous phases. R1-L01 is said to have been a failure, but in

which coincide unanimously with the accuracy of the legal

reality it was really just the first trial. In the second phase,

framework. Considering the short timeframes, the Mexican

the government managed to improve its procedures for

government managed to step up the required mechanisms

the bidding round, and by R1-L03, it was already able to

and provide what these players need to invest in Mexico,

understand the nature of the business. Moreover, in phase

and most international companies were surprised by the

three, the government acquired enough credibility from

outcomes and the parameters in the new legal instruments.

its performance in the past phases, attracting a great deal

In this regard, I believe that the government has taken real

of investment from different companies. However, R1-L03

advantage of the learning experience of the first three

can also be considered part of the preparation process

phases, testing the waters and seeing how far they could

for the round that will significantly change the shape of

address some issues in preparation of the most important

the Mexican oil and gas industry, R1-L04, the deepwater

element in the opening of the oil and gas sector, which is

phase.

R1-L04. Q: What could be some of the consequences of a delay Q: What are the main contributions made by IOCs

in R1-L04?

to shaping the type of contracts, the blocks, and the

A: To date, the government has managed to stick to

allocation of risks?

the timetable of Round One and avoid any delays, so it

A: It was clear from phases one to three that oil companies

would be surprising if this phase is not conducted within

were able to get a seat at the table with the Ministry of

the established timeframe. Nevertheless, considering the

Energy and build a close relationship with decision

importance of this phase, it would be understandable

makers. This approach allowed the development of

if

communication lines between the government and the

time to organize the process and ensure its proper

IOCs, which made it easier to take the industry’s concerns

implementation. However, the schedule established by

and worries into consideration when designing the legal

the government is reasonable, so I do not believe that it

framework. In this way, IOCs have been shaping the

will be delayed as it provides enough time for all actors to

nature of the legal instruments for R1-L04. The important

prepare and participate in a timely fashion. Furthermore,

decisions were not made by the government alone, as

the government has devoted a lot of effort to keeping the

the process entailed listening and discussing the main

round on track as a way to foster credibility. The Ministry

subjects with the rest of the actors involved in the sector,

of Energy and the other entities involved will continue to

which is not an easy task. Now, the Mexican oil industry

build on that, as IOCs’ confidence is essential to ensuring

is properly represented within the government, making

the success of the next rounds.

the

Mexican

authorities

decided

to

take

more


| VIEW FROM THE TOP

SUCCESS FACTORS OF L-03 AND HOPES FOR L-04 BENJAMÍN TORRES-BARRÓN Partner at Baker & McKenzie

71 71

Q: What factors led to a 100% success rate in R1-L03, and

the competitiveness of oil companies. One example of

what challenges will the operators face?

this situation can be seen in oil rig leases, since day rates

A: Baker & McKenzie believes that the authorities’ concern

have dropped to almost half of what they were two years

over the relatively disappointing response in previous

ago and only the most technically advanced rigs may be

phases led to them to increase the attractiveness of R1-

contracted at higher rates. Access to low-cost equipment

L03. Firstly, the license model adopted in this tender was

for long-term projects is one of the reasons there is still a

extremely helpful in generating renewed interest, as it

great deal of potential and interest in deepwater projects.

entailed much less burdensome administrative processes

Be this as it may, it is too early to make predictions on how

than the previous production-sharing models and a

the sector will develop in Mexico.

modification in the requirements relating to guarantees and collaterals. The latter created greater flexibility in the

Q: What factors exist intrinsically within PEMEX and are

new contracts, a characteristic we believe to be one of the

exacerbating the unfavorable oil-price situation for the

reasons for the success of R1-L03. Also, the release of the

NOC?

minimum bidding requirements in advance simplified the

A: Despite the many challenges, PEMEX remains an

task for the participating companies, in contrast to R1-L01,

intrinsic part of the oil and gas sector in Mexico. A market

in which the bidders were only informed of the minimum

without any public players to offset private companies

values after delivering their submissions.

would lead to an imbalance within the sector. PEMEX has a long payment history and the NOC has never defaulted.

The projects present a number of challenges for

Given current conditions, the new contract requirements

operators, including real estate regulations in Mexico and

are understandable, meaning the parastatal is still a viable

the intricacies of rights of way. This is made even more

partner for collaboration. As long as a project is sound

difficult due to the Social Impact Assessment, which now

and cash flows are based on viable financial models,

includes a new component that must be addressed before

working together will generate savings. Nonetheless,

the commencement of work. Compliance with these

the impact of PEMEX’s struggles on the general industry

regulations will require time and money, and possibly

cannot be ignored. There are many solutions that could be

investment in infrastructure in order to transport and store

implemented. The parastatal has downgraded its payment

the hydrocarbons that will be produced.

obligations and is currently renegotiating certain contract terms while terminating others. For new contracts, it is

Q: What are your expectations for Mexico’s deepwater

requesting a 120-180 day payment term and is offering

development?

factoring opportunities to its contractors to help them

A: Mexico is currently undergoing a difficult situation due

finance their work. Another solution for companies in the

to the low oil prices causing a decline in market growth.

industry has been to rely on redundancies to cut costs.

In the case of the deepwater sector, the crisis is not

PEMEX has sought alternative ways of cutting costs

particularly relevant since projects will not be producing

and contractual obligations by delaying or suspending

oil for at least six years, and by the time the exploitation

new projects. In addition, the NOC is using its affiliate

activities begin, we expect the prices to have begun to

companies to diversify and enter into the power generation

recover. As a result, investors are focusing on strategically

business, especially in terms of cogeneration since it has

placing themselves in areas that will provide them with a

5,000MW of potential for this energy source, but this is

competitive advantage in the future. Current conditions

evolving slowly. The lack of proposals for shallow water

are allowing companies interested in deepwater projects

projects could be capitalized on by PEMEX through CEIP

to secure more competitive prices for services and goods

contract migrations, an alternative that could increase its

from subcontractors, suppliers, and vendors. This increases

production and efficiency.


| INSIGHT

LOW OIL PRICES POSE A STUMBLING BLOCK FOR TENDERS stress in the energy industry with low prices, relatively weak demand, and extremely high supply, driven by

CARLOS PASCUAL

improvements in productivity in the US and aggressive

Senior Vice President of

marketing strategies from Saudi Arabia and other OPEC

IHS Energy

members,” Pascual laments. “There has been downward

72

pressure on prices, forcing companies to cut costs and make difficult decisions concerning capital expenditure.” “The competitiveness of Mexico’s resources is going to

As a result, he concludes that these companies must

depend on how the government groups together the

carefully select the areas that will receive capital

resources and fiscal terms for each bid round. In each one

expenditure, basing their choice on expected rates of

of the phases, companies’ assessment of the resource

return. If Mexico determines it is not willing or ready to

possibilities vis-à-vis other global options will be critical.”

offer attractive terms, it should do so in a conscious and

The words of Carlos Pascual, Senior Vice President of IHS

strategic way by structuring bid rounds intelligently and

Energy, highlight the tremendous resources Mexico can

proceeding when it is able to offer bidding terms that will

offer in the wake of the Energy Reform, which will be

secure the serious investors the country expects.

decisive in the development of the investor base in the country. R1-L02 and R1-L03 place a strong emphasis on

“If the oil price were US$100/b today, I suspect that the

attracting Mexican companies to bid, a relatively untested

outcome of Mexico’s Round One would be different,”

market because, to this day, Mexican companies have

claims Pascual. “There would be more clients operating

typically been service providers, but may now have re-

here and, consequently, there would be a wider range of

establish themselves as operators. Internationally, the

companies with which we could work.” Those are realities

critical test will be R1-L04, which concerns deepwater

to which the company must adapt. One of the key parts of

blocks. “The Mexican government understands that it

IHS’s business is to help companies understand and adapt

has to put sufficient resources on offer, together with

to a low-cost environment. As such, part of the challenge

attractive fiscal terms, and evaluation criteria that will

faced is in helping companies understand how they can

make its deepwater offerings competitive in comparison

increase efficiency in the current environment.

to investment opportunities elsewhere,” according to There is significant hope that the unconventional resources

Pascual.

development across the border in the US could extend into R1-L01 indicated that the competitiveness of Mexico’s

Mexico in the northern and central parts of the country, as

resource base will heavily depend on the quality of

well as the coastal zones near Tabasco and in Veracruz.

resources being offered, Pascual argues. In R1-L01, only two

Those resources have not been extensively developed at

blocks were awarded, affecting the further development

this stage as they are generally expensive and, considering

of the supply chain that will provide those companies

the

with services and equipment, and potentially prompting

investments in the country, have not been the highest

the biggest test of Mexico’s supply chain through several

priority for companies. In the US, unconventional and shale

other mechanisms. One of these will be the migration of

resources continue to be developed because the history of

technical service contracts to productionsharing contracts,

investment and cost-effective management allows for lower

whereby Mexican companies, such as Grupo Diavaz and

costs. Drilling rigs, other services and infrastructure support

Perforadora Mexico, are seeking to become operators in

are widely available. Through the use of data management

the hydrocarbons sector. R1-L03 may result in a number

on each well developed, it is possible over time to target

of other service companies establishing themselves as

investments to the most productive fields and reduce the

operators too.

investment required to develop shale resources. “In Mexico,

current

cost

environment

and

other

potential

the initial costs will be higher because companies will have A critical challenge in Mexico, and everywhere in the

to create the entire industry, first drilling numerous wells to

world, is to understand the dynamic and challenging

gauge the quality of the resource base,” Pascual explains.

international

accordingly

IHS expects the exploitation of shale and unconventional

develop a combination of competitive resources and fiscal

oil and gas to come at a later point in the development of

offerings. “We are going through a period of tremendous

Mexico’s resources, when market prices begin to recover.

cost

environment,

and

to


| VIEW FROM THE TOP

MORE LESSONS LEARNED FROM ROUND ONE JESÚS RODRÍGUEZ DÁVALOS Partner at Rodríguez Dávalos Abogados

73 73

Q: Has the development of Round One raised investor

by participants fell slightly below said values, with a 5%

confidence in the Mexican upstream sector?

spread. Had the values been published before, the bids

A: Unfortunately, one of the main concerns clients had

could have been slightly adjusted for a successful awarding

going into the oil and gas business in Mexico was that

of more contracts, leading to an award rate over 30%, well

corruption could potentially lead to the awarding of the

within the success range of 30-50% anticipated by the

contracts under suspicious circumstances. The three phases

CNH. As for R1-L02 and R1-L03, they were successful with

of Round One issued so far, however, have been carried

award rates of 60% and 100% respectively, and incredibly

out under absolute transparency by CNH. As we all know,

aggressive bids by some of the participants. In R1-L02, ENI

confidence is a fundamental but fragile factor, and even

International offered almost 84% of the operating profit as

though there is confidence in the award methods, this trust

government take to win the block with the most reserves,

in the institutions and regulators needs to extend to the

and R1-L03 saw bids of up to 85% of additional royalty.

whole range of activities that encompass the operation of

If anything, it looks like many companies decided to bid

a hydrocarbons block. Effective acquisition and recognition

regardless of the price of oil or because they are highly

of rights of way and transparency in the accounting and

optimistic about its future.

financial procedures of the oil taxation instruments come to mind. These factors are especially relevant to give

Q: To what extent do you feel that unnecessary restrictions

confidence to present and future investments.

were hindering conversation with regulators? A: Indeed, in an effort to promote transparency in the sector,

Q: To what extent do you believe that the three first

there are stringent restrictions regarding the interaction

phases of Round One have been successful so far?

between members of the private sector and CNH

A: In R1-L01 only 14% of the blocks were awarded. These

personnel. There are official, institutional communication

results are explained not by the drop in the price of oil

channels through which the private sector may express its

but because the Ministry of Finance did not publish the

concerns, and the Commissioners and other government

minimum values for the bidding variables before the

officials constantly participate in industry forums where

proposal presentation date, and some of the bids presented

they listen to investors’ and operators’ opinions.


| VIEW FROM THE TOP

BRINGING A WORLD-CLASS REGULATORY REGIME TO MEXICO ECKHARD HINRICHSEN Country Manager for Mexico of DNV GL - Oil and Gas 74

Q: How have the Energy Reform and Round One impacted

the mandate given to them by the state. CNH and the

the market in which you operate?

other authorities are concerned with transparency, which

A: The new agencies CNH, ASEA, and CENAGAS, have

is extremely reassuring, although this may complicate the

good intentions, but the enactment of these will depend on

exchange of ideas during the critical initial phase. Complying

the budget they receive. The implementation of a modern

with these regulations will be a challenge for PEMEX and

regime for operating and safety standards will also largely

we plan to apply our extensive experience to help the NOC

depend on the influence of companies. DNV GL is in contact

adapt to these changes. Modern regulations are usually

with the authorities, offering help to establish a world-class

more competitive, typically goal-oriented in nature, allowing

regulatory regime, given our knowledge of international

companies to be more innovative and find more appropriate

standards and the work conducted with regulatory bodies

solutions. I consider Mexico to be one of the most interesting

worldwide. So far, these organizations have not been

investment opportunities worldwide, and the interest shown

as responsive to our offer as hoped, as they are in the

in each phase of Round One, and particularly the second

process of establishing their structures and implementing

phase, was quite promising. Last year, we worked to identify

| INSIGHT

MARSH-R1 ENERGY PACKAGE viable. Therefore, the company expected that the main concerns for companies participating in the rounds would Sebastián Aguayo Marine and Aviation Leader Energy Practice of Marsh

Rosa Morán Oil and Gas Leader - Energy Practice of Marsh

be to comply with the contract requirements and to contain costs, which were both addressed in the insurance program. The Marsh-R1 Energy Package is designed to help

The worldwide insurance industry has developed coverage

companies on the most basic level of compliance with the

to cater to upstream, downstream, and midstream specific

contract. “An important number of licensees and operators

requirements in order to protect the patrimony of investors

have gained experience in the Mexican market by working

and companies associated with these activities. Sebastián

with PEMEX, which used to ease the companies’ concern of

Aguayo, Marine and Aviation Leader - Energy Practice of

acquiring an insurance product,” states Aguayo. “However,

Marsh, believes that the current main drivers for the oil and

they will now have to work on their own or in joint ventures

gas industry in Mexico are the rounds, particularly as many of

with other private actors, which has motivated us to

PEMEX’s investment activities have been delayed, which is a

develop an insurance program that is as user-friendly as

situation that is expected to continue for the next couple of

possible.” He adds that one of the main challenges given

years. “We decided to develop an innovative product called

the low oil price environment is the optimization of costs.

