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Highlights of Mexico Oil & Gas Summit 2015

Highlights of Mexico Oil & Gas Summit

Mexico’s Energy Sector: Moving Forward

Lourdes Melgar, Deputy Secretary of Energy for Hydrocarbons at the Ministry of Energy

 

The summit began with a presentation from the Ministry of Energy’s Deputy Secretary for Hydrocarbons, Lourdes Melgar, who began her speech by thanking Mexico Business Publishing and Mexico Business Events for organizing the event. After reminding the audience of the processes embedded in the Constitutional Amendment, such as the creation of ASEA, strengthening institutions like CNH, and creating new contract models for the upstream segment, Melgar highlighted the importance of ensuring transparency for the private sector in the now open industry. “It is well known that the Reform aims at increasing the production of oil and gas and the restitution of reserves. It aims to become a model that will foster the development of the country as it has a clear strategy for local content and it fosters a strong industrial base,” she stated.

In 2014, Melgar commented, Round Zero took place, and the Ministry of Energy awarded PEMEX the areas that it will be working on during the coming years. This Round was conducted bearing in mind PEMEX’s technical, financial, and operational capacities, criteria that is stated in the Constitution. PEMEX was awarded 83% of 2P reserves, which equals an area of 90,000km2 and can reach production levels of 2.5 million barrels.

PEMEX can migrate these assigned fields to some contracts. The first way is through farm-outs and this is one of the areas that the Reform did not follow international practices, leading to some confusion in the private sector, Melgar mentioned. “Our legislators decided to make sure that finding the right partners was done in a transparent process through a bidding process. We need to design a mechanism for the farm-outs that complies with legislation, while having flexibility in order to make it attractive for players that wish to participate in the farm outs.”

It is important to reiterate that there is a group of entities that play a hand in awarding the contracts. The Ministry of Energy is in charge of designing the contracts and giving the bidding guidelines. CNH offers the Ministry its technical support and is in charge of conducting the biddings and providing access to the Data Room. The Finance Ministry determines the economic and fiscal terms. It is important to point out that once a contract from PEMEX is migrated, CNH will represent the State in every stage and in all contracts. The Ministry of Economy will ensure that there is compliance in matters of local content.

“When Round One was designed, the context was vastly different since the oil prices oscillated at US$100, which is no longer the case. Yet one cannot forget Mexico’s rich geology and resources,” said Melgar. “Our objective is to have an ecosystem of key players and attract new players. In simpler terms, we want to have diversity in terms of business opportunities.” Melgar admitted her disappointment regarding the awarding of two contracts in Round One L01. Nonetheless, she pointed out the positive aspect, “The good side of the story is that we have strong companies with global recognition participating and these two blocks went beyond the government’s expectations. The public sector is going through a learning curve and the industry is no exception.”

She explained PEMEX decided not to participate in Round One L-01 because the NOC is under financial duress due to the declining oil prices. “PEMEX must be very selective in terms of what it invests in. PEMEX has signaled that it will not participate in the first, second, and third bids. However, it has expressed interest in the fourth bid, which will include farm-outs and synergies.”

Melgar moved on to addressing some concerns of industrial players, one of them being the rules of consortia participating in the bids. “Regarding this matter, we will follow international practices that give the industry freedom to have all sorts of consortia. We are looking at other issues troubling the industry such as corporate guarantee and administrative rescission.”

As for the success of Round One, she mentioned that the authorities established three elements to benchmark. One of them was that transparency was carried throughout the whole process and this was achieved. Another important factor was to create an ecosystem in the Mexican oil industry and have a rich variety of participants. “Now we have two companies in the energy landscape that can do E&P,” she boasted.

Optimizing the Role of the Oil and Gas Industry through the Mexican Petroleum Fund

Presentation: Julio A. Santaella, Executive Coordinator of the Mexican Petroleum Fund

Julio Santaella, Executive Coordinator of the Mexican Petroleum Fund

Julio Santaella’s presentation focused on the Mexican Petroleum Fund (FMP), a public trust where the Central Bank is the trustee and the Ministry of Finance is the principal. After the 2014 Energy Constitutional Reform, the fund was created to receive, administer, and distribute revenues exclusively from oil and gas exploration and production activities (E&P). Performing as a sovereign wealth fund, the FMP has roles such as managing the financial aspects of the contracts given after the biddings, and receiving and distributing petroleum revenues, while it is also tended to stabilize the government’s income stemming from petroleum.

