Asserting himself over the room’s noisy crowd, the representative Ricardo Anaya Cortés, president of the Chamber of Representatives of Mexico, raised his voice in the microphone to announce the approval of “the constitutional reform in Energy Matters. Approved in both general and particular issues, the Decree project that reforms and adds different articles of the Political Constitution of the Mexican United States in Energy Matters, it is then sent to the state legislatures for their constitutional purposes.”
With those words pronounced on December 12th, 2013 and which were ratified by Decree eight days later, Mexico ended more than 70 years of monopoly by Petróleos Mexicanos (Pemex) and opened the door to private investment.
Almost two years later, the reform to an industry that was untouchable for decades is now shaping itself.
The first step was Round Zero where Pemex was the key player. As expected in the legal document of the reform, the Secretariat of Energy (Sener) allocated Pemex a group of areas in exploration and fields in production ready to be operated by the state-owned company. The aim has been somehow giving advantage to Pemex in view of the arrival of new players to the Mexican oil board, in many cases, with better technical and financial capacities. In total, Sener, along with the National Hydrocarbon Commission (CNH in Spanish), allocated 68 percent of prospective resources that Pemex had requested -23.4 billion barrels of crude oil equivalent (MMboe)- and all 2P reserves it had requested -20.5 MMboe- which represents 83 percent of the country’s total (see Figure 1). The Mexican government thus wants to ensure that Pemex will maintain its current production level, around 2.5 million barrels of oil per day (MMbpd) during the next two decades. Nevertheless, Pemex will have the chance to participate in future bidding processes individually, in consortium with other companies and may also transfer certain areas that it had been requested from third parties in the farm-outs included in the second to last call out of five in which Round One is divided into, the true evidence of the attractiveness Mexico has among private investors.
EVOLUTION OF HYDROCARBON EXPLOITATION AND EXPLORATION BIDDINGS AFTER THE ENERGY REFORM
The sudden fall in oil prices has marked the beginning of what is going to be the new oil era of Mexico, and the governmental inexperience of this type of auctions has shaken hands with the international situation. In fact, according to experts, this is one of the reasons that explains the poor results of the first call of Round One, the winners of which were published in July 15th. “It was the first exercise of this kind carried out in Mexico and possibly the lack of experience of regulating bodies could have had an effect,” explains to Energía16 Arturo García Bello, Deloitte’s Energy and Resources Industry Leader in Mexico. Then, only two of 14 blocks offered were finally awarded, to the same consortium (integrated by Sierra Oil and Gas, Talos Energy and Premier Oil). A heavy blow based on the expectations that the auction had created.
Poor economic conditions
But beyond the little experience, the economic conditions were not advantageous. According to a study published by the U.S. consultancy firm Baker Botts, “the Mexican authorities underestimated the capital shortage in the world market, especially in a low oil prices scenario.” Experts agree on this regard when considering that the requests were too high and at some points risky for the investor. On the one hand, corporate guarantees –the minimum capital requested by the government to protect the interests of the state in case of an accident-amounted to $6 billion, an “extremely high” amount according to Ruben Cruz, KPMG’s Energy and Resources Industry Leader in Mexico. On the other hand, the model of contracts is not attractive either. Round One includes two types: Production-Sharing Agreements (PSA), which distributes the exceeding production of contractor’s cost between the latter and the state. The underlying risk is that Management has to recognize that the contractor has incurred in such expense, and doing so in a country like Mexico, where bureaucracy may delay procedures, may turn into a deterring factor. The other type is the License Agreement (LA) in which there is no need to justify expenses because it grants the license to the one submitting the highest offer, but it is also the contractor who covers all risks, such as the geological ones. Finally, Cruz recalls that “minimum levels required were not disclosed” until the actual day of proposal submission.
It is not to forget either, the nature of the 14 areas offered, located in shallow waters off the coast of the Gulf of Mexico and counting prospective resources for 687 MMboe that, as García explains, “had a great risk component, as they were assets without proven reserves, with a significant investment in the exploratory stage, having returns uncertain to a certain extent” (see Figure 2).