Marsh-R1 Energy Package aiming to serve the new needs of

Marsh-R1 has been designed not only to comply with the

the market,” he explains. In this program, Marsh considered

CNH contract requirements, but it also oversees one of

that the blocks and fields awarded in the last tender will

the key objectives of any insurance program, which is to

be highly dependent on cost containment to be financially

protect the company’s patrimony in case of an incident.


projects and companies of interest, and have moved to offer

underway that aim to standardize equipment, and subsea

our services to these companies. For example, we have

infrastructure in particular.

strong links with CENAGAS and are supporting the pipeline system operator in the takeover of 12,000km of previously

Q: How will the market adapt to R1-L04, and what does

PEMEX-owned gas pipelines.

this phase mean for DNV GL? A: The fourth phase, which tenders deepwater blocks, is

Q: How can DNV GL help companies winning contracts in

the most important, and the one that will attract most

Round One to be successful in Mexico?

investment. The exploratory drilling performed by PEMEX

A: Success in the current environment requires knowledge

so far corroborates the presence of significant volumes

of the industry and a supportive network. DNV GL can offer

of oil, similar in quality to the ones found on the US side

75

companies over 20 years of experience in the Mexican oil

of the border, in the Perdido area. The country has some

75

and gas industry, as well as contacts with PEMEX and the

of the world’s deepest waters, reaching depths of over

authorities. We are expecting strong demand from foreign

3,000m. The development of these fields will require

companies, such as ENI, Shell, and Statoil, which work

companies with considerable technology, experience,

with us in Europe. Locally, we can support newly formed

and capital to support the risk. DNV GL’s experience is

companies and elevate these unexperienced firms to the

extensive, having worked for Shell in the Perdido area

required level by certifying their management systems or

and in most other deepwater fields around the world. As

training their personnel. Mexico should have world-class

a leading consultant in deepwater, we are working with a

standards, and we can help all firms conform to these. We

large group in Houston, Norway, and Petrobras in Brazil.

expect our Reliability Availability Maintainability (RAM)

Rig supply is a real concern, given that rigs reaching

solution to be particularly valuable in the present and the

3,000m are sparse, but PEMEX is currently working with

near future. We plan to apply the same technique as the

Seadrill and Grupo R. Local service companies will race to

operations of US shale gas companies, which battle in a

offer their support to winning operators, but only the large

competitive industry, to operations in PEMEX. Moreover,

companies will have sufficient expertise and resources to

we have various initiatives 74 and joint industry projects

compete with the majors.

| INSIGHT

FINANCING OPTIONS FOR WINNING BIDDERS It has been suggested that the contracts negotiated for Round One are more beneficial for the government than the companies. For Rosa María Morales Cid, Senior Analyst Oil and Gas Latin America of Moody’s, the situation is slightly more complex than this. “When R1-L01 was

Alberto Jones Tamayo Director General of Moody's

Rosa María Morales Cid Senior Analyst Oil & Gas Latin America of Moody’s

carried out, the prices were elevated, there were certain expectations, and I believe the authorities had prepared

be impossible to open an asset-backed trust using PEMEX

the rounds in a different context,” she explains.

receivables as collateral, because the credit rating of PEMEX may deteriorate further. Secondly, this approach would not

The ratings agency’s Director General, Alberto Tamayo,

provide companies with an enhancement in terms of credit

shares that there has not been a great deal of demand for

ratings, and the prudent approach may be to take time to

rating services from Round One winners just yet. “I think

become established in the country. This also depends on the

that, at this stage, new entrants already have their funding

off-taker, because selling natural gas to PEMEX would differ

in place and want to establish their operations and become

in terms of ratings than if it was sold to CFE, whose rating

stable for a few years before considering any bond activity,”

is Baa1 with a negative outlook. “However,” he concedes,

he states. “This applies unless the company desires to put

“in the international markets, the spreads may not be as

together a structured transaction, but in this environment,

favorable as they were one year ago due to volatility and

the typical way to do so would be to use the asset backing

depreciation of emerging market currencies. Companies in

from long-term contracts and receivables to issue a bond

this industry are probably currently referring more to the

with an SPB or a trust.” However, he surmises that it would

banking industry or using their own capital.”


EXPLORATION

3

The combination of budget limitations and PEMEX’s position as the upstream monopolist have left Mexico underexplored over the past decades. In order to increase Mexico’s oil production by 500,000b/d in the coming years, and ensure the long-term sustainability of Mexico’s desired production levels, an increase in exploration activity will be crucial. In 2015, PEMEX announced the discovery of four shallow water fields off the coast of Tabasco, which are expected to contribute additional production of 200,000b/d in the short term. In the words of the Emilio Lozoya, former Director General of PEMEX, these were “the first discoveries achieved using the new tools provided by the Energy Reform”. Despite this success, PEMEX’s reserves represent 9.6 years of production at the current production level, a number that is destined to drop when production increases.

PEMEX will no longer be the sole player carrying out exploration activities in Mexico. It has already created a multi-client seismic market which resulted in a boom in both seismic data acquisition and the reprocessing of existing data. This chapter provides an overview of the direction Mexico’s exploration activity might take in the coming years, takes a closer look at PEMEX’s exploration strategy, and assesses the ambitions of private companies in this newly opened market.

77


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| CHAPTER 3: EXPLORATION 80

VIEW FROM THE TOP: Alma América Porres, CNH

82

VIEW FROM THE TOP: José Antonio Escalera, PEMEX E&P

84

VIEW FROM THE TOP: Oscar Roldán, CNH

85

VIEW FROM THE TOP: Edgar René Rangel Germán, CNH

86

MAP: PEMEX's 2015 Exploration Achievements

86

INSIGHT: Wallace Pescarini, Schlumberger

88

TECHNOLOGY SPOTLIGHT: 3D CSEM, EMGS

89

VIEW FROM THE TOP: Juan M. Santana, EMGS

90

VIEW FROM THE TOP: John D. Lawrence, Petricore

91

VIEW FROM THE TOP: David Pring, PGS

92

TECHNOLOGY SPOTLIGHT: GeoTag, Sercel

93

VIEW FROM THE TOP: Duane Dopkin, Paradigm

94

VIEW FROM THE TOP: Pavel Hernández, OH Maritime

95

INSIGHT: Karim Lassel, CGG

96

VIEW FROM THE TOP: Brian Hanson, ION Geophysical

97

INSIGHT: Alberto Galvis, Citla Energy

98

INSIGHT: Matt Bell, IKON Science

99

INSIGHT: Javier Rubio, Geoprocesados

100

VIEW FROM THE TOP: Robert Hobbs, TGS

101

VIEW FROM THE TOP: Robin Ellis, Sercel

79


| VIEW FROM THE TOP

THE NEW FACE OF MEXICO’S EXPLORATION MARKET ALMA AMÉRICA PORRES CNH 80

Q: How has the decision to release all the exploration

exploring onshore basins. In fact, the Gulf of Mexico

data repositioned Mexico as an exploration destination,

was the first focus of acquisition service companies. 2D

both for companies that want to produce in the future

seismic is being used to recognize additional areas of

and those who want to reinterpret the data?

the Gulf of Mexico. PEMEX had acquired deepwater data,

A: The exploration segment in Mexico advanced in the

but just for areas close to Perdido and in the southern

past year because of the regulatory changes and now it

basins were the large gas reservoirs were identified. Now

is well positioned to discover new resources in the near

companies are collecting data in the remaining areas

future. The Mexican exploration sector is oriented toward

through 2D seismic.

data acquisition and special reprocessing, which allows the possibility of playing around with the evolution of

Although it might seem that there is an overlap in data

technologies and available information. At the moment,

acquisition activities in the Gulf, the objectives are different

the information and processes are being upgraded with

in each study, as some intend to examine the seabed while

new technologies, reprocessing, and new data acquisitions.

others are trying to determine depths. Electromagnetic studies shed light on the type of fluid combined with

The interest companies are showing in carrying out

information from seismic and drilled wells, and hundreds of

exploration activities is amazing, particularly in studying

square kilometers are being explored with this approach.

the Gulf of Mexico, and there is a smaller interest in

Geochemistry studies provide important data to improve modeling and to identify hydrocarbons in the basins.

RESERVES INCORPORATION (billion BPCE) 3P3P RESERVES INCORPORATION (billion boe) 1.7

companies that might be interested in deep or shallow water blocks. New results are showing something similar to Brazil’s pre-salt formations, which we will see more of

1.5

1.4

Integrated geochemical data also reduces uncertainty for

average 1.3

1.1

1.2

in the next few months. This means that, in addition to the usual formations, there is a continuous salt layer under which there could be hydrocarbon resources. Overall, all

0.8 0.7

these endeavors will allow us to have a deeper perspective on the Gulf, thus reducing uncertainty, in no more than two years. Onshore is also more complicated than exploration in

2010 2011

2012

unconventional unconventional deepwater deepwater

2013

2014 2015

shallow water shallow water onshoreland

discovered resources discovered resources Investment2010 US$ constant Investment billion 2.9 US$ billion Discovery cost Discovery cost 2.0 Source: PEMEX US$/b Source: PEMEX

the Gulf of Mexico because operators have to carry out social impact assessments that can delay the permitting process. In addition, no large-scale studies have been made to date. Shale is another complex area because the current oil price is not conducive to production in these

2011

2012

2013

2014

2015

3.0

2.9

2.8

2.8

2.4

fields, but the Ministry of Energy will ultimately determine when the round will take place. Most of the exploration activities in the south region were given to PEMEX, and the NOC left the rest for future bidding rounds. There are

2.0

1.7

2.4

3.4

3.7

also areas that have been barely explored or not explored at all, such as Chiapas and some portions of the state of Veracruz.


Since PEMEX works by asset, the intersection of

onshore conventional resources, which will require new

several areas lacks reliable studies. Most of the onshore

technologies and creativity. Mexico is focused on the

exploration being carried out right now consists of studies

offshore resources where we knew we had resources in

and reprocessing, although data acquisition activities are

the Cretaceous formations, so we neglected the Tertiary

gradually increasing, changing the exploration perspective

formations in the southeast, which might have interesting

for the next few years. There are a few companies

volumes waiting to be uncovered.

reprocessing the existing seismic information for onshore blocks, ultimately increasing the value of the information

Q: How has access to information evolved, and what can

we have and saving time in improving the quality of the

companies expect from the Data Room in future rounds?

available data.

A: The Data Room had to be developed because there was a lack of knowledge about the information that existed

Q: How do you see the evolution of exploration

in Mexico. In fact, we had to make geological atlases.

technologies and the entry of new technologies now that

However, it was important to develop a Data Room at the

the market is open?

initial stage to incorporate all the information needed to

A: The technology operators have in their R&D centers gives

support technical decisions. For onshore blocks, we had

them a unique competitive advantage, and R&D centers also

to gather information directly from the asset, which is

tend to go the extra mile when developing solutions to new

different from having integrated information, performing

problems. Most people think about seismic acquisition when

quality control as a single component, and managing it

talking about Authorization for Hydrocarbons Recognition

in advance or evaluating the missing components with

and Superficial Exploration (ARES). However, this also entails

sufficient time to obtain it.

superficial recognition studies for the exploration side. Many of these studies have employed geochemistry, gravimetric

The process for the following rounds will be different, since

analysis, magnetometry, and geology studies used to relate

a massive data transfer is being carried out already. Future

already-drilled wells with seismic and the electromagnetic

data rooms will be more improved than the ones we have

side, which deals with fluids. Seismic might be the most

today, as we will use our acquired experiences and apply

impressive aspect due to its scope, but geochemistry studies

the lessons we have learned. We are going to modify the

are the second most frequently requested service. For me,

membership requirements for the Data Room because the

successful and state-of the-art technologies will be those that

state might have information on drilled wells that will be

enable the possibility of drilling in high pressure conditions

publicly available, so having a data room for each phase

at significant water depths. If the pre-salt formations are

will not be necessary. Information will always belong to the

confirmed, then the technological side will also encounter

state and will be contained in the Hydrocarbons Information

more challenges, as these characteristics will not be found in

Center, but it will be available to operators. Almost 80% of

other markets. These are areas that will evolve significantly

the operators that want to enter Mexico will have access to

in the coming years.

the information in the next three rounds, which is the goal. It is difficult to maintain control of the data when this is

Onshore presents a different scenario, as the technology

not integrated and an inventory is lacking, but if we have

used leads to increased efficiency levels in the production

the complete volumes, we have the chance to go over it in

stage. This will be the case for shale reservoirs, which

advance for future rounds. As reprocessing activities take

hold significant volumes. Confirming the volumes and the

place, companies will help complement the information.

hydrocarbon potentials is the next challenge, as well as finding the sweet spots so that barrels do not cost US$40

Q: What are some changes the industry can expect as a

each. There are seismic and characterization technologies

result of CNH’s current endeavors?

that allow location of those sweet spots at lower costs that

A: ARES will be modified and a new version will be issued

the ones that rule the industry today.

this year, which will include well integrity, which will look at exploration wells, deepwater drilling, and standard model

In the current climate, there is a play between prices and

wells. Another aspect relates to royalties, as the previous

efficiency. Operators in the US are drilling natural gas

version did not detail how the purchase of information

wells and they are turning a profit. The price of a cubic

should be paid for. This is important to specify as clearly as

foot of natural gas is relatively cheap, yet the US is making

possible in the new multi-client market. A company might

a business out of it and there is no reason why Mexico

purchase a seismic or electromagnetic block, reprocess

should not be able to develop a profitable shale industry.

it with its in-house technology, and sell the reprocessed

It is speculated that the southern region could have oil

information several times. In a multi-client market, if the

in addition to gas, which would create a more attractive

company did not acquire the original data, it has to pay a

business for everyone. Much remains to be explored in

percentage to the state.

81


| VIEW FROM THE TOP

PEMEX EXPLORATION ADAPTS TO THE NEW ENVIRONMENT JOSÉ ANTONIO ESCALERA Director of Exploration at PEMEX E&P 82

Q: PEMEX spent MX$35 billion on exploration in 2015.

we will begin the development stage once the project

How was this amount spent, and what are the most

is sanctioned. Another discovery worth mentioning is

outstanding results?

the Tetl field, which was found through the Tecoalli-1001

A: If exploration activities are meant to turn non-discovered

well. We will drill a delineation well in Tetl to learn more

prospective resources into prospective resources, we

about this field and plan the future production. Finally,

had a successful year, as we discovered 1.1 billion boe.

Jaatsul is another discovery where we are about to start

However, 400 million boe in deepwater resources became

appraisal drilling operations with the objective of reducing

contingent resources because at the average 2015 oil

uncertainty in reservoir size and then define the wells and

prices, these discoveries are not commercial. We also did

facilities needed to exploit it.

some delineation activities in the southern deepwater Gulf of Mexico gas province and in some reservoirs in Perdido,

Q: To what do you attribute the 45% success rate of the

such as Exploratus. We also found oil in Cratos, but we will

30 exploration wells you drilled last year?

have to wait for higher prices before developing this field.

A:

This

success

international

pozos • Increase in drilling

efficiency and well completion

geología y geofísica administración 75%

• International efficiency standards were met

• Tariff negotiations in drilling equipment

• 15-30% adjustments

• Innovative schemes in seismic data acquisition and processing

• Reduction in costs per acquisitions (km2)

• Optimization of administrative expenses

10%

within

during

the

the last

average five

of

years.

low oil prices, the success rate would have been 38%. Achievements

The most important factor is the fact that we know the geology, although it is also worth mentioning that we are harvesting the benefits of our investments in technology and high-quality seismic data. For shallow water blocks in the Gulf, we acquired close to 2,000km2 of seismic data, including multicomponent, full-azimuth, long offset

Deepwaters 60% Shallow waters 30%

15%

operators

lies

Considering discoveries that are not commercial due to

PEMEX EXPLORATION INVESTMENT Average Investments in MainINVEST Efficiency PEMEX EXPLORATION Exploration 2012-2015 Initiatives

rate

• 25% reduction

and high-density ocean bottom cable, and wide azimuth variable depth high-density streamer surveys. These allowed us to improve subsurface imaging in areas where prospective resources were unclear. A multidisciplinary approach to geological knowledge paired with the application of cutting-edge technologies have enabled us to continue advancing with positive results. Any

wells

geology and geophysics

management

Source: PEMEX Source: PEMEX

company with a commercial success rate of 30% or more can be considered an accomplished player.

Last year we carried out some important work in shallow

The current oil price is forcing us to focus in areas with

waters that led to the discovery of six fields, which amount

lower investment risk, mainly in smaller but more profitable

to 650 million boe. The six fields we discovered last

areas. This means we have decelerated our deepwater

year can start producing in two or four years and yield

activities and moved to shallow water and onshore plays.

around 200,000 boe that will allow it to maintain the

Nonetheless, Mexico’s potential in deepwater is enormous,

country’s production platform. There are two fields that

just like that in unconventional resources. PEMEX’s

seem particularly promising: Xikin and Esah. In the first,

challenge is to work efficiently in these resources,

we will drill a new delineation well this year to generate

especially given the potential for shale we have identified

more certainty and accelerate its development. Esah is

in the Tampico-Misantla basin. Although the current

also a significant discovery that is easier to manage, so

economic landscape does not allow for these resources


to be developed, we need to advance with prudent

investments. Previously, PEMEX used to pay for the full

investments in a strategic way so that we can obtain the

cost of an exploration study, but now we can get a study

necessary knowledge and be ready to produce once the

for 20-30% of what it cost in the past. A lot of the studies

oil price settles.

being conducted are 2D seismic. From what we have seen, it is a high-quality seismic that was acquired using

Q: What are the drivers behind your shift form large

the most appropriate design parameters for a regional

reservoirs to more profitable ones?

analysis of the Gulf. However, due to our limited resources

A: Our current exploration strategy responds to the oil

and our existing knowledge of the country’s basins, these

price. In times with limited financial resources, just as

studies are not a priority for us at the moment. As for the

the rest of the industry, PEMEX has to focus on the most

3D seismic that is being acquired in the Salina del Istmo

profitable areas that can contribute reserves to support

Basin, we are going to wait until more reprocessing has

production in the short and medium term. However, we

been done before making a decision.

83

cannot lose sight of the medium and long term, especially when unconventional and deepwater resources will

Q: Where are you going to focus your exploration

play an important role in Mexico’s production. Trion and

activities for 2016, and what are your priorities?