The speaker said income for the FMP will come from the revenues generated by contracts with PEMEX and private E&P companies. The main two outcomes will be the shared profit intended for the companies, and the portion planned to contribute to the federal and local governments, comprising 4.7% of Mexico’s GDP. The rest will be deposited in the long-term savings reserve.

The governance behind the FMP is composed of a Technical Committee conformed by seven entities, including the Ministry of Finance, the Ministry of Energy, and the Governor of the Central Bank. There are also four independent members that are appointed by the Senate with an eight-year appointment.

“One of the roles of the Technical Committee is to appoint the Executive Coordinator, which manages the financial aspects of oil contracts, including the calculation and execution of the payments derived from them,” explained Santaella. The Executive Coordinator will also propose to the Congress the allocation of additional transfers like universal pension or investment in science.

Santaella mentioned that the relation of the Fund with contractors and assignees vary. The fund will only receive the amount of oil rights the assignees determine, and for contractors, the FMP will estimate and instruct the payment for each party. “Income will come from royalties, exploration fees, and profit shares, depending on the type of contract signed by the operating company.”

Santaella reiterates that all information received will also be cross-checked with CNH. There will be quarterly reports of activities (which include prices, production and costs), financial statements financial statements, transfers made to the government, fiduciary feed charged, and statistical information related to assignments and contracts. Santaella delineated the four steps that will be taken in the implementation of Round One. The first step is taken when CNH summits the contract for the round and once this is in place the FMP contacts the contractor to start the procedure required to gain access to the technological platform. This platform will be used to share information with authorities and exchange payment instructions. The second step takes place one month after the contract is signed. At this stage, the FMP will start to receive the first payments due to exploration fees. Santaella then described the third step, where CNH approves the first work pan and its associated budget. Contractors cannot lie on their laurels, as they must submit the accumulated costs information that can potentially be recovered on the condition of finding a commercial discovery. The very last step is when production starts and the FMP calculates the full set of contractual duties based on the information presented by all involved parties and it then instructs respective payments.

Santealla was keen to point out that all these procedures are done with the objective of promoting and developing a fair and stable oil industry. He also stressed the importance of enhancing transparency and government accountability, which at the end of the day will benefit future generations. Through this fund the exposure of public finances to the volatility of oil revenues will be reduced. He also boasted that in the long term the reserve will play a role in supporting the investment in human capital development, which will ultimately promote a sustainable development of Mexico’s economy.

Regulator Perspective: Highlights of Round One

Juan Carlos Zepeda, President Commissioner of CNH

Juan Carlos Zepeda talked about Round One and said the most important element of the first phase is that the authorities confirmed that the legal framework and the regulations are viable and solid. “Phase 1 endorses our perspective that we are following the right path, yet there still are remarkable improvements to be made. Nevertheless, the process was transparent, giving future tenders the confidence needed to present important and serious bids.” For Zepeda, it is worth highlighting the level of interest and competition in the six blocks that were bid on. The two awarded contracts expressed an optimistic first step and a viable operating framework. “The degree of achieved transparency was CNH’s main objective. We broadcasted the entire event and close to 112,000 people followed the bid. Such interest in a tender has not been seen in any other country,” expressed Zepeda.

The CNH Commissioner admitted that the government still has lessons to learn. “We did not achieve the 30% goal regarding the awarding of contracts. Only five enterprises and four consortiums were present at the bidding, but most participants will be joining in during the subsequent tenders, as many have registered for the next phases.” Zepeda pointed out that pre-qualifiers’ noticeable lack of confidence was driven by aspects such as the novelty of the opening of the Mexican oil and gas industry, the fact that Iran’s nuclear settlement will increase oil production to an additional 1 million b/d in the following year, predominant interests in deepwater, and oil prices at a decade-low. In the current short-term scenario, companies do not have unlimited capital to invest, meaning that players will bid for the best possible option. Also, large companies seem more inclined to invest in deepwater blocks in the Gulf of Mexico and oil fields in Arabic countries. Deepwaters represent an opportunity to employ the latest technology to maximize production and profit, while operating in the Middle East symbolizes a geopolitically opportunity to supply China’s increasing oil demand. “These decisions have to be made in an oil price slump that is not showing short-term signs of recovery, partly due to the companies’ high inventories and OPEC’s great production.”