ROUND ONE: DETAILS OF CALLS 1, 2, AND 3
The process regulating bodies took no long to take measures to avoid the situation in the second bidding to happen again and the CNH approved in early August a reform to the basis, with the purpose of increasing the attractiveness of the areas to be auctioned in September. Thus, corporate guarantees were reduced from $6 billion to $2 billion. Likewise, production that must be given to the state, in all cases below 36 percent – as opposed to the minimum of the first bidding, above 40 percent-; the possibility for the awardee company could carry out exploratory activities prior to the exploitation was included, demands were relaxed in terms of work plans and legal security was strengthened by including the new guidelines for ruling and consulting period in case of an administrative rescission of contract. Finally, changes in the CNH enabled the creation of consortia as it was possible for a participant to leave the group not affecting the rest of the members.
Success of second call
With all these changes, on September 30th, regulating bodies, companies and the media met in Mexico to open the envelopes containing the proposals for the five areas offered. The auction was the test to measure whether these adjustments had succeeded in making this round more attractive than the first one, and they actually did, since three of five blocks were awarded in an auction where high amounts offered by interested parties were remarkable in terms of production given to the state, well above the minimum levels required. “The percentages of the state interest in operating income offered by winning bidders were much higher than the minimum values established,” remarks Deloitte’s Leading partner. Actually, Eni, -awardee company of Area 1 composed by three fields with light crude oil– submitted an offer of 83.75 percent of the government’s share of profits, as opposed to the minimum requested, 34.8 percent. The consortium composed by Argentina’s Pan America Energy and E&P Hidrocarburos y Servicios obtained Area 2, where Hokchi field is located, with 2P reserves of 61 million barrels (MMb) of light crude oil. And finally, the American Fieldwood Energy together with the Mexican Petrobal were the only bidders and winners of fields Ichalkil and Pokoch, composing Area 4, which has 2P reserves of 68 MMb of light crude oil. Only the biddings for areas 3 and 5, with 2P reserves of heavy and light crude oil, respectively, remained unawarded.
Ruben Cruz, from KPMG, highlights that these results were achieved “with the same Contract in Production of the first bidding process,” and quotes among the success reasons that the minimum amounts required were disclosed by the state before the auction –unlike the other auction in July- and the inexistence of exploratory risk when reserves were shown, which allowed adjusting the offers.
For Juan Carlos Zepeda, president of the CNH, the outcome confirms “the success of the energy reform,” while for the Assistant Secretary of Hydrocarbons from Sener, Lourdes Melgar, the auction confirms that “there is interest to investing in Mexico despite the relatively low prices of oil,” a positive sign because, as García claims, although they need long maturity “the assessment of projects has more restrictions that in high price periods for hydrocarbons.”
AREAS CONSIDERED FOR ROUND ONE’S BIDDING
The near future of hydrocarbons
Mexico will challenge again its energy attractiveness in December, when proposals will be opened for 25 ground areas with a surface of 777 km2 and a certified volume of reserves of 1,882 MMboe that will be offered under License Contract. Due to the size of the fields and investments and technology required, this bidding is focused on Mexican companies. As a matter of fact, 39 of 60 companies that have started the prequalification process are local. According to KPMG, it is a “way to generate local experience, and to improve technical and financial practices of local capitals.”
However, the crown jewels’ auction has no date yet. It is the fourth bidding, which will award areas in deep and ultra-deep waters in the Gulf of Mexico; and the fifth one which corresponds to unconventional reservoirs and Chicontepec, the latter having a remaining volume of 42,150 MMboe according to the 5-year Bidding Plan prepared by Sener (see Figure 3). In these cases, Ruben Cruz notes that “there is a latent exploration risk,” as these are projects that require investments of some billion dollars” so there will be “few companies that will be able to participate” due to the technical and financial requirements and warns that in these calls “legal certainty is going to be decisive.”
Post by: Francisco Neri Bonilla