Maximino have been delineated, and we are drilling a well

A: Our main focus will be the Southeast Basin, both

in a prospect close to the latter. While the profitability of

onshore and offshore. In the latter, we have five drilling

deepwater fields is low right now, this will not be the case

rigs operating and by the end of the year we will have two

in seven years.

more. As for the onshore areas, the budget is limited, but if the tide turns at the end of the year, we will put three more

The inclusion of exploration opportunities close to our

drilling rigs into operation. Regarding deepwaters, the goal

fields gives an important upside to our farm-out areas.

is to scale down from four to two semi-submersible drilling

It is worth mentioning that in the case of deepwater

rigs by the end of the year and accelerate the farm-out

exploration, PEMEX was acting on its own because we did

process so that we can share risk and benefits in Perdido.

not have another option. However, it is clear to everyone that we need partners to develop those fields. Just like

The Tampico-Misantla Basin has a considerable potential

we are adjusting our strategy based on the low oil price,

for unconventional shale oil resources with the advantage

we will also leverage on the reform to change the way

of having existing facilities and people who have the

we operate in deepwater fields so that we can share the

technical knowledge on how to extract oil. The goal is to

risk and the rewards with other parties. Even though

reach the same efficiency levels as companies in the US. In

deepwater activities have decelerated, we have been

2014, the extraction cost of a barrel from unconventional

analyzing farm-out areas in order to start the migration

reservoirs was US$90, and now these companies can

process with the Ministry of Energy and CNH. Once our

produce a barrel at US$40-50. In addition to speeding

partners are selected, we will jointly define the exploration

up the learning curve, we need a special fiscal regime for

and exploitation program for every area. We also want to

this kind of resources, which the authorities are aware of.

participate in the fourth phase of Round One, where we

Even though Mexico’s shale resources are not profitable

will enter into a partnership and bid on blocks that are in

right now, we need to be prepared for the next turn in

line with PEMEX’s oil-focused exploration strategy.

oil prices.

Q: How is PEMEX going to interact with the multi-client market? A: At some point carrying out seismic studies was

MEXICO RESERVES DISTRIBUTION 2015 (billion boe) Basin

Cum. Prod.

PEMEX’s duty because the law mandated it, but now multi-client campaigns are an important instrument that

Reserves

Prospective Resources

1P (90%)

2P (50%)

3P (10%)

Conv.

10.8

14.2

18.2

12.5 2.4

Southeastern

47.8

the geology and evaluate the petroleum potential at lower

Tampico-Misantla

6.3

1.0

5.9

10.6

costs. PEMEX’s efforts in deepwater basins should not

Burgos

2.5

0.3

0.4

0.6

be overlooked, as we acquired over 100,000km2 worth

Veracruz

0.8

0.2

0.2

0.2

of 3D seismic from wide-azimuth and narrow azimuth

Sabinas

0.1

0.0

0.0

0.1

Deepwater

0.0

0.1

0.4

1.8

will allow many players, PEMEX included, to understand

using a single vessel, which allowed us to reduce costs considerably. The new way of operating in Mexico, the multi-client market, is important because it allows us to share

Un Conv.

3.3 1.5

0.6 0.4 5.2

Total PEMEX

57.5

12.4

21.1

31.5

20.7

5.2

Total Mexico

57.5

13.0

23.0

37.4

52.61

60.21

Source: PEMEX 1 As of January 1, 2014.


| VIEW FROM THE TOP

NATIONAL DATA REPOSITORY AMIDST ROUND ONE OSCAR ROLDĂ N Head of the National Hydrocarbons Information Center 84

Q: How has the process of the data transfer developed,

transparent process, meaning that all data is available to

and how is this helping the progress of the Energy

any individual who requires it. The only exception is raw

Reform?

seismic data, since this constitutes a considerable amount

A: One of the objectives of the Energy Reform is to boost

of information, so instead it is granted through the ARES

the exploration activities in the country, which highlights

regulation.

the need for more data. Since we started to operate the bidding rounds, we realized that in order to be successful in

Q: What would be the impact if companies in Round Two

the implementation of the Energy Reform we had to create

purchase the relevant information from the private sector

an efficient information industry in Mexico. We have three

instead of accessing the Data Room?

instruments that will enable us to achieve this: data packs

A: Companies that have access to the data through the

for bidding rounds, a licensing system for access to data,

license system will later have no need to buy data packs

and data generation through a multi-client system.

in order to participate in the future bidding rounds. So far we have data from two different areas of the Gulf of Mexico

Q: What feedback did you receive from companies

available in the National Data Repository: deepwater

regarding the data available for R1-L01, and how did this

blocks and shallow water blocks in the southeast basins.

impact the subsequent phases?

For deepwater, we have 20 seismic surveys, all of which

A: We received considerable suggestions on all aspects

are final products and migrated acquisitions, as well as the

of process oversights, ranging from data and technical

data from 55 wells. For shallow waters, we have 15 seismic

aspects to contracts. During R1-L01, we received great

3D surveys, four packs with information on 165 wells, and

feedback from companies, which was addressed in the

one pack with 23 seismic 2D surveys. The shallow water

future bids.

wells include Ek, Balam, Sinan, Bolontiku, Ayatsil, Tekel, Pit, and 40 exploration wells around the area. We have

Someone expressed disappointment due to the fact that

given licenses to 13 companies and delivered more than

the data was cut. The comment expressed concern about

25 licensed data packs in the first seven months following

the need to connect the wells to the appropriate surveys.

the issuing of the guidelines in October 2015. In terms of

Although this was a relatively basic issue, it was something

data packs for bidding rounds, we have delivered 143 data

we overlooked. Therefore, we decided to open all the

packs for the first four tenders of Round One, and hosted

data without cutting or filtering any of it. All the data

312 visits to the Data Room.

transferred from Pemex and IMP has to be made available to any interested company, which we continue to work

Q: What are the new rules regarding the passing of

on. This is the reason why we develop the instrument of

acquired multi-client seismic on to CNH?

data access through a license model. Like all governmental

A: The rules have remained basically the same. Companies

activities, however, regulations had to be created. Issuing

give CNH the data they collect and we keep it confidential

the regulation that granted access to all the seismic

for a 12-year period in the case of new data, and six years

surveys and well data took a considerable amount of

in the case of reprocessed existing data. The multi-client

time and effort. Nonetheless, we managed to succeed

system has been extremely successful, as evidenced by

in launching the regulation and obtaining the price of

the fact that we have authorized 31 different projects: 22

the data. The process entailed creating the data packs,

for the acquisition of new data and 11 for reprocessing

checking the surveys and the variations, working with

existing data. This amounts to approximately 350,000km

the Ministry of Finance, and obtaining approval for the

of new 2D seismic data, 111,800km2 of new 3D WAZ

price. Finally, we managed to release the licensing system

seismic data, and the reprocessing of 387,000km2 of

at the end of September, and we created an extremely

existing data.


| VIEW FROM THE TOP

ISSUES PERTAINING TO MEXICO'S RESERVES EDGAR RENÉ RANGEL GERMÁN Former Commissioner of CNH 85

Q: What is your perspective on the development of

that not only deepwater projects, but also other projects

Mexico’s reserves volumes?

will be affected.

A: Reserves pose a significant problem, because our most important mature fields are declining more than

The third potential problem is Chicontepec, which has tight

expected. Most of the production around the world

oil, meaning that it is not possible to drill a well that continues

comes from mature fields and everyone is concerned

to drain oil. Chicontepec has small sand lenses and thousands

about where new production will be coming from, which

of reservoirs from a technical point of view, so many wells

is why unconventional resources are so relevant. There

must be drilled to reach each of those reservoirs. The most

are no real alternatives to replace current production

significant development plan that PEMEX developed for

volumes, and we might reach 100 million b/d soon. Given

Chicontepec included 50,000 wells, which is beyond the

that mature fields are declining faster than expected,

capabilities of any company on the planet.

there will be a substantial drop in reserve levels in the next two to three years.

Many people will say that Chicontepec is extremely important because 40% of Mexico’s 3P reserves are

Deepwaters could also pose a problem. Although the

located here, but only a tiny piece, less than 1 billion

volumes are there, we have not developed the right

barrels, are 1P reserves. To produce the 3P reserves, all

strategy for deepwater. We can validate this since it

50,000 wells must be drilled. Of course, following the

is never clear why well locations have been selected.

migration of the COPS and CIEPS, new operators are not

However, it is not within our remit to assess or evaluate

going to want to drill the quantity of wells required to

PEMEX’s exploration strategy, so we must receive the

produce the 3P reserves of Chicontepec. For example,

proposal and treat the submission like that of any other

new operators might plan to only drill 200 wells instead

company. In the year when a well is drilled, typically a huge

of the 5,000 planned by PEMEX for the same area,

volume of reserves is announced. In the years following

which would have a detrimental effect on future reserve

this announcement, PEMEX then makes revisions that

calculations, and we will see this development during

often substantially reduce reserves, in some cases down

the current and next year. As we move forward, we must

to zero, since the volume is there but production is not

develop a strategy to prevent the loss of those reserves.

economical. Another factor that will affect reserves is that some of Adding the oil price factor given that prices dropped from

the mature fields have not seen their development plans

US$100 to US$30, then many of the deepwater reserves are

delivered in terms of advanced and enhanced recovery.

contingent resources, and when resources are contingent

Most of these cases are in the southern region, in fields

to price then oil companies are unlikely to make the

such as Samaria or Jujo-Tecominoacán, where PEMEX

large capital investments necessary to start production.

only drilled a fraction of the planned wells due to budget

This means that we are expecting another large drop in

constraints. If PEMEX is ultimately only able to deliver one

reserves this year and next. In order to evaluate reserves,

well instead of 20 for several years in a row, then this also

producibility is calculated as the unweighted arithmetic

affects the production profiles of these fields.

average of the price of the Mexican mix on the first day of each month within a 12-month period. Therefore, when

In some cases, private operators taking over such fields

calculating the reserves for January 1, 2016, we still have a

and increasing investment will support a recovery of the

good oil price since the average of the Mexican mix is over

reserve levels to a certain extent, but I do not see this

US$50, and for light crude oil it surpasses US$60. But the

happening in Chicontepec. In summary, in the short term,

average for 2016 will be less than US$30, which means

poor reserves numbers are coming in 2016 and 2017.


| PEMEX'S 2015 EXPLORATION ACHIEVEMENTS

1

86

3 2

9

10

11 12

5

4

8 Well producing oil, gas, and condensate Well producing wet gas Hydrocarbon fields

6

7

2015 SUCCESFULL EXPLORATION WELLS 1.

Cratos -1A

4.

Tecoalli-1001

7.

Licanto-1

10.

Jaatsul-1

2.

Hem-1

5.

Xikin-1

8.

Tsimin-3DL

11.

Esah-1

3.

Nat-1DL

6.

Licayote-1

9.

Batsil-1

12.

Cheek-1

From February 2015 to the same month in 2016, a total of 25

marine region of the Gulf of Mexicosaw the completion of

wells were completed, 11 of which were unsuccessful. Of the

11 wells during the aforementioned period. Wells in these

successful wells, two were located onshore in the southern

offshore fields produce oil and gas, and they include Batsil-1,

region. Licanto-1 was completed in August 2015 and has

Cheek-1, Tecoalli-1001, Jaatsul-1, and Tsimin-3DL, which

a depth of 4,030m, while the second one, Licayote-1, was

were respectively completed in March, April, September,

completed in December 2015 and is 2,585m deep. Both

November, and December of 2015. Their respective depths

produce oil and gas for commercial purposes. Two other

amount to 5,150m, 4,530m, 4,900m, 5,075m, and 6,900m.

wells were completed in the northern marine region of the

There are also two wells that produce wet gas: Hem-1, which

Gulf of Mexico. The only commercial field out of these two

is 4,429-meters deep and was completed in March, and Nat-

offshore ones, Cratos-1A, was completed on November 2015,

1DL, completed in October with a depth of 4,569m. Xikin-1

produces gas and condensates, and has a depth of 5,952m,

and Esah-1 are also commercially viable, have respective

compared to the 5,779m of Corfu-1, a non-commercial well

depths of 5,279m and 3,930m, and were completed on

completed in August 2015. The northeastern marine region

August and September of 2015. The two last productive

of the Gulf of Mexico saw the completion of just one well,

wells are non-commercial. Alaw-1 is 5,279m deep and was

Kayab-101. This offshore, non-commercial well has a depth of

completed in May, and Miztรณn-101 has a depth of 3,930m

3,510m and was completed in March 2015. The southeastern

and was finished in August.


| INSIGHT

MULTI-CLIENT SURVEYS ATTRACT INVESTMENTS “The project has been wellperceived by CNH because

WALLACE PESCARINI President Mexico & Central

this is exactly the kind of

America of Schlumberger

activity the government

87

needs in order to attract new

vessels. The colossal investments required for this endeavor

investors”

investment, we must always consider the ROI as a long-

are solely provided by Schlumberger. “For this level of

Wallace Pescarini, President Mexico & Central

America at Schlumberger

term goal. Our decision to make this significant investment is based on research with operators and research with PEMEX, bearing in mind that the NOC could benefit from the data,” comments Pescarini. He says that CNH has

When the oil price drops as it has done in the past years,

provided excellent visibility with its Five Year Plan, and

the first thing companies cut back on is investment in

Schlumberger has also conducted its own research in terms

large E&P projects. However, in Mexico, there is a balance

of the appetite for investment of international companies.

and, while PEMEX was reducing investment in exploration,

“The project has been well-perceived by CNH because

Schlumberger

in

this is exactly the kind of activity the government needs

welcoming new customers. An example of this can be

in order to attract new investors. The combination of the

witnessed in the seismic campaign the company is currently

transparency and professionalism implemented by CNH,

carrying out in the Campeche Bay, which is one of its largest

our customers’ trust, and our belief in the country makes

multi-client programs and the biggest in Mexico by far.

the investment extremely attractive for the company.” The

has

made

significant

investments

project strengthens Schlumberger’s position in the Mexican “The program is Schlumberger’s biggest seismic campaign

exploration sector, which now enjoys a prestigious position

in the world. We have a strong belief in the country’s energy

due to the company’s participation in preparing the data

sector and the benefits of the reform, and we are already

rooms and creating the National Data Repository alongside

beginning to reap the rewards of this investment,” shares

CNH. Meanwhile, Schlumberger has been a valuable partner

Wallace Pescarini, Schlumberger’s President Mexico &

in ensuring transparency and data security, meaning that

Central America. This project has been undertaken by the

both parties were able to benefit from the collaboration.

company’s exploration arm in order to offset the losses

“We are delighted to have been given the opportunity to be

caused by the current situation in PEMEX, and the company

involved in the history of the oil and gas industry in Mexico

managed to sell some of the multi-client data to customers

outside of PEMEX operations, and I believe that this is only

such as Statoil, demonstrating that government policies can

the beginning for us.”

lead to success. The project’s scope goes beyond R1-L04, as the collected data will be useful for Schlumberger and its

Some

people

could

believe

the

multi-client

survey

customers over the next five to ten years. Pescarini explains

might create a conflict of interest, given Schlumberger’s

that he is increasingly seeing customers who acquire the

collaboration with CNH. However, Pescarini stressed that

data, win a bid, and subsequently require a more in-depth

CNH has a clear set of guidelines in terms of Schlumberger’s

analysis of the allocated fields. In this sense, Schlumberger

access to certain information, and the information obtained

can work with these customers in reprocessing the data

through the multi-client surveys is being provided directly

and creating a much more detailed report. He adds that

to the Commission, as stipulated in the license. “Ultimately,

in the current environment, these services are particularly

the scenario is more of a partnership rather than a

attractive due to their ability to minimize risk.

conflict of interests, as CNH also needs us to make this type of investment in order to attract newcomers to the

The project, which began in August 2015, has been divided

country,” explains Pescarini. There are clear lines between

into five phases, of which 60% had been completed by early

Schlumberger’s duties helping CNH with transparency and

2016. Schlumberger is using its latest seismic technology

data security, and access to the data that would provide an

for the program in Mexico and two fleets comprising 14

advantage in the bidding rounds.


| TECHNOLOGY SPOTLIGHT: 3D CSEM Measuring wellbore resistivity has been a fundamental

of the subsurface, often called a temperature-compaction

formation

Marine

model, typified by resistivity that gradually increases with

Controlled Source Electromagnetic (CSEM) surveying

evaluation

depth. Using all the navigation parameters of the 3D CSEM

uses the same principles to illuminate resistive bodies,

survey, forward modeling is performed over the input 3D

such as commercial-scale hydrocarbon reservoirs, from

resistivity volume to generate a synthetic dataset, which

the seabed. When integrated with other data, 3D CSEM

is quantitatively compared to the acquired data. If the

data helps distinguish prospects with high hydrocarbon

mismatch between the synthetic data and the observed

saturation

from

tool

prospects

since

with

the

low

1920s.