Zepeda mentioned that participants have to present a development plan and metering system. CNH will be in charge of reviewing compliance with these requirements. The steps following the signing of the contract will have to be stated in the plan, and the operational information will be presented to COFEMER in real time. “Communication will be a key component since the information emanating each contract will be useful for several organizations,” Zepeda stressed.

The approval of drilling and the regulation ruling these wells have to be registered on CNH’s platform. This will include metering systems, development plans, and drilling permits. “As the entity in charge of managing the contracts, CNH has the necessary infrastructure to keep track of this information. We will be signing the first two contracts before August 21,” explained Zepeda.

The consortium will have to summit its exploration plan within 120 days. If there is a commercial discovery, it will have to obtain certificate and present a development plan. Zepeda said that in the following days, CNH will transfer the information on the exploration areas. “We are going to establish the baseline in terms of environmental standards and infrastructure along with ASEA. Our main goal is to deliver a fully transparent process, in order to earn the trust of the Mexican people and build a reliable procedure,” he concluded.

Round One – L1: Shallow Water Exploration Blocks

Moderator: Gullermo García Alcocer, Chief of the Unit of E&P Policies at the Ministry of Energy
Panelist: Randal Stilley, President and CEO of Paragon Offshore
Panelist: Ricardo Arce, CEO of Grupo Mexico Oil and Gas
Panelist: Oscar Roldán, Director of Economic and Statistical Evaluation at CNH

Guillermo García Alcocer, Oscar Roldán, Ricardo Arce, and Randal Stilley

The moderator, Gillermo García Alcocer, began by asking panelists about the positive aspects of the first biddings round. Arce highlighted the evident transparency entailed in the process, and showed confidence in CNH and the Ministry of Energy maximizing participation in the following rounds. Roldán said, “It is true that the results were not what we expected, but this was not due to structural issues. Instead, I would point out to several restrictions from the government and the global situation affecting the industry. The media gave an unflattering impression of the round without digging into the structural issues.” Finally, Paragon Offshore’s Randy Stilley showed optimism because the lessons learned will be applied in subsequent rounds. “There are many opportunities moving forward from this round. As a drilling contractor, this is where my main focus is. An obvious element of this round is the impact of the global economic situation. In this sense, he most economically viable drilling programs are the ones that will thrive.”

Roldán pointed out that restrictions in the submission bases, such as partnerships and economic requirements, will ultimately impact profitability and thus the companies’ appetite for participation. “The market focused more on profitable areas that are easier to produce. We have to make information available before calling for submissions in order to reduce uncertainty. CNH already has all the data for the rest of Round One, and we are in the process of structuring it.” Along this line, García Alcocer commented on Block 7, which companies did not show interest in in spite of its geological attractiveness.  García Alcocer explained that this was the outcome of the governments’ view differing greatly from that of the industry.

Arce admitted seeing a selective industry in terms of the blocks that were bid on, concluding that the type of block will determine the type of company that bids for it. He suggested that the fact that only seven out of 25 companies that entered the round participated on actual bids could be the result of exaggerated requirements.

Gacría Alcocer proceeded to ask Stilley about the attractiveness of Mexico for international companies. The Paragon Offshore representative said, “Just because there is a dividing line between Mexico and the US does not mean the geology varies that much. There is plenty of interest in Mexico’s geological prospects. The first bidding round is important because of its historical implications, but the best is yet to come.”

When Roldán was asked about the implications of authorities removing barriers for the gathering and acquisition of seismic data, he pointed out that Mexico is in a technical transition. “There is plenty of information that has been gathered throughout many years, and now geological companies are actively requesting authorization to gather information.” He mentioned that there is data on over 20 deepwater blocks, which is valuable for companies. This data was gathered by PEMEX and is now managed by CNH. “The purpose of transferring data was to make the information available to private players with the goal of increasing participation.”

When Garía Alcocer asked Arce about the route Mexican companies might take to shift from service providers to operators, the Grupo Mexico representative stressed that not all service providers want to become operators. He did point out that Round-L3 will open the door of the oil and gas industry to many Mexican companies, as the requirements are lower than in the two previous rounds.