hydrocarbon

data is larger than a given threshold (derived from the

saturation. When a CSEM survey is performed, a horizontal

measurement uncertainty), the 3D resistivity model will

electric dipole (HED) source is towed above the seafloor.

be updated based on the mismatch. This process iterates

The dipole source emits a continuous, time-dependent

until the synthetic data matches the observed data within

EM signal that yields a specific frequency spectrum.

the specified misfit threshold. The output of 3D CSEM

The resulting EM fields are measured by receivers that

inversion is a 3D resistivity volume, which can be loaded in

are deployed on the seafloor. The receiver grid has a

any interpretation software environment, and thus can be

3D configuration, which enables recording data from all

correlated and integrated with other available geophysical

azimuths. The water depth of operation for a CSEM survey

information.

ranges from 20-3,500m. The depth of penetration into the subsurface is between 0-3,500m, depending on the

3D CSEM inversion provides a subsurface 3D resistivity

electrical properties of the overburden.

distribution that delineates prospects and reservoirs, and places them accurately both laterally and in depth. The

3D CSEM inversion is EMGS’s standard imaging product

incorporation of full-azimuth data acquired in 3D grids

for CSEM data. The firm’s 3D CSEM inversion has been

enhances the spatial resolution and accuracy of the final

successfully used to image formation resistivities with

3D resistivity volume. Ultimately, when clients integrate

CSEM data acquired in a variety of geological settings such

the provided resistivity volumes with seismic, well log, and

as shallow water blocks, continental slopes, deepwater

other data, they are able to upgrade their Probability of

blocks, and salt basins, as well as for a range of E&P

Success (PoS) and Volume in Place assessments. These

applications. The goal of CSEM inversion is to estimate a

improvements are often possible when CSEM data is part

subsurface resistivity volume that explains the acquired

of the prospect evaluation workflow, whether integrated

CSEM data within the measurement accuracy and which is

into a customer’s current practice or by using the tools

geologically meaningful.

offered by EMGS. By using CSEM data in combination with other subsurface measurements, users can increase their

To conduct a 3D CSEM inversion, EMGS creates an initial 3D

success in exploration, de-risk and polarize their prospect

resistivity model. This model is a simplified representation

portfolio, and optimize their development programs.


| VIEW FROM THE TOP

COMBINING DATA SETS FOR MORE ACCURACY JUAN M. SANTANA President of EMGS North and South America 89

Q: Which distinctive technologies will you implement in

a new deal in 2013. This contract, and its extension, is an

your multi-client programs in Mexico?

endorsement of our technology and the value that CSEM

A: We have integrated seismic and controlled source

delivers in hydrocarbon exploration. Moving forward we

electromagnetic survey (CSEM) data, and as a result,

will further develop the relationship and support PEMEX in

we are able to deliver reliable solutions to explore leads,

its exploration efforts in the Gulf of Mexico. As far as this

rank prospects, and make more informed decisions. The

project’s impact on the Mexican bidding rounds, EMGS

advantages of CSEM surveys lie in their ability to provide

has a permit from CNH authorizing the acquisition of up

information about the subsurface resistivity that, in

to approximately 88,000km2 of 3D CSEM multi-client

conjunction with seismic, provides powerful information to

data in the Salina del Itsmo Basin. In addition, we have

explore a variety of scenarios. These include the presence

an agreement to reprocess the existing 3D CSEM data in

or absence of hydrocarbons, their estimated volumes,

Mexico, as part of a multi-client model.

characteristics on the seal, lithology differentiators in terms of shale and salt, and salt imaging, among others features.

Q: How would you rate the mechanisms that allow collaborating with CNH, and Mexico’s new multi-client

The 3D CSEM integrated products take interpretation

approach to exploration?

further

by

A: The process for the multi-client program with the CNH,

establishing correlations between seismic and CSEM

called ARES B, was relatively straightforward. I admit

data. By utilizing joint indicators of reservoir properties,

this was somewhat lengthy, as ASEA and the Ministry of

one can qualify geophysical data and enhance structural,

Energy also had to be included, which required separate

stratigraphic, and fluid property interpretations for a region

procedures. However this is understandable, as it was a

or zone of interest. Notably, combining 3D CSEM surveys

pioneering project and several doubts had to be allayed by

with seismic data provides the hydrocarbons industry with

the relevant authorities. We expect the process will become

an additional and independent dataset, which previously

more streamlined, meaning that these kinds of projects will

could only be obtained with an extremely costly well bore.

be accelerated in the future. It will be beneficial for CNH to

Moreover, EMGS’s technology allows the hydrocarbons

implement mechanisms for the multi-client projects so that

industry to incorporate its measurements over large

they have greater impact in acquiring further knowledge.

areas in 3D. This means that, when integrating 3D CSEM

Moreover, we have made considerable advancements in our

techniques with traditional hydrocarbons exploration

multi-client seismic and CSEM integration program, the main

tools, companies can make a more accurate interpretation

objective of which was to reduce exploration uncertainty by

of the exploration potential of an area, optimize their

contributing the significant added value that CSEM brings

portfolio and drilling schedule, and ultimately increase

to the existent multi-client seismic. In this way, integrated

their probability of success.

exploration workflow, including the CSEM data is established

and

provide

a

competitive

advantage

in conjunction with an exploration company’s technical team. Q: What have been the main lessons learned from your 3D CSEM multi-year contract with CNH?

We consider that the main area of opportunity for

A: EMGS will prioritize acquiring CSEM data for the future

exploration companies in subsurface comes in the form

bidding rounds in Mexico as outlined in the Ministry of

of 3D, and because challenges are inherent with this type

Energy’s Five Year Plan. The plan for future licensing rounds

of technology, integration is vital. Our approach has been,

in the offshore fields of Mexico aligns well with our plans

and will continue to be, the combination of 3D CSEM with

in the region and the received CNH permits, and we are

seismic data, in order to reduce exploration uncertainties

now actively seeking funding for our projects. We signed

and more accurately and efficiently identify, assess, and

a contract with PEMEX in 2010, and subsequently signed

rank plays in a potentially productive area.


| VIEW FROM THE TOP

LABORATORY SERVICES AT THE INDUSTRY’S FRONT DOOR JOHN D. LAWRENCE CEO of Petricore 90

Q: How are you managing to maintain your relationship

Due to geological similarities in the sediments, these

with PEMEX in the current environment?

resources could prove just as fruitful as those already

A: I have been involved with PEMEX since 1978, and I have

extracted in the US, although I believe we are still a long

never experienced a situation as critical as that in which

way away from seeing major shale development in Mexico.

the NOC finds itself at the moment. The main problem we are seeing is the delay that can last up to several months

Q: How is Peticore benefiting from an environment in

in terms of billing for services, and now the payment

which companies look for low-cost, integrated services?

conditions have been changed for a period of up to 180

A: Offering both well services and rock analysis gives

days, which essentially means that the suppliers and

us a particular benefit since the services are intrinsically

service providers must finance PEMEX over this time. The

linked. In the future, our regional, geological knowledge,

costs of factoring are relatively high, so this has been a

a consequence of our range of services, will be our main

particularly problematic situation for our company. On the

competitive advantage in the emerging market, as our

other hand, we have a contract with PEMEX E&P, which

competitors lack the experience in Mexico that we have.

is also available for use by production assets, providing

In the specific case of Mexico, we have a full-service

rock analysis for PEMEX interests across the breadth of

laboratory established in the region where most activity

the country. The project is running slowly, mainly due to

is seen, whereas most competitors do not have the same

PEMEX’s current low levels of activity and the lack of wells

facilities, and their local provisions are limited. They then

that are providing samples for analysis.

tend to send samples back to their main laboratory, which is normally located in Houston, Texas, or Aberdeen,

Q: What will be the implications of the fact that PEMEX

Scotland, and there tends to be a long waiting list for

returned 95 wells to the authorities for Petricore?

analysis due to the fact that the laboratory acts as a global

A: Firstly, there will be a lack of productivity due to

hub for the company. However, we have a lab dedicated to

decreased PEMEX activities in the country. Presumably,

the sample analysis here in the heart of the oil community,

the reason for the return is the fact that these fields are

exclusively for the Mexican oil market, meaning that we

not overly attractive to PEMEX, meaning their appeal for

can provide the results much quicker.

private players in the case of new bidding rounds may be limited. However, the principal reason for the return of

Q: How do you plan to demonstrate your capabilities to

the fields is PEMEX’s lack of resources, meaning that the

IOCs that are expected to enter the market?

fields are not necessarily unattractive, but that the NOC

A: We have invested in marketing in order to increase

simply does not have the resources to establish effective

visibility and make the oil community aware of our presence

operations. The whole sedimentary base of the Gulf

on a global level. Timeliness is crucial in this industry as many

of Mexico, from Florida to Campeche holds a wealth of

operations are time sensitive, and the data must be provided

opportunity for hydrocarbon exploration. Moreover, it is

as quickly as possible so that companies can quantify

likely that the south side of the Gulf has been exploited to a

reserves and determine production methods. Moreover, this

much lesser extent than the north due to intense activities

business has a reputation for its delays, so at Petricore we are

in US offshore drilling practices, meaning that new players

very much focusing on the speed at which we can deliver our

should not make the mistake of underestimating the

services, while maintaining quality. Competitors have always

potential of these fields. There are certainly conventional

seen establishing a laboratory in Mexico as a highly risky

fields awaiting discovery and, although I do not anticipate

venture, due to a high investment requirement and relatively

we will discover any more behemoths like Cantarell,

few contracts. In this way, we have gotten a head start, and

the unconventional and shale sources are relatively

will be well-positioned to offer our unique local knowledge

underdeveloped, especially compared with the US side.

to any companies entering the new landscape.


| VIEW FROM THE TOP

THE OPPORTUNITY LIES IN DETAILED IMAGING DAVID PRING Country Manager Mexico of PGS 91

Q: What strategies are you implementing to cope with

true broadband data and produce some extraordinarily

the stringent economic environment in the industry at the

high-quality images when we process, as well as giving us

moment?

access to pre-stacked data that facilitates extremely high-

A: The focus at the moment lies mainly on the control of costs

quality reservoir characterization work.

and implementation of meticulous risk analysis. In addition, we have effectively adjusted the size of the company, both in Mexico and internationally, in an effort to rebalance the current supply and demand situation. In order to move ahead, spending has to be strictly controlled. We have an agreement with Schlumberger and Spectrum in Mexico that allows us to work together, essentially to promote and sell multi-client data, specifically related to the 2D seismic, which provides an example of controlling risk. Q: Based on your experience of 2D studies, what do you expect to be the role of 4D technologies for seismic in the Mexican market? A: Among our successfully completed projects is a large 2D regional study, and this has been acquired, processed, and is now being sold on the international market. As soon as all the permits were in place from CNH last year, we were able to begin and complete this study. To date, there has been no 4D in Mexico, and that is mainly due to the fact that the most promising reserves in the country tend to be in

To date, there has been no 4D in Mexico, and that is mainly due to the fact that the most promising reserves in the country tend to be in

carbonates

carbonates, and there is uncertainty regarding the viability

Q: What is the importance of detailed exploration in field

of the 4D signature that can be recovered from these types

developments?

of reservoirs, especially those that are extremely deep.

A: In spite of our focus on large-scale exploration, PGS

However, there is no reason why this cannot be attempted

has advocated high-density surveys for a long time. A few

by a company who believes that the risk is worthwhile. In

years ago, we implemented a program called High-Density

our experience, when we model 4D and subsequently shoot

3D (HD3D), which was essentially an attempt to produce

4D, we usually find that there is a significant improvement in

high-density, spatial sampling, both in-line and cross-

the signal, since we tend to model conservatively. Therefore,

line, and this produces the most favorable circumstances

if the model displays a minimal chance of success, there is a

for obtaining a high-quality image. When looking at a

solid opportunity when the seismic is shot.

reservoir-scale survey, the area under consideration would typically be hundreds of kilometers rather than thousands

Q: What are some of the advantages both the company

of kilometers, but the detail that can be extrapolated is

and its clients have obtained from your fleet?

greatly improved. Regarding processing in smaller-scale

A: For our marine acquisition and processing, we base

surveys, much more effort is applied to building the

processes around the Ramform platform, which is a

required velocity model for pre-stacked depth migration,

specialized, safe, and highly efficient seismic vessel

which can produce extremely high-quality imaging and

design. The acquisition equipment is based around dual-

detail on a scale that facilitates development of the

sensor Geostreamer technology, which allows us to record

reservoir.


| TECHNOLOGY SPOTLIGHT: GEOTAG The French company Sercel, a global leader in seismic acquisition with 50 years of experience, is continuously developing technologies that help companies in the hydrocarbon exploration industry. One of the company’s leading technologies is GeoTag, an acoustic positioning system for seabed seismic acquisition. In order to conduct a seismic or ocean bottom survey, companies cannot simply send a surveyor equipped with a GPS, as this would not provide any accuracy. GeoTag is the latest generation of positioning devices with the highest degree of accuracy, which is ensured thanks to a twoway communication of time-distance measurements from the GeoTag transponders located on the seabed and the GeoTag transceivers found on a vessel. The AC powered transceiver is connected to the INS via a junction box and can receive up to ten simultaneous replies and absolute positioning is then computed with a precision of 0.2m after processing. One of the challenges faced by similar devices but overcome by GeoTag is saturation. Thanks

be it OBC, transition zones, or ocean bottom nodes, and

to its ability to handle up to 10,000 units per crew, the

its size provides customers with considerable advantages.

positioning device provides an extremely high quality

While competitors’ transponders are 442mm long with a

resolution for large 3D surveys.

diameter of 63mm, Sercel offers the smallest transponder on the market with a length of 370mm and a diameter of 60mm. Maintenance is also simplified by the transponder’s

range of 1,000m and can function up to a water depth

simple design that allows the customer to perform basic

of 500m, making it a suitable option for both shallow

repairs independently, including changing the alkaline

water and deepwater surveys. It is an extremely adaptable

battery pack that has a typical six-month long life in

technology as it can be used with any kind of equipment,

operation.

ISO 9001

Certified

The submarine positioning device has an operating

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| VIEW FROM THE TOP

BRINGING NEW TECHNOLOGY TO OLD WELLS DUANE DOPKIN Executive Vice President, Geoscience Product Management of Paradigm 93

Q: What main elements of your software allowed to

azimuth imaging and characterization system, geologically

reduce the time between seismic acquisition and first oil

constrained velocity models, and software to develop

by nearly 40%?

challenging anisotropic velocity models in deepwater

A: Paradigm developed this solution for its software and

and onshore shale basins. These technologies have had

support licensing arrangement with COMESA, which

a major impact on the quality and resolution of both 2D

includes software updates and maintenance services.

and 3D seismic acquisitions. We have a rich portfolio

This arrangement is strengthened by a collaborative

of seismic imaging applications that include Kirchhoff

relationship where we prioritize and deliver enhancements

operators, reverse time migration propagators, and local

that improve COMESA’s productivity and the solutions

angle domain operators that can be adapted to different

that are relevant to its customers and assets. The

subsurface conditions. Our “diffraction imaging” extracts

Paradigm seismic processing and imaging solution is

discontinuous subsurface features not observable with

a field tested solution that incorporates continuous

conventional seismic methods. Our full azimuth imaging

improvements, enhancements, and innovations reflecting

solutions are ideal for both deepwater and shale resource

the requirements of a large global customer base. This

plays for deriving anisotropic models and carrying out

solution, which led to the aforementioned time reduction

inversions for fracture intensities and orientations.

of 40%, combines the best of high performance computing with high levels of interactivity, interpretation, and

Q: As operators move from appraisals to beginning to plan

modeling, significantly reducing the time to results even

their drilling phase, what can Paradigm’s technologies

for the most challenging projects. The comprehensive

and software do to reduce uncertainty, and translate that

footprint of this solution means the customer does not

into increased productivity?

have to leave the solution, avoiding costly time losses

A: One of the activities that we do quite well to reduce

going in and out of third-party applications. It is a good

exploration and development risk is to carry out projects, not

match for the COMESA geoscientists who need to deliver

only with borehole and seismic data, but also with knowledge

quality results in challenging project timelines. Moreover,

of the stratigraphy and structure of the subsurface. Many of

the solution is optimized for the latest hardware, compilers,

the projects that we execute synchronize the geological and

and operating systems so that COMESA can predict and

geophysical model, which is something many traditional

plan these project schedules more easily.

seismic contractors are not able to do routinely because they do not have access to the subsurface geological modelling

Q: What type of demand are you seeing from PEMEX to

technology. We use the geology to guide and constrain our

reprocess and reappraise some of its legacy data?

geophysical operations while ensuring that both data sets are

A: It is important to understand that Paradigm is not a seismic

consistent with each other. The end result is a seismic image

acquisition or oil field services company. Consequently, the

volume that is consistent with both seismic and geologic

opportunity for taking legacy seismic and borehole data,

invariants, such as travel times and well markers, and a

upgrading it, and exposing it to new technologies and

higher resolution velocity model constrained with azimuthal

workflows can bring substantial returns and cost savings

measurements. Additionally, our subsurface models are

for operators like PEMEX. Paradigm provides an oil field

generated in chrono-stratigraphic (depositional) space,

independent solution with best-in-class science to ensure a

accommodating any level of structural and stratigraphic

successful outcome for its operators.

complexity, and providing a platform for velocity, structural, stratigraphic, facies, and reservoir property modeling. All of

In this area, we have brought many innovative contributions

these not only drive a better seismic imaging workflow, but

to the seismic processing and imaging market, including an

also drive a better quantitative interpretation solution with

innovative broadband seismic deghosting solution, a full

seismic inversion procedures.


| VIEW FROM THE TOP

NEW MARITIME MANAGEMENT IN THE GULF OF MEXICO PAVEL HERNĂ NDEZ Director General of OH Maritime 94

Q: How has your company evolved in the last year, and

A: There are few companies in Mexico that can fulfill

what challenges have you faced and overcome along the

the financial, technical, and human capital criteria that

way?

is demanded by our clients, some of which have even

A: We had an interesting and challenging year due to the

higher standards than PEMEX. Most of the international

new payment protocols and the new technology that our

companies that carry out seismic services on a large scale

clients are demanding. The main obstacle has been the

are public companies from the US and Europe, which

changes in policy that allows payments to be made in

have a level of compliance that is much higher than what

terms of 180 days, and although this was just announced

PEMEX requires. Preparing our first bidding proposal was

in November 2015, it has already been implemented. It

a challenge, but fortunately, our successful compliance has

has been challenging for us because we are accustomed

provided us many references from other companies that

to a payment delay of 30 to 90 days, but not of 180

want us to offer the same services. This is our competitive

days without notice. As a company, we had to learn to

advantage, and although we would like to inform more

overcome this situation and we ended up being one of the

clients about our services, we provide a niche service in a

few businesses still under contract for seismic services last

narrow market. Therefore, our references generally come

year. Our clients were also demanding a change in logistics

in the form of word of mouth. Last year, we started working

due to the fact that different types of new technology

with Seabed Geosolutions, a joint venture between CGG

were being brought to Mexico. One of them is based on

and Fugro, who was looking for a reliable partner with

seabed surface recognition, and its cables are laid directly

knowledge on compliance because the seismic industry is

on the seabed to analyze the components underneath. We

relatively dynamic.

had to do this in a high-traffic density area in Campeche, and we provided personnel that were involved in the day-

Q: What kind of services do you expect to provide in

to-day logistics to help with this new stumbling block.

activities in the Gulf, and which of these services do you expect will experience the most demand in the coming

Q: Is OH Maritime considering potential clients that are

years?

carrying out multi-client services in the Gulf of Mexico

A: One of the main services that the operators will

with the authorization of CNH?

need is reliable port agency services that are able to

A: We are definitely looking into those players. In fact, one

maintain communication while offering cost-effective

of the companies that already have CNH authorizations is

practices across all operations because the seismic

a client of ours, CGG, which uses our consulting services.

market is depressed. In order for port operations to

At the moment, the industry is not yet in a position where

maintain stability, there is a need for talented port

there is a great demand or need for seismic studies, as it is

agents. These operators are demanding more of these

still dependent on contracts for the Round Zero reservoirs,

services in general, and looking for Mexican suppliers

of which PEMEX retained about 80% of the sites that have

that can provide quality services. We have a port agency

to be explored, and some of them require an update on

license and our objective is to improve and increase our

seismic data. R1-L04 is going to be interesting for our

operations in the ports of Coatzacoalcos and Tuxpan,

clients because it will auction areas that have not yet been

which have a high demand for services. Operators will

tapped into, and this means that these areas must see

also be demanding legal advisory services, as foreign

investment before exploration wells are developed.

personnel requirements are always being reviewed. These players want to start operations in Mexico and they want

Q: How can you take advantage of being able to follow

to know if they can become a local company, establish

and comply with PEMEX’s complex requirements to stay

a permanent branch, and the terms and conditions for

ahead of the competition?

having foreigners in the contract.


| INSIGHT

ACCOMPANYING EXPLORATION IN THE NEW MARKET “The name of the game is imaging, and the more a company can provide accurate and reliable images, the better positioned it will be”

KARIM LASSEL Geomarket Director & Country Manager Mexico of CGG 95

“The name of the game is imaging, and the more a company Karim Lassel,

can provide accurate and reliable images, the better

Geomarket Director & Country Manager Mexico of CGG

positioned it will be.” In this sense, CGG will conduct high-end, wide-azimuth acquisition, supported by a host of advanced processing technologies, to offer the very highest-resolution

Service companies have several ways to demonstrate

subsurface images. Lassel is also confident that CGG’s team,

an outstanding track record, and one of CGG’s flagship

made up of an imaging center in Villahermosa and offices in

projects is the high-res, broadband wide-azimuth marine

Houston, which has gained unique experience in deepwater

seismic survey it completed for PEMEX in 2014. In the

processing techniques by working on the US side of the

words of CGG’s Director & Country Manager for Mexico,

Gulf, will provide the company a distinct advantage. Lassel

Karim Lassel, “this survey was one the most high-profile

comments that CGG’s acquisition of Fugro’s Geoscience

projects in terms of volume of data that the industry

Division back in 2013 brought world-renowned geoscience

has seen, both inside and outside Mexico. CGG supplied

brands to the company’s existing portfolio, which means

PEMEX with an end-product of high added value that was

that CGG now has high-end products and services that have

beneficial for the NOC in proceeding with its exploration

not been fully deployed in Mexico yet and is in the process

program, particularly in Centauro.”

of making them better known to transform data into more valuable, actionable information.

Exploration activities look set to accelerate in the country due to the development of a new multi-client market.

In Lassel’s view, the opening up of Mexico’s oil and gas

Additionally, the licensing rounds generate the need to

sector has provided a new landscape for the industry in

revisit existing data and integrate different data types and

the unconventionals and deepwater sectors, in addition

vintages where possible; interested companies will most

to shallow water. Even though CGG is renowned for

likely have to use their internal resources as well as call for

its expertise in Mexican offshore projects, the onshore

external services. CGG has been granted several permits

segment has some appeal for analysis and reinterpretation.

by CNH that allows the geoscience expert to acquire

The company has gained plenty of knowledge in the US on

and process data in Mexican waters. Lassel expects the

how to process onshore data for sweet spot identification

company to acquire and process approximately 240,000km

and unconventional reservoir characterization, which will

of high-resolution, airborne magnetic and gravity data over

be helpful for operators in R1-L01. Lassel comments that

six large areas. CGG already has the backing of a number

his company intends to play a role in the development

of investors who have expressed interest in participating

of these potential reserves by importing cutting-edge

in this venture and is looking for more clients. In addition,

technology and processes developed mainly in the US into

CGG has initiated a multi-client reprocessing project for the

Mexico. Although CGG is well positioned, Lassel is aware

Centauro deepwater. This is the only reprocessing project

that competition will be fierce and his company is not

CGG has decided to do in Mexico for the moment.

protected from the industry’s downturn. Nevertheless, CGG will benefit from its reputation as a strategic partner,

The industry in Mexico is reinventing itself, and Lassel points

and as a technology leader and high-quality service

out that the trend in acquisition technology is moving

provider. “Every survey we have conducted puts us in a

away from 2D seismic, as Mexico is already well covered,

very strong position in terms of service performance, HSE,

and focusing more on high-tech broadband wide-azimuth

social responsibility, and innovation. I see great windows

acquisition that can image deep structures combined with

of opportunity, as the market will be driven by more than

the latest advanced processing, interpretation, and analysis

just one operator, although PEMEX will definitely remain

techniques to support the exploration and drilling phases.

our main client in Mexico.”


| VIEW FROM THE TOP

MAPPING THE MEXICAN TERRAIN BRIAN HANSON President and CEO of ION Geophysical 96

Q: What factors led to the extension of ION’s multi-year

and significant experience with Mexican geology make us

contract with PEMEX for onshore and offshore surveys?

the preferred imaging partner for many new operators in

A: Our biggest achievement to date, however, have been

Mexico. We are currently working on a number of projects

offshore. The recent changes in the regulatory regime

to deliver continuous high-quality 3D data over large areas

in Mexico have created enormous opportunities for E&P

in critical regions such as Perdido and Campeche. These

companies in Mexico, and ION has been a significant

data sets will be available in time to reduce geologic risk

player in getting data into their hands to help them

for the impending lease sales.

develop their exploration strategies in the region. First, in 2012, we gained access to the University of Texas data

Q: What experience gained from your data in the US

in Mexico and reprocessed the seismic data shot in the

sector of the Gulf of Mexico will be translated into its

1970s and 1980s. The uplift we achieved on that data

Mexican counterpart?

was remarkable. We named the project YucatanSPAN ,

A: Drilling activity in the US has been high, and our

and it enabled our customers to identify key prospective

GulfSPANTM and FloridaSPANTM programs provide our

areas ahead of their competitors. In 2015, we acquired

customers with the data and knowledge they need

22,000km of new data entitled MexicoSPANTM, and this

to develop their E&P programs in Mexico. The level of

covers the southern half of the basin and ties directly

competition in the US Gulf of Mexico has also driven a

to our GulfSPANTM program in the US. MexicoSPANTM

tremendous wave of innovation. Our pioneering work to

images the prospectivity of the sedimentary section

develop and apply Reverse Time Migration (RTM) and

and also the deepest part of the basin, providing the

other technologies gives us a substantial edge in imaging

framework to understand the basin evolution and

complex areas such as the salt related discoveries of

potential petroleum systems that are present. We

the Perdido fold belt. In Mexico, the knowledge that we

provides our customers most of

gained from the YucatanSPANTM reprocessing project

TM

believe MexicoSPAN

TM

the 2D data they need.

was invaluable because it allowed us to develop the MexicoSPANTM program with a clear focus on answering the key questions, whereas our competitors had to acquire dense regular grids to sample the geology. Our unconventional reservoir characterization ResSCANTM workflow was developed over several years of evaluating and characterizing multiple onshore US reservoirs. The integration of the various disciplines, such as geophysics,

In 2015, ION acquired

22,000km of new data entitled MexicoSPANTM

petrophysics,

geomechanics,

rock

physics,

reservoir

engineering, drilling, and completion operations, provides the context for our customers to optimize well and field development plans. These workflows can focus on well orientation by using the latest wide-azimuth and multicomponent seismic technology, seismic inversion to

Exploration success in the US Gulf of Mexico has been

identify completion or production sweet spots or azimuthal

driven by large volumes of multi-client 3D data. The next

anisotropy to better understand fracture orientations.

step for Mexico is to develop prospects by applying the latest geologic knowledge and processing technology to

Q: What are the advantages of ION’s BasinSPANTM over

the existing 3D data. Our leading edge imaging technology

conventional multi-client survey libraries?


A: BasinSPANTM programs are designed at the basin scale

seismic data across the whole Gulf of Mexico as part of

in order to deliver knowledge across an entire basin, from

BasinSPANTM and complemented that with potential field

margin to margin. They are designed and acquired to

data. Our coverage extends from Dallas, Texas to the

provide the complete exploration framework and connect

Yucatan peninsula.

conjugate basins, which are basins that formed when the continents were in a different location than today. That

Q: What are the benefits of Reverse Time Migration (RTM)

means delivering seismic lines that are not just longer

in ION’s technology portfolio, what have been its results

than those of our competitors but that also provide the

in exploration activities in the Gulf of Mexico, and what

highest quality image of deeper strata at 40km or more.

improvements has ION made to this technology?

This allows geoscientists to unravel the geologic evolution

A: About ten years ago, ION was the first company to

of the basin. The BasinSPANTM library allows us to make

commercialize the large-scale use of RTM. It delivered

interpretations across entire continental margins, and we

accurate images in the presence of steeply dipping or

can correlate the geology in Brazil to similar age rocks in

even overthrust reflectors that are encountered in complex

West Africa, for instance. We tied our Mexican program

subsalt plays. RTM has continued to evolve, and today we

to the Caribbean region. BasinSPANTM programs are never

can use much more realistic anisotropic representations of

TM

just regular grids of lines. Each line in a BasinSPAN

the subsurface. Our implementation of RTM is extremely

program is designed to answer a specific question about

efficient, allowing us to deliver RTM images at high

the basin architecture. Typically, we shoot orthogonal

resolutions, without any of the limitations of traditional

to the bathymetry and parallel to the syn-rift extension

Kirchoff migration. ION’s major differentiator is not just

direction. We also take care to tie existing well control.

our algorithms, but our leading experience in successfully

We have acquired or reprocessed over 96,500km of 2D

implementing technology for our customers.

| INSIGHT

NEWLY CREATED PLAYER SEEKS THE RIGHT PARTNERS Much of the talk on the restructuring of the oil and gas industry involves the creation of local operators. However,

ALBERTO GALVIS CEO of Citla Energy

the risky and capital intensive exploration sector does not come up in conversation as often. ACON Investments saw the potential of the exploration segment and decided to

added to the skills and assets that we already have within

fund Citla Energy, which was created to participate and

our company, such as our financial muscle,” says Galvis,

invest in the national exploration and production sector. “The

who also highlights his 15 years of experience in several

Energy Reform brings huge opportunities for the private

countries as an asset that will serve his company.

sector, as the government structured a way for investment to flow in an orderly and organized fashion. An event of this

Galvis lists the reasons why companies should consider

magnitude happens every couple of decades in the global oil

partnering with Citla, “Firstly, we have a strong and robust

and gas industry, and we created Citla as a vehicle to be part

financial backing, which many local companies are lacking.

of it,” shares Alberto Galvis, CEO of Citla Energy.

Secondly, we are contributing international standards that will help the industry operate in a responsible manner

So far, Citla has secured significant funds from reputable

and with higher technical capabilities. Finally, we will

institutions, including the World Bank, through the

bring international experience that will contribute to the

IFC, the China-Mexico Fund, and Mexican pension

industry, as this was closed for 75 years and will benefit

funds, as well as ACON Investments, its sponsor private

from new ideas and ways of doing business.” Galvis hopes

equity firm. In addition, Citla is working on building its

that these capabilities and assets will allow his company

operating capabilities, for which it is negotiating with

to participate in R1-L05. “We find those onshore blocks

potential partners that have had activities in Mexico for a

are quite attractive, given the large volume of resources.”

considerable time. “We will soon have proven operational

He also mentions once the timing of the farm-outs is

capabilities through our partners that will provide us with

confirmed, Citla Energy will look into this opportunity

the necessary knowledge and experience. This will be

seriously.