Stilley commented that the fact that PEMEX did not participate in the round was not a surprise. “PEMEX has its plate full with the fields it was awarded in Round Zero. Its absence from the round does not send a negative message, but it rather opens opportunities for others, contributing to a level playing field.”
To conclude, García Alcocer asked about the participants’ perspective on the future of oil prices. Arce said the current environment is allowing companies to evaluate opportunities with a conservative approach. Roldán gave an optimistic perspective by reminding the audience that Mexico has diverse resources, so it is possible to produce even if the price per barrel remains at US$50. However, this would halt the development of unconventional resources. Stilley made the last contribution, saying that the drop in oil prices made the industry focus more on costs. “The industry is always struggling with decline rates, and this will eventually fix the price of oil.”

Effectively Navigating the Legal Framework & Opportunities for Improvement

Moderator: Aurora Pierdant, Director General of WISE Consultants
Panelist: Raul Romero, Partner at Rodríguez Dávalos Abogados
Panelist: Carlos Morán, Partner at Cogan & Partners

Carlos Morán, Aurora Piedrant, and Raul Romero

Aurora Pierdant began by reminding the audience about the intricacy, complexity, and attention to detail in the new legal framework for the oil and gas sector. In her view, this framework opted for transparency and flexibility, one of the achievements in the Reform. There are a couple of things to consider when navigating the upstream sector. Mexico is creating new rules, contracts, norms, regulations, and features in a market that is not yet mature. In this sense, there are many rules and no market where to implement them. “How should the communication channels be opened even further between the public and private sector in order to encourage an open dialogue?” she asked. 

Carlos Morán intervened and claimed the framework has been created from scratch and has been delivered piece by piece. This means there is a lot of spaces of uncertainty and makes it difficult to discern which regulator takes charge and when it has to work together with another regulator. Sometimes, operators find it difficult to see who to request the permits to. This is time consuming, creates uncertainty, and it is ultimately inefficient. It is a learning process not only for the regulatory bodies, but for every company participating within the market. “Historically, the government has been very slow in creating regulatory frameworks and today this cannot occur; the faster these regulations are issued, the better the industry will fare. Regulators are working really hard to solve issues and concerns; however, some go beyond their capabilities and must be addressed at a legislative level. For companies participating in Round One, a salient concern was the administrative rescission and if Mexico wishes to maximize revenues in hydrocarbons and see the Reform bear fruit, it must remove the requirement of administrative rescissions.”

Piedrant said the removal of obstacles like the administrative rescission is extremely complicated, so she suggested that the authorities should soften and clarify the terms. Then she asked the panelists about barriers they have identified. Morán said the processes could be improved by incorporating experts and technical advisors into the dialogue and implementing international standards. Piedrant pointed out the tribunals’ lack of experience with the new types of contracts, leading to a discussion on successful litigations of matters related to administrative rescissions. According to Morán, there are no legal precedents in Mexico for this issue, and Mexico should smooth out the barriers of entry for players who have decided to enter the bidding rounds if it wishes to compete against other attractive countries. Raul Romero claimed that layers have to support the tribunals in their learning process. “The lack of knowledge from behalf of the tribunals may be a barrier for obtaining financing because of the fear of the unknown. At the end of the day, our job is to support the authorities and tribunals in order to uphold transparency throughout.”

The conversation about the complexity of the framework for the upstream sector raised questions about the framework for midstream. Piedrant asked what should be done to reduce uncertainties and support the midstream sector. Romero noted that midstream has been dominated by natural gas and LP, and now it will include poly-ducts and a series of other goods. “The main task for this sector is to attract investment and the authorities must ensure they create the right investment conditions. It is crucial to have an efficient regulatory framework in order to develop strong economic models.” He also pointed out that CRE must enter the industry and learn how the operations of midstream work, and PEMEX is the one with the knowledge. “CFE and PEMEX have had control of natural gas in Mexico for some time and CRE must take this into account when regulating these two players,” he concluded.