97


| INSIGHT

GEOMECHANICS OPEN THE DOORS TO NEW FRONTIERS When deepwater drilling was more active, Ikon Science was focused on helping companies understand formation pressures offshore in Mexico. Bell comments that wells

MATT BELL

targeting prospects in Mexican waters adjacent to high-

President of Ikon Science

profile discoveries in the Wilcox play, such as Tiber, Cascade, and Jack, may cost up to US$250 million to drill,

98

and are likely to encounter high pressures, often while Over the past year, Ikon Science, a global leader in

dealing with narrow drilling margins. Following recent

Quantitative

(QED),

changes in legislation, Bell has noticed increased interest

onshore

in applying Ikon Science’s technology in Mexico, both

has

been

Exploration developing

unconventional drilling its

and

traditional

and

new

resource

completion geophysics

Development

workflows

plays,

providing

engineers, and

for

in

geology

value

to

onshore and offshore, especially in the Joint Impedance

addition

to

and Facies Inversion technology (Ji-Fi), which was

customers.

launched internationally just over a year ago. “We are

According to Matt Bell, President of Ikon Science,

seeking pilot studies in Mexico, and would be happy to

the application of quantitative seismic interpretation,

hear from any companies interested in trialing this radical

particularly in combination with geomechanics and

technology on those fields.”

geopressure prediction, is relatively underdeveloped in Mexico, which provides Ikon Science an opportunity

Ikon Science has developed a series of case studies

to help unconventional resource developers identify,

from deepwater wells drilled in the Gulf of Mexico that

drill, and complete ‘sweet spots’ within the reservoir.

demonstrate the value of the company’s pore pressure

“Unconventional reservoirs face a different set of

prediction and time-based data analysis methods. Given

production challenges from conventional reservoirs.

that geology does not change as activity moves across

Some of the major questions operators have surround

the US-Mexican border, Ikon Science can bring significant

the effective use of hydraulic fracture stimulation to

regional expertise to bear on local Mexican prospects.

deliver economic production rates,” Bell explains. He

During drilling, it is critical to calibrate borehole stability

points out that the answers to these questions are rooted

and pore pressure predictions to known events, such as

in geomechanics, as geomechanics plays a critical role in

connection gases, tight hole conditions, and pack off

understanding the direction in which a stimulated fracture

tendencies. By performing its analysis on time-based

will grow, how far the fracture may grow horizontally and

data, much of which is done in real-time, Ikon Science can

vertically, and whether the stimulated fracture will be a

produce robust and accurate pore pressure predictions.

simple planar fracture or a complex network of fractures.

In accordance to the company’s mantra, “the regional informs the local”, Bell expects that the understanding

Bell notes that a fracture contained within a resource layer

Ikon has gained in developing regional geopressure and

during stimulation is likely to yield higher production than

rock property studies in the US Gulf of Mexico will transfer

a fracture that grows out of zone. The major control on

successfully to clients on the Mexican side.

fracture containment is the stress contrast between the resource layer and adjacent rock strata. This stress contrast

In addition to regional, multi-client studies, Ikon Science

can be captured by a calibrated geomechanical model.

is also willing to work on smaller, detailed investigations.

“Reservoir stimulation may result from new fractures

The company’s 1D geomechanics workflow produces a

being generated during the hydraulic stimulation process,

highly detailed profile of strength and stress along a given

from pre-existing fractures and planes of weakness being

wellbore in order to predict wellbore stability, fracture

reactivated, or from a combination of both,” he details.

permeability, and fracture orientation. Depending upon

The magnitude and orientation of the principal stresses,

the scope of the project, these 1D models can be used to

captured in a calibrated geomechanical model, and the

populate highly complex 3D models, driven by seismic

relative orientation of pre-existing planes of weakness will

attributes, geostatistics, or both. The 3D models can be

determine whether new fractures are generated or pre-

used for predrill stress and strength predictions, or as

existing fractures are reactivated. Similarly, the amount

a part of more sophisticated models to address issues

of stress anisotropy within the reservoir will govern the

such as complex structure, salt dynamics, fluid flow, fault

complexity of stimulated fractures.

reactivation, subsidence, or changes in permeability.


| INSIGHT

GEOSCIENCE HELPS OPERATORS INCREASE PRODUCTION As the fall in oil prices shakes the entire industry, Geoprocesados

has

adapted

its

strategy

by

first

identifying the services that reduced the highest incidence

JAVIER RUBIO

of risk for its clients. Javier Rubio, General Manager of

General Manager of

Geoprocesados, explains that oil companies have reduced

Geoprocesados

their investments, but they should opt for the studies 99

his company is conducting because these will reduce the uncertainty of their wells, exploration sites, and

reduction of PEMEX’s budget. Rubio claims the geological

operations. “We are looking to provide services that can

and geophysical studies his company carries out belong to

incorporate production at a faster rate, reduce risk, and

the industry segment that has been less directly impacted

increase the success rate of wells.” He also points out that

by the budget cuts. “The types of studies we conduct tend

people tend to confuse geological and geophysics studies

to have medium- to long-term results, especially when it

with exploration projects, although some of the former are

comes to exploration. PEMEX is cutting down on operations

often carried out with the aim of improving production.

and services with a short-term impact and when it comes to exploration, the NOC tends to view everything from a long-

Although Geoprocesados’ expertise encompasses most

term perspective.” According to Rubio, Geoprocesados’

oil and gas areas found in Mexico, the company provides

structure is based on ways in which it can provide PEMEX,

a significant added value in naturally fractured formations

its main client, with the most effective service. He says the

and fractured carbonates, and is currently acquiring more

entrance of new operators provides opportunities for his

experience in unconventionals. “If a well does not correctly

company, but he will only offer services in those projects

cross the highly fractured zone, the production will not be

where Geoprocesados can provide an added value. Rubio’s

optimal, and the differences between the numbers of oil

team molds its services to fit the clients’ geological strategy

barrels could be immense,” Rubio explains. Geoprocesados

and helps them adapt to the Mexican terrain. The company

has assembled a multi-disciplinary team with experience

has already worked alongside players that participated

in naturally fractured carbonates, which is able to

in the shallow water round, and is looking forward to

significantly reduce uncertainty in the characterization

continuing working with new clients.

of fractured deposits, and assist petroleum companies in creating wells in productive zones.

Maintaining its positioning at the technological forefront is crucial for a geoscience studies company, and one of

Rubio says Chicontepec is a challenging location to

the best ways to achieve this is through partnerships.

develop due to its complex reservoirs, but it is full of

Geoprocesados collaborates with Paradigm, a company

potential for the industry to exploit if the characterization

whose core business is developing software. Conversely,

is properly completed. “The geological composition

Geoprocesados is a full service provider, which strengthens

of Chicontepec, which is a Tertiary formation, and

the partnership on both sides of the spectrum. Rubio

unconventional resources, which are deeper, could be

explains that Paradigm invests money in the development

highly profitable if the portfolios are balanced correctly.

of new technologies, whilst Geoprocesados invests

If companies focus on implementing local technologies

in training team members and optimizing processes.

in the upcoming onshore rounds, the benefits would be

Geoprocesados also has a meaningful association with

greater,” Rubio suggests. In addition, new salt formations

TEEC, a German technology developer, which gives Rubio’s

and the possibility of discovering pre-salt formations will

company an idea of the European trend in geological

change the game. Mexico has an abundant amount of salt

and geophysical technologies, as the Mexican sector is

in its geology, with locations such as the Salina del Istmo

significantly influenced by North American technology.

Basin, and Rubio argues that salt increases the complexity

Geoprocesados’

of any geological formation so it is important to possess

technologies from TEEC and Paradigm, something that

knowledge on how to work on these formations and of the

few companies can do due to the complexity entailed

different process applications.

in using these solutions. “We are constantly integrating

wide-azimuth

services

incorporate

innovative technologies into our depth imaging algorithms, Even though Geoprocesados has adapted to the low oil

new topographies, and tools for the construction of speed

price, the company did not change its strategy due to the

models,” Rubio comments.


| VIEW FROM THE TOP

QUALITY DATA BOOSTS INTEREST IN THE INDUSTRY ROBERT HOBBS Former CEO of TGS 100

Q: How could your services optimize the purchasing

Q: How does TGS stand out from its competitors in the

activities of the Mexican market?

Mexican market?

A: Our data library is economically compelling, as a multi-

A: In Mexico, we were the first company to announce

client model allows companies to access seismic information

the development of an offshore seismic program. We

in a far less expensive way than paying a geophysical

decided to undertake what is probably one of the largest

company to acquire proprietary data. Seismic information

single offshore 2D programs in the world. The project

will be especially important for areas located in the Mexican

comprises

offshore sector of the Gulf of Mexico as they are just now

offshore sector, from the Perdido fold belt to the coast

becoming available to international investors in the oil and

of Yucatan. The dataset resulting from this project will

gas sector. For companies entering this sector, it would

allow geoscientists to obtain an in-depth overview of the

be necessary to access a relatively inexpensive source of

entire basin, and no other company has that. We can make

seismic data to understand the sub-surface conditions of

that commitment because we are confident about the

the area and decide whether they are worth the investment.

potential of the Mexican Gulf, especially considering the

Having access to accurate seismic data is also beneficial for

prolific exploration that has taken place on the US side. To

any government thinking about offering its hydrocarbon

complete the project we have hired almost the entire fleet

resources for bidding or exploration, as national authorities

of a major 2D seismic company and we currently have four

need to create a competitive atmosphere for companies

of the company’s 2D vessels working on our project.

186,000km,

covering

the

entire

Mexican

willing to exploit those resources. This is precisely the case of Mexico. One way to assure a competitive environment

Q: How do you balance new and acquired information in

is to provide companies with the information they need

your database?

about the basin's potential, as it will boost interest and

A: All the data we acquire is brand new. Obviously, there is

participation from the industry.

published information in the public domain that is useful for us to plan our activities prior to acquiring a program.

Q: How do you manage to obtain the technology for

Additionally, in our approach, we are not only acquiring

seismic assessment acquisition in remote areas?

seismic data but also looking to acquire complimentary

A: The great thing about TGS is that we can access

geoscience data sets that will aid exploration companies

any acquisition technology currently available on the

in assessing the active petroleum systems and reducing

market and optimize the technology to solve a particular

drilling risk. Included in our data offering in Mexico are

geological problem. Traditionally, our biggest competitors

multibeam data and piston core samples. Multibeam

are vessel providers. Full service geophysical companies

data provides detailed mapping of the seafloor and its

owning the vessels will typically carry out some level of

physiography.

multi-client acquisition. The reason behind this strategy is that they need to keep their vessels operational all the

We use this information to locate optimal sites for seafloor

time as they are costly to maintain. Therefore, if they are

coring of potential hydrocarbon seep sites. From the cores

not generating revenues on that asset they are losing

we conduct a chemistry-based study that analyzes the

money, and so the motivation for these companies is to

hydrocarbons in the sea bottom. The results are a chemical

keep their vessels operational, and that is how they make

chromatography that helps companies understand the

their investment decisions. We, on the contrary, make our

hydrocarbon systems. The most important feature about

investment decisions based on the prospective reserves

this information is that it is all integrated with the seismic

of the basin and we never acquire a project without

data. The success of the strategy is confirmed by the level

assurances of the commercial attractiveness for our

of risk reduction it provides in validating prospects and

customers.

petroleum systems.


| VIEW FROM THE TOP

ONE STEP AHEAD IN SEISMIC ACQUISITION ROBIN ELLIS Vice President of Sales and Marketing of Sercel 101

Q: How can you use new technologies, especially in

that the percentage of high-technology vessels is likely to

seismic acquisition, to inform companies of the value of

be stable. We would expect our proven technology, which

conducting a new study?

has already had a tremendous amount of success in the

A: The new technologies we have developed in recent

US, to be more widely employed on the Mexican side of

years are concentrated on the next step forward in seismic

the Gulf of Mexico. In fact, CGG has already employed this

acquisition. Industry milestones include the transition from

technology for PEMEX. Furthermore, we have developed a

2D seismic to 3D seismic some 15 years ago. We are once

new generation of Sentinel called Sentinel MS, an innovative

again at the forefront of the next step, which is broadband

multi-sensor streamer featuring two additional acceleration

acquisition, something that we already have considerable

components that offers directional measurements for both

experience with in the Middle East and the US. Seismic

cross-line and vertical wave fronts, as well as improved noise

surveys conducted in recent years have generally been

cancellation. This new version of Sentinel will herald the next

based on a 10-100Hz window, but a lot of energy can be

leap forward in marine seismic acquisition. There are also

acquired at frequencies out of this range. Doing so results

several OBC surveys currently up for tender and Sercel's

not only in significantly higher quality image resolution

SeaRay428 will surely be offered, having already built a

but data obtained at frequencies below 5Hz can be used

positive reputation with multiple successful ocean bottom

to carry out seismic inversion, thus gaining valuable

surveys completed in Mexico. We also plan to launch the new

information about the rock properties within the reservoir.

508XT in Mexico in the near future, and this should provide a

In the last few years, we have introduced several products

new paradigm in land seismic acquisition by allowing a new

to facilitate this process, including the Nomad 65 Neo

level of acquisition flexibility and operational reliability for

and Nomad 90 Neo seismic vibrators, both of which are

all types of geographies, climates, and environments. Our

capable of delivering stronger low frequency content.

successful collaboration with Grupo Núùez remains active and we are currently exploring other partnerships with which

On the receiver side, we have broadband products, such

to strengthen our position in the country.

as the DSU1-508, featuring QuietSeis Sensors which are the industry's lowest noise MEMS based sensors. As an

Q: To what extent do you believe that there will be an

alternative, the SG5 is a high-sensitivity analog geophone

increase in exploration activity, as certain inland blocks

with a 5Hz natural frequency. We also recently introduced

in the southern region begin to be reappraised for the

the 508XT, a new generation land seismic acquisition

rounds and eventual farm-outs?

system featuring cross-technology (X-Tech) architecture,

A: I expect a certain amount of recovery following the

which combines the best of cabled and wireless system

success of R1-L03. There is a great deal of legacy seismic

characteristics to optimize crew productivity and reduce

available, which was used in the decision-making process

operational downtime. It is a product that we are sure will

of awarding of the blocks. The question becomes whether

be ideally suited for high-production vibroseis operations

the new players will drill based on the existing information

in northern Mexico.

or whether they will see value in carrying out new studies in order to acquire more detailed pictures of specific areas

Q: How do you expect your activity to be divided in terms

within the block. In the areas that are already producing,

of projects and technologies?

the aim of any new seismic study would be to find ways to

A: Although there is certainly the potential for large-scale

increase levels of production, and high resolution seismic

multi-client seismic studies in the North, the previous

can contribute greatly to that. An alternative is downhole

bidding round will undoubtedly generate demand for high-

seismic, which can generate an extremely high resolution

density albeit smaller surveys. In the marine sector a lot of

subsurface image of the area close to the well site and allow

the older vessels are being laid up at the moment, meaning

interpreters to better assess how to enhance recovery.


4

DRILLING & WELL SERVICES

Companies’ drilling budgets have been slashed dramatically and drilling companies are actively pursuing all potential opportunities to succeed in the challenging drilling market. The name of the game is survival until the anticipated upturn in drilling activity in the Mexican oil and gas industry. The two blocks awarded in R1-L01 are estimated to contain roughly 142 million boe and 102 million boe respectively, representing an opportunity for drilling and services companies. The fields awarded in R1-L02 are expected to produce 90,000b/d in the next two years, and the totality of those tendered in R1-L03 are believed to have an average production potential of 14,000b/d and 94mcf/d over the coming two to three years, also creating the need for efficient drilling services to help operators achieve both of these estimates. It is undeniable that the reduced budgets have created a heightened need for cost-effective drilling services, innovative technologies, operational excellence, the streamlining of the supply chain, and the integration of services.

This chapter will explore the opinions of the key stakeholders in the drilling and well services segments regarding the critical success factors in today’s challenging operating environment, as well as offering their proposed solutions to problems encountered in the fields.

103


We deliver, No excuses.

is committed to providing “local solutions for local drilling needs”. We offer solutions in drilling and completion fluids, solids control, transportation services, technical testing and analysis services.

Houston Office: 11700 Katy Fwy, Suite 200, Houston TX, 77079. Phone: +1 832 672 4459 Mexico Office: Prolongación 27 de Febrero, Edificio 3017, Colonia Tabasco 2000. C.P. 86035, Villahermosa, Tabasco. Phone: +52 199 3310 67 60

www.qmax.com


| CHAPTER 4: DRILLING & WELL SERVICES 106

ANALYSIS: PEMEX’s Drilling Strategy

107

VIEW FROM THE TOP: Wallace Pescarini, Schlumberger

108

VIEW FROM THE TOP: Ricardo Arce, Perforadora México

110

TECHNOLOGY SPOTLIGHT: GeoSphere, Schlumberger

111

INSIGHT: Guido Rivas, QMax

112

VIEW FROM THE TOP: Bruno Lima, Halliburton

113

INSIGHT: Juan Castañeda, Halliburton

114

VIEW FROM THE TOP: Fernando Ortiz, Seadrill

116

INSIGHT: Steve Walker, Loadcraft

117

INSIGHT: PJ Pendlebury, Global Drilling Support

118

VIEW FROM THE TOP: Myles Woloshyn, Turbo Drill

119

TECHNOLOGY SPOTLIGHT: Steady Scout, Turbo Drill

120

TECHNOLOGY SPOTLIGHT: PowerDrive Archer RRS, Schlumberger

121

VIEW FROM THE TOP: Tony Solis, TSC Offshore

122

VIEW FROM THE TOP: Wang Sheng, COSL

123

INSIGHT: Jorge González, ALS Wellvention

124

VIEW FROM THE TOP: Rodrigo de Vivanco, Kratus Energy

125

INSIGHT: Oscar Suárez, DM Ingenieros

105


| ANALYSIS

PEMEX'S DRILLING STRATEGY SERVICES & PLATFORM DAILY COSTS (US$ thousand/d 2015) DAILY RIG RATES 2015 (US$ thousand) 503

International reference

451

1st quartile 384

2nd quartile PEMEX

365

previous average actual average

106

60

88

72

66

55

water depth 250ft International Source: PEMEX

81

97

75

water depth 300ft

reference

1st quarter

146

130 112 105 117

water depth 350ft

163 167

140

water depth 400ft

S/S 10,000ft

PEMEX last average

2nd quarter

actual average

Source: PEMEX 1 The semisubmersible platforms of 1,000 were excluded ' and 7,000 ' for lack of comparable base

PEMEX is putting efforts in achieving efficiency in all its

DESCRIPTION OF IMPLEMENTED INITIATIVES

exploration-related activities. Between 2012-2015, 75% of the company’s exploration investments went to drilling.

Seismic Data Acquisition

IMPLEMENTED INITIATIVES

The main efficiency-seeking initiatives in this area included

• In deepwaters, acquisitions costs were reduced through a dedicated INITIATIVES vessel scheme IMPLEMENTED (daily fee) negotiating tariffs for drilling equipment. In this sense,

increasing efficiency in well drilling and completion and

Deepwaters (streamer) thousand US$/km2

12

PEMEX succeeded in reaching drilling efficiency levels similar to the international standards and adjusting tariffs IMPLEMENTED INITIATIVES by 15-30%.

• For shallow waters, a payment per delivered seismic image scheme allows deffered payments and enhanced savings due to the volumes entailed

Given the fact that drilling activities tend to receive the most investments, PEMEX defined an initiative to improve

90 12

Seismic Data Processing • Cost reduction through the use of high-performance computing equipment and latest generation algorithms

in shallow waters, and 58m/d in deepwater assets. The first quarter of 2016 throws optimistic numbers that meet

deepwaters.

-58%

90 950

900

-5%

-33%

60 -5%

950 2 900 US$/km

Source: PEMEX

the international benchmark, with an average of 69m/d for onshore, 86m/d in shallow waters, and 88m/d in

60

5 -33% 60

90

in deepwaters. The following year, the NOC improved these figures, reaching 58m/d in onshore wells, 52m/d

-58%

12

Shallow waters5 thousand US$/km2-33%

drilling efficiency in 2014. In 2014, PEMEX drilled 43m/d in onshore areas, 26m/d in shallow waters, and 40m/d

-58%

5

-5%

950

900

Source: PEMEX Source: PEMEX

PEMEX DRILLING EFFICIENCY (drilled meters by day Source: - m/d)PEMEX PEMEX DRILLING EFFICIENCY (m/d) 25th percentile (89 m/d)

25th percentile (81 m/d)

86

88

10th percentile (68 m/d) 69 58

52

60% 43

58

+100%

+200% 40

26

onshore Source: PEMEX Source: PEMEX

shallow waters

2016 (1T) 2016 (1T) 2015 2015 2014 2014 deepwaters


| VIEW FROM THE TOP

INTEGRATED APPROACH TO DRILLING IMPROVES EFFICIENCY WALLACE PESCARINI President Mexico & Central America of Schlumberger

Q: How advanced is Schlumberger in transitioning from a

services, not only for PEMEX, but also for any new players

service provider to a company that offers solutions such

entering the market.

as increased production, higher recovery rates, and lower cost per barrel?

Q:

A: Through our Schlumberger Production Management

Schlumberger to become more efficient in Mexico, and

business, we partner with operators to develop a field, with

pass the resulting cost savings to your clients?

the investment provided by our company and payment is

A: We have implemented several mechanisms, such as

returned through a dollar per barrel quota. We have applied

our internal KPIs we use to measure efficiency within the

this model across Latin America and in other continents,

company. Our Center for Liability and Efficiency in Veracruz

and the system has proven extremely successful both for us

is a state-of-the-art engineering center that supports our

and for the operators. As a result, I believe we are inherently

operations. We established this center in 2011, and to date

programmed at Schlumberger to try to constantly change

we have managed to improve maintenance turnaround

the way in which the field operates and place ourselves in a

times more than fivefold. This generates savings that

position to create extra value. One thing that has remained

allow us to be much more competitive and some of these

steadfast between our beginnings in 1927 and now is our

savings have been translated to PEMEX. We then have

approach toward technology, and this is the case regardless

external KPIs that gauge the efficiency in terms of PEMEX

of whether it is single segment, integrated solutions, or

and other customers and this can be witnessed through

Schlumberger Production Management. We have witnessed

our drilling performance here in Mexico, which is between

increased efforts by our competitors to follow our footsteps,

30-40% more efficient than that of our competitors.

but we have always remained ahead of the pack due to

Any saving PEMEX can make in the current operating

our drive to change the environment combined with the

environment can be vital to its operations.

What

implemented

measures

have

allowed

company’s emphasis on technology and human resources. Q: In the current environment, what are the most Q: How will the integration of Cameron into the

successful technologies and international best practices

Schlumberger family impact the value proposition you

you are planning to introduce in Mexico?

can offer in the Mexican market?

A: Nowadays, in an environment of low budgets, the customer

A: The Cameron acquisition is one example of the fact that

is constantly seeking new technology and processes that

we are trying to modify the playing field once more. This is

can improve drilling performance and efficiency. Improving

one of the most eagerly anticipated acquisitions we have

our drilling performance has been a process of continuous

planned, and although it is still awaiting approval by certain

evolution, and several factors have contributed to our ability

regulatory boards, we are interested in creating a wave in

to cut costs, such as the release of new technologies like the

the industry in terms of offerings and integrated services.

PowerDriveÂŽ and GeoSphereÂŽ systems that help optimize

Schlumberger has been well-known as a solutions provider

and target drilling. We have also opted for a more integrated

with a comprehensive portfolio, catering from sub-surface

approach, and are able to capitalize on several synergies we

to drilling, but now it will be possible to provide services

have created internally across our business areas. In the short

for surface facilities. No other competitor can match this

term, we are much more focused on improving efficiency.

strategy. PEMEX has always been at the forefront of the

The second challenge for newcomers to the market lies in

industry in terms of integration, so we are trying to bring

understanding the potential of the reservoir, and much of our

a unique model that will benefit the NOC by offering it the

characterization technology will play an important role for

opportunity to maintain current operations and integrate

these new players. In this way, we have by far the leading

well construction with surface facilities. Mexico is one of

technology in the industry, as well as a substantial portfolio

the countries with the most potential for value-added

to cater to each phase.

107


| VIEW FROM THE TOP

MEXICAN MAINSTAY’S AMBITIONS TO BECOME E&P MAJOR RICARDO ARCE CEO of Perforadora Mexico

108

Q: How did Perforadora Mexico perform so impressively

create redundancies due to downtimes for the company,

in the last 12 months, with five of its seven rigs under

we find it important to explain the motivations and the

contract?

bigger picture to the workers. We follow all the legal

A: We had a positive year compared to our expectations

requirements, we pay the required salaries and bonuses

at the beginning of the year. We were able to grow in

without negotiation, and we help them find a new job. This

comparison to 2014 and finished the year with all our

is the most ethical way to carry out the optimization of the

equipment under contract, mainly due to the fact that we

company. In some cases, I speak to employees personally,

were able to negotiate with PEMEX. We gave the NOC

and in the remainder of cases the human resources

the rate reductions it requested, but in return we were

department helps them through the process and explains

able to obtain an extension of all our current equipment

the situation. Last year, we reduced the workforce by 10%,

contracts. In terms of numbers, we were forced to cut

but we have been cutting costs for the last three years,

some costs and we reduced our staffing levels to become

and the most significant redundancy was made when our

more efficient, which is always an important action to take

onshore drilling contract expired for the northern region,

at the beginning of a turbulent period.

and we lost around 400 people.

Depending on the kind of equipment, we offered a

Q: Who are your main partners, and what are the

discounted rate of between 15-22% to PEMEX, in return

additional services that they help add to your portfolio?

for a one-year extension in all of our contracts. The most

A: Confirming partnerships would be premature at the

important ones were those that were due to expire in

moment, as we are still evaluating all our options due to

the next few months, which were the Chihuahua and

PEMEX’s current situation. With these kinds of cuts, we

Zacatecas rigs, and now both will be operating for at

expect PEMEX to seek more projects, so we are unable

least another year. All the rigs are currently active with

to align ourselves to only one company. We are drillers,

the only exception of our older Sonora rig, which finished

so any contract works better for us if it is a mixed-

operations in March. Since then, we provided maintenance

REMI (Equipment Lease with Integrated Maintenance),

to the rig to prepare it for new contracts, and we have

including drilling operations. We also have a great deal

recently tendered it to one of the Round One winners. I

of expertise in cements, meaning there is a significant

believe there is a great deal of opportunities for the Sonora

amount of room for partnerships with companies that

rig, and even though its depth capacity is much lower than

can provide the remaining services to complement our

that of other rigs, it is ideal for work-overs. At this point

offering. Although we have the capabilities to carry out

in time, we are preparing to participate in some of the

many of these operations independently, we are able

bidding processes with the new operators that are going

to recognize the fact that other companies have more

to enter the shallow water fields. Campeche, Chihuahua,

expertise in certain areas than we do, especially in terms

Veracruz, Tabasco, and Zacatecas are all drilling, and

of fluids, directional drilling, and well completion. Some

Tamaulipas is ready but PEMEX has not yet given us a

companies are integrated and provide all of these services,

location to install our equipment.

but we would not rule out the possibility of contracting different companies that specialize in these individual

Q: How do you manage a situation where you must

areas. Normally, we would not seek to work with large

simultaneously make people redundant and make the

service providers, as these companies tend to want to

remaining workforce more efficient?

serve as the owners of the contract and subcontract

A: For me, it is clear that everything we do is ultimately for

tenders to companies like ours, whereas our aim is to own

the benefit of the entire company and we will never forget

the contract, or in some cases, to form alliances with equal

that employees are an important part of it. If we need to

power and responsibility.


109

Q: What were Perforadora Mexico’s intentions in the three

would rather wait than win a project while losing money,

phases of Round One so far, and how did you participate?

and this strategy is the reason why Grupo Mexico is a well-

A: In the first phase, R1-L01, we did not evaluate the

established company in the Mexican market.

opportunities because the risk profile of these fields was too pronounced for a company like us, which would

Q: What would be your ideal type of E&P project, and

essentially be a newcomer in this sector. In R1-L02, we

what characteristics would these fields hold?

evaluated two fields in depth, we entered into negotiations,

A: First of all, we are interested in PEMEX’s farm-outs,

and even signed with an operator. We delivered the

and we know that one of PEMEX’s priorities is to promote

prequalification documents, but we ultimately decided

the farm-outs as soon as possible. We still need a solid

not to proceed due to the discovery of certain elements

operator to partner with in the endeavor, but we can

of risk. However, after having processed the numbers,

provide all the equipment to work there. Subsequently,

I am confident that we would not have won any fields

we will be evaluating more onshore projects and lower

because the numbers were far too high. In R1-L03, we

risk shallow water fields with proven reserves rather than

prequalified independently through one of our companies

exploration blocks. We will need to enter the farm-outs

called Controladora de Infraestructura Petrolera Mexico,

in partnership with an operator because I am certain that

a company that is the owner of all the assets in the oil

CNH’s prequalification criteria will not only be related to

and gas sector. We evaluated around seven fields through

size and financial capabilities, but also to a breadth of

a high-level screening process, ultimately focusing our

expertise in specific processes and technology.

efforts on three of the four larger fields, and we delivered these three proposals.

The Bolontiku and Sinan shallow waters fields are two promising fields that will be included in the farm-outs,

Although we did not win, we are sure the reason behind

although they will be difficult to drill and develop due to

this was price, because we know that the prices proposed

the levels of pressure and the high temperatures. However,

by the winners were too high and this was confirmed

our performance has been solid in a considerable number

when six contracts were not signed by the winners. We

of wells in this area, and we know the region well. In the

created strong business cases for each field, and we were

Ayatsil-Tekel field, we currently have the Veracruz drilling

planning to invest between US$50-75 million in each,

rig, and hopefully soon the Tamaulipas rig will also be

increasing production from around 240b/d to aproximately

positioned in this field, so due to the level of investment

3,000b/d or more. In some cases, we may have been

we have already placed in this field, we will be evaluating

slightly conservative due to individual field characteristics,

it carefully. Ayatsil-Tekel is difficult due to the heavy oil

but ultimately our assumptions were realistic. We were

it produces, so we will need to seek the correct partner

not requesting a significant ROI on each of the fields

to ensure success in this field. We also still believe that in

and when we delivered the proposals, the numbers were

onshore, there are a significant amount of opportunities to

within the average. We are not worried at the moment

continue growing, or at least to maintain PEMEX’s current

because, although we want to become an E&P player, we

level of production.


| TECHNOLOGY SPOTLIGHT: MAPPING WHILE DRILLING SERVICE Schlumberger’s GeoSphere service uses deep, directional

drilling a tight inclination above the reservoir also makes

electromagnetic measurements to reveal subsurface-

completion operations challenging; landing too deep

bedding and fluid-contact details more than 100ft from

creates a slump in the wellbore that can lead to early

the wellborn. Allowing operators to map while drilling, this

water breakthrough or more attic oil. Furthermore, a high

service provides a depth of investigation that changes the

pressure difference between the overburden rock and the

game for steering capabilities within complex reservoirs.

top of the reservoir can lead to severe well integrity risks.

Typical logging-while-drilling measurements detect only

Due to its accurate mapping capabilities, the GeoSphere

the first nearby geological boundary, while the GeoSphere

service helps ensure optimal landing by extending the

service’s scope maps reservoir layers in the horizontal

radial depth of investigation more than 100ft around the

section over 100ft around the wellbore. In fact, operators

wellbore.

have successfully mapped the upper and lower boundaries of a reservoir simultaneously in real time. The acquired

In addition, the GeoSphere service reveals subsurface

data enables an accurate prediction of upcoming strata

layers and fluid contents at the reservoir scale, which

or formations in both high-angle and horizontal wells.

has a significant impact on field development strategies.

Geoscientists and drilling engineers can then interpret

Real-time mapping data enables operators to stay in the

reservoir data and steer wells for maximum reservoir

sweet spot by steering the well strategically and avoiding

exposure.

unplanned

reservoir

exits.

Conventionally,

logging-

while-drilling tools provide downhole measurements a The GeoSphere mapping-while-drilling service can also

few inches from the wellbore, but GeoSphere’s 100-feet

improve well-landing operations, reducing drilling risks,

scope improves reservoir characterization and reduces

eliminating the need for pilot holes, and increasing

geological uncertainties. Data provided by the service

reservoir exposure. Pilot holes are often used to evaluate

can be integrated with seismic data to help operational

formations before landing the horizontal, but this costly

engineers analyze the reservoir, adjust well paths while

method does not always mitigate risks in complex

drilling, and deliver smoother wellbores. The GeoSphere

reservoirs where shallow or deep landings can occur. In

mapping-while-drilling

the case of a shallow landing, a long part of the reservoir

details at the reservoir scale to help refine geological

section is drilled in the overburden, compromising lateral

and structural models, ultimately enabling operators to

exposure and impacting well productivity. Likewise,

maximize production.

service

reveals

subsurface


| INSIGHT

FLUIDS LIFEBLOOD OF DRILLING SERVICES A well is like the human body, and in this system, drilling fluids are often referred to as the lifeblood. In the same way that blood is needed to survive, drilling operations also require quality drilling fluids as an integral component

GUIDO RIVAS

of the system, and these drilling fluids must be correctly

Vice President of QMax

adapted to individual well conditions. One of the critical factors for success is circulation, and lost circulation is a major problem for some areas in Mexico, costing a

Moreover, Rivas believes that, with the changes in the

considerable amount of money due to the loss of thousands

Mexican oil and gas industry, PEMEX will be forced to

of cubic meters of fluid. Therefore, QMax has implemented

become more efficient in the face of increased competition.

technical efforts in order to address these problems in

This applies to all aspects of the E&P operations, including

the country, and the company has developed several

reservoir engineering and exploitation, as well as drilling,

customized solutions to manage this issue. “At the moment

whereby the NOC will be forced to drill faster, at a lower

there is a particular offshore well that is losing circulation

cost, and with the most advanced technology. “PEMEX,

and the customer is currently on the verge of replacing a

along with new players in the market, will be looking to

competitor with us due to our breadth of experience and

partner with leading companies that can help them achieve

past success,” boasts Guido Rivas, Vice President of QMax.

these new objectives,” he states. “They will be looking for

“This is the result of our focused attention to problems,

companies that can act fast in applying technology to

development of new formulations in our laboratories,

common drilling problems to lower costs and improve

country-wide distribution, and our ability to continue

efficiency.” Because of the company’s problem solving

working until an effective solution is achieved.” The focus

approach, the quality of its people, and the effectiveness

the company has on ensuring delivery of efficient services

of its infrastructure, Rivas believes QMax is an ideal partner

at the lowest possible price is a clear strength for QMax.

for both PEMEX and new companies entering the market.

The company has a total capacity of approximately

Although interested in new partnerships, Rivas concedes

23,000m3, spread over seven mud plants throughout the

that 2016 will be a difficult year and the market might be

country, but unfortunately, only around 30-40% of that

down by around 20-40% compared to 2015. “We hope

capacity is currently in use. In the past, QMax has run up

to prove our capabilities to a number of new and existing

to 80 rigs simultaneously and, although Rivas shares that

players and be able to deliver on our promises of top quality

this was challenging, he is confident of the company’s

services, lower costs, and increased efficiency,” he explains.

capability of capturing this percentage of the total market share. The landscape at the moment is incredibly difficult to negotiate across all sectors of the oil and gas industry, so Rivas believes there is a need to adjust accordingly in order to become leaner and cut costs where possible. QMax has made adjustments, not only in operations, but also in staff numbers and investments, while maintaining motivation among the workforce and technology development. “We have made some mistakes along the way, and as a result, we must continuously modify our strategy,” Rivas admits. “After the weak year in 2015, I think 2016 will follow this pattern. Consequently, we are preparing for a modest level of activity, a more aggressive level of competition, and as a result, we have placed a concerted focus on technology, processes, and development of human talent.” As an agile and flexible company, he shares that QMax is able to respond quickly to any market fluctuations and make the necessary adjustments, whereas other competitors do not have the capability to implement such a fast response.

QMax has run up to 80 rigs simultaneously

111


| VIEW FROM THE TOP

BASICS OF A SUCCESSFUL INTEGRATED PROJECT MODEL BRUNO LIMA Project Manager – Mexico Country Manager of Halliburton

112

Q: What are your service divisions structured in the

of different stakeholders, for which the customer usually

Mexican market?

is seeking to simplify the number of interfaces and ensure

A: Halliburton comprises two divisions, the Drilling and

project deliverability through an enhanced integration of

Evaluation Division, and the Completion and Production

service-quality capacities. A second tier is to naturally add

Division, with 12 product service lines (PSLs) between them.

the local knowledge on both engineering and procurement

One additional PSL, Consulting and Project Management,

to the integrated package, considering the long-term

is the nucleus of our integrated services strategy and

experience and capture of lessons learned to be deployed

works

collaborative

immediately to the project planning and execution,

early engagement and an inclusive process, our Project

across

both

shortening the learning curve and increasing overall project

Management

team

divisions. develops

Through

innovative

performance. While the previous models are usually charged

solutions to produce effective well designs and completion

and

applies

according to time and materials, there are high tiered models

plans. To achieve a detailed understanding of the challenges

for which the risk allocation is spread among the stakeholders,

at hand, the Halliburton well construction and completion

therefore capping the customer’s exposure and aligning the

project teams encompass a wide range of disciplines and

project performance to its financial outcome. Certainly, the

job functions, from geology, geophysics, and engineering

biggest value generated by the integration is the alignment

to operations, supply chain, safety, regulatory compliance,

of objectives among the stakeholders. Such alignment is key

and management. The goals of our Project Management

to controlling the project variables, such as cost, quality, and

team fall into the three main categories of improvement

schedule, and to ensuring that all stakeholders participate

of well construction rates, rigorous risk assessment and

proactively to assure optimal project performance.

mitigation process, and the reduction of non-productive time. Halliburton Project Management has already built a

Q: How could new customers originating from the Energy

network of providers, which are continuously assessed

Reform profit from the utilization of integrated projects?

on their quality assurance and quality control processes

A: There are four different outcomes that customers

and practices. The governance is exercised through a

would like to achieve during periods of low barrel prices:

bridge document, which controls the responsibility and

reduction of CAPEX and OPEX, decrease in project

accountability of the parties, and also establishes the

footprint, simplification of interfaces, and ensuring project

management of change process. Currently, in Mexico we

performance indicators are fully met without compromising

are present with high-value, high-performance, integrated

any eventual boundary condition. The Integrated Project

projects

Model generates a variety of opportunities to meet and

in

deepwaters,

shallow

waters,

exploration,

unconventional resources, and deep HPHT land wells.

overcome all four customer-driven challenges. Halliburton’s unique capacity and expertise in the Mexican market

Q: What is the most effective business model for an

allows our customers to better dimension their CAPEX

integrated project?

from the time of the bidding process, through exploration

A: Halliburton Project Management can tackle any phase of

execution and throughout the asset’s productive life. We

the asset life cycle, spanning from exploration to appraisal,

provide a method to acquire best-in-class technology, local

development, and lately the plugging and abandonment of

expertise, and a simplified interface with all necessary third

fields. The work is structured in a scalable fashion that can

parties for the project, while having total alignment and

encompass a single rig or entire set of assets, both onshore

trust among stakeholders. The level of synergy we have

and/or offshore The level of integration or coordination

with stakeholders allows infrastructure to be designed

required is assessed according to the customer’s needs

and built according to the required specifications, such as

for each project. The simplest model, Integrated Services,

the top tier 3600 HP rigs currently working for one of our

comprises purely the planning and operational coordination

customers in the south region of Mexico.


| INSIGHT

MEXICO’S PLACE IN THE HALLIBURTON FAMILY With a breadth of activities and a portfolio that spans the breadth of the sector, from deepwater, to mature fields, and unconventional resources, Halliburton has

JUAN CASTAÑEDA

a presence in six of the seven continents of the world.

Vice President of

Regardless, according to Juan Castañeda, the company’s

Halliburton Mexico

Vice President of Mexico, the country is one of the most significant

markets

for

Halliburton

worldwide.

“The

Halliburton Mexico team and its continuous focus on

tier drilling rigs currently deployed and drilling the deep

safety, value-driven solutions, performance and providing

HPHT wells in the south region of Mexico,” Castañeda

a lower cost per barrel for our customers is positioning

claims. These, according to the Vice President, are

Mexico for long-term growth,” he asserts.

creating groundbreaking results for well construction and operations. True to form, Halliburton has implemented

He shares that, since 2013, Halliburton Mexico has had a

innovations across all sectors of the oil and gas industry,

differentiated structure compared to other traditional

and has deployed cost saving initiatives in deepwater,

markets, which is more focused on the wide span of

shallow waters, onshore, and unconventional reservoirs.

local operational necessities and tailored to provide the support necessary to the on-going activities of Halliburton

Castañeda comments that Halliburton is working hard on the

customers in Mexico, as well as to CNH, and supporting

development of new solutions to strength these synergies,

the process of Energy Reform. “Such early engagement

as the company is continuously working to enable our

with core stakeholders and new players has allowed us

customers to maximize production from existing reservoirs,

to support our customers through the decision making

while reducing downtime and risk, therefore reducing

process with a dynamic and rapid response team in

significantly the cost per barrel. “We are innovators and

place,” Castañeda explains. Since Halliburton has had a

problem solvers, and our technologies are geared toward

long-term presence and investment in Mexico, it has been

addressing specific challenges throughout the oil and gas

able to create an infrastructure and a resource capacity

value chain,” Castañeda says of this diversified strategy.

to support the geographical and technical diversity

Another significant example of the strong synergy with

of its customers’ assets and operations. The company

its customers in Mexico is the shared vision and value of

has implemented a Journey to ZERO program, wherein

sustainability to its communities, including customers, the

it strives to eliminate safety incidents, environmental

Halliburton employee community, the local communities

incidents, and nonproductive time. “We have implemented

where we work, and the global community.

a strong cultural value proposition with our Journey to ZERO, improving our performance on key metrics, which

One of the benefits to emerge from the current environment

help generate additional savings in terms of overall cost

of capital preservation across the upstream sector has been

per barrel.” To demonstrate this, Halliburton’s business in

the ability to facilitate innovation and a deep focus on value

Mexico is American Petroleum Institute (API) Q2 certified

in a pronounced effort to reduce CAPEX and OPEX. “The

for service quality in upstream operations.

Mexican market is a leader in innovative solutions and we expect to continue to see the establishment of technology

Halliburton has had a preponderant role in Mexico’s oil

deployment,

processes,

and

integrated

solutions

to

and gas industry for years, and Castañeda believes the

reduce capital costs across all projects, while working

company has had a hand in shaping the industry, given its

together with our customers on innovative business

strong long-term relationship with PEMEX, which has in

models to re-shape and optimize current contractual

turn enabled the creation of new technologies, processes,

industry benchmarks,” Castañeda explains. He is confident

business models, fully integrated projects, and sustainable

that Halliburton’s presence remains strong, and shares

solutions. “Since the introduction of the Halliburton 221,

that the company prides itself on listening to customer

the first stimulation boat in Mexican waters 37 years

concerns and challenges and finding appropriate solutions.

ago, the development of solutions has evolved through

“Halliburton’s focus is on generating customer value, and we

a great number of wellbore and reservoir technologies

have structured the organization to support the historical

for drilling, logging, fracking, and pumping, as well as the

transformation that will lead to a myriad of opportunities in

engineering and construction of high-performance, high-

the Mexican market,” the Vice President concludes.

113


| VIEW FROM THE TOP

SETTING THE STANDARDS IN DRILLING FERNANDO ORTIZ Commercial Director of Seadrill

114

Q: What specific competitive advantages allowed Seadrill

Q: What factors allowed the West Pegasus platform to

to achieve 150% excess capacity?

achieve a 90% uptime, while being more reliable than

A: Seadrill has the youngest and most modern fleet among

your competition?

all drilling contractors. We operate a versatile fleet of 68 rigs

A: West Pegasus can achieve high performances and

that comprises drillships, jack-ups, and semi-submersibles,

set the record for drilling here in Mexico. Thanks to

and tender rigs for operations in shallow to ultra-deepwater

its capabilities, we were able to drill the Maximino-1

areas in harsh and benign environments. Our headquarters

well located in the Perdido area, the most challenging

are in London and we operate from six regional offices

deepwater project in the country. It was located at a

around the world. Ciudad del Carmen is our main base of

depth of 2,922m, and required the drilling of a delimiter

operations in Mexico. We work with some of the largest oil

well of 3,016m. This represents not only the deepest

and gas companies, and we have a clear goal when it comes

water well for PEMEX to date, but also for Seadrill.

to safety in the protection of our personnel. Our total injury

Maximino-1 is considered the crown jewel of deepwater

frequency is the lowest among our competitors, and this can

projects for the Mexican state-owned oil company. In

be attributed to our use of the most advanced safety tools

October 2015, the performance of West Pegasus was

in the market, and the most professional workforce in the

at 99%, practically 12 points above that of our local

country. As forecasted, we successfully achieved our goal of

competitors. The maintenance of our equipment is

a 150% surplus, which translates into the management of up

carried out above the minimum requirements, and runs

to 12 rigs in our new operational hub in Ciudad del Carmen.

at the highest standards, allowing us to avoid downtime.

It is worth mentioning that we are currently managing seven others rigs from this hub, with six located in the Gulf of Mexico

The rig has specific characteristics that allow it to reach

and one in Venezuela. Seadrill also strives to be part of the

impressive performance rates, such as its equipment

country’s development, and in line with this, we are pleased

with an NOV drilling package. The derrick and top drive

to say we have achieved a level of 80% nationalization as of

are capable of lifting 1,000 short tons and utilize range 3

Q3 2015, demonstrating our commitment to Mexico and the

pipes, as well as having the ability to build stands of DP

development of local content.

or casing offline without interrupting the main operations


of the well center. This is due to the fact the drill floor is

framework, as well as the same service quality standards

equipped with two iron roughnecks and has two powered

we deliver worldwide. These companies may feel held back

mouse holes to build stands offline. This additional

by their lack of knowledge of the Mexican environment,

equipment also adds to the redundancy of the rig floor,

but we have been here since 2011 and understand the local

reducing the risk of downtime for our clients, while at the

market’s dynamics. As such, we expect our experience and

same time increasing the efficiency of the operation. The

safety operational standards to act as an advantage for

rig floor is kept over the well thanks to eight Rolls Royce

securing contracts with these IOCs.

Aquamaster azimuth thrusters operating at a constant pitch and variable speed. These are designed to maintain

Q: How is Round One affecting your company, and how

the West Pegasus drilling operations in 70 knots wind

will you manage to improve your position in the industry?

conditions and waves up to 7m high. Should there be an

A: We do not consider R1-L01 to be the disappointment it

issue with the well, it can be controlled with a 6 ram 2

has been hailed as, but rather we believe it is to be viewed

annular NOV Schaffer BOP rated for 15k pressure. The BOP

to a certain extent as a test. We were glad to see the

is connected to the subsea wellhead with a riser system

results of this phase lead to adjustments in the bidding

capable of reaching water depths of 3,000m.

process of future rounds. Even with disappointing results, it is also reassuring to observe that global players have

Q: How has your cooperation with PEMEX fared, and what

maintained their interest in the Energy Reform. Seadrill

future partnerships are you looking forward to?

has special interest in the fourth phase, which we believe

A: Our cooperation with the parastatal is an ongoing

will be successful and provide tremendous opportunities

commitment, as we are also seeking to provide continuous

for our company. Our target is to bring one of our new drill

improvements

ships to Mexico in order to show companies how much

to

new

PEMEX

affiliate

productive

companies, focusing on exploration and drilling. Our

money, space, and material this technology can save.

cooperation can be seen through our work standard permit authorized by PEMEX in all joint operations in

Our aim is to secure contracts with IOCs, to consistently

Mexico, as well as common drilling practices in terms of

be the region’s best deepwater performer, and sustain our

well control to optimize current operations. Just recently,

vision of “Setting the Standard in Drilling”. We aim to achieve

our West Pegasus semi-submersible deepwater rig was

the latter objective thanks to Seadrill’s three main pillars.

awarded a provisional commitment for a 2+1 year contract

We focus on people, constantly training and developing a

extension with PEMEX, despite the delicate business

safety culture within fluctuating boundaries, the technology,

environment. West Pegasus is also used as a school rig for

providing the most modern fleet and components with top

Mexican deepwater exploration.

maintenance systems in place, and the processes, which respect a strict and systematic philosophy. We persistently

Seadrill is extremely interested in securing contracts with

assess opportunities, both traditional and non-traditional,

ExxonMobil, Chevron, BP, and all other major oil companies

from a technical and commercial point of view, evaluating

investing in Mexico, as we are currently doing in other parts

partnership offers, expansion opportunities into new

of the world. Our goal is to approach foreign companies

geographical and technological markets, and keeping

and accompany them into Mexico, providing a secure

abreast of changes in global regulatory regimes.

115


| INSIGHT

REMAINING COMPETITIVE IN A LOW OIL PRICE ENVIRONMENT are primordial to its operations given the requirements of many of its customers, including PEMEX.

STEVE WALKER Managing Director of

“Our presence in Mexico is very much concentrated

Loadcraft

according to our clients’ needs, and at the moment, we are focused on the southern region. In addition to the Mexican NOC, our clients include CP Latina, IHSA, Key Energy,

116

Terry Mclver, now the owner of Loadcraft, took a leap

Petroalfa, San Antonio, Setin, and Weatherford,” Walker

of faith one day when he went to purchase a rig at a

states. At the moment, the company’s main aim is to make

repossession facility and decided to buy the entire

contact with companies in Mexico, which makes R1-L03

facility instead. From there, he then brought in two of

extremely attractive for Loadcraft. Overall, Walker believes

his sons, and his son-in-law, to work with the employees

that Round One will contribute to an increase in the demand

from the previous company that went bankrupt, and built

for