Round One - L2&3: Shallow Water Production & Onshore Fields

Moderator: Claudio De La Cerda, Chief Operating Officer of Jaguar E&P
Panelist: Fabio Ortega, Director of Ecopetrol Mexico
Panelist: Marco Antonio Cota, Director General of Exploration and Extraction at the Ministry of Energy
Panelist: Jaime Martínez, Business Development Director of ERM
Panelist: Alberto Ochoa, Engineering Manager at Grupo Diavaz

Alberto Ochoa, Fabio Ortega, Claudio de la Cerda, Marco Antonio Cota, and Jaime Martínez

The panel on shallow waters and onshore production began with a question on how to achieve the goal of producing an additional 500,000b/d. Fabio Ortega from Ecopetrol said the goal was established before the price of oil dropped, thus is no longer a realistic target but rather a reference. As a second point, he said competition is fierce at the moment and Mexico, as many other countries, is competing for capital. However, companies are meticulously examining their options.

Ortega commented about the reforms that opened the oil and gas sector in Colombia a few years back. He said these, indeed, helped increase production, but this took four years. In his view, the shift in production happened because Colombia implemented rather simple contractual and regulatory models. The type of reform also allowed the entry of new players that greatly contributed to the increase in production. “Something we should not undermine,” he stressed, “is the participation of the NOC, which is responsible for 60% of the country’s production.” Ortega said the productive levels of Ecopetrol were also the result of the autonomy the company gained after the reforms. He finalized by saying that increasing production should always go hand-in-hand with finding prospective resources that can be exploitable throughout the duration of the contracts.

Claudio De La Cerda asked Alberto Ochoa from Grupo Diavaz about the characteristics of the companies participating in Phase 2 of Round One. Ochoa said the characteristics are stated in CNH’s guidelines, but he would add traits like having participated in analogous fields, skilled personnel, and environmental compliance. “Innovation is important under the current low-price environment. Also, unconventional resources make innovative companies stand out.” He concluded saying the characteristics are there and now the industry should apply the lessons learned from R1-L01 and promote participation, which depends on contractual terms.

De La Cerda addressed Rodrigo Hernández to ask him about the necessary steps to attract companies to R1-L03. The member of the Ministry of Energy confidently said the requirements for L-03 would differ from those in the two previous rounds. “The third phase consists of smaller fields that were left aside because PEMEX needed larger fields to meet its production goals,” he said, adding that their size do not make these fields lees interesting for other types of companies. Hernández mentioned that the authorities might offer the license model for the third round because production-sharing contracts could result in less efficient participation or complicates operations. He also stressed that in the criteria for the onshore round will be different than in the previous rounds, as the authorities will focus on the experience of people comprising the company rather than the company’s capabilities. “This is the path to develop a market of Mexican operators,” he explained.

To conclude, De La Cerda asked Jaime Martínez, from ERM, what are the main social, safety, and environmental aspects operators should anticipate. Martínez began by pointing out that the best way to deal with social matters is to anticipate them. “There is available information that can give us an insight on the social context of several areas, so I suggest establishing contact and involving the communities at the earliest stages.” As for safety, he mentioned the fatal accidents the industry has witnessed this year both in PEMEX and in platforms in the US. “In Mexico we do not have an optimal performance in terms of safety, an area that entails high costs. Regardless of how much companies we spend, the safety performance is still not optimal, and low oil prices might tempt companies to cut budgets for safety.” However, he sees opportunities to reduce costs and achieve better security performance in areas such as corporate culture, effective management systems, and adherence to procedures.

Regulator Perspective: ASEA’s Role in the Upstream Industry

Presenter: Carlos de Regules, Director General of ASEA

Carlos de Regules, Director General of ASEA

“This is a moment to stand back and reflect about the enactment of the Reform and especially Round One,” Carlos de Regules, Executive Director of ASEA, expressed during the introduction of his presentation. This contemplative moment led De Regules to add that the main message carried by Round One is that markets demand certainty in all processes. With this in mind, ASEA aims to ensure the healthy development of the industry and certainty is inscribed in its DNA. “The results show that we are on the right track, but we have to pick up the speed,” he added.

De Regules continued by explaining that the industry and the regulatory bodies have one goal in common: to ensure the security of the operations and the protection of the environment. All the regulations that will be created will be done in collaboration with the industry. De Regules was adamant that ASEA would not close its doors to dialogue and it would strive to work closely with all parties involved. He also recalled Article 19 of the Constitution, which mandates ASEA to regulate and supervise the industrial safety, operative safety, and protection of the environment. “We are totally focused on the hydrocarbons sector and Congress has made it clear to separate the administration of oil resources from environmental security.” In his eyes, this distinction will lead to positive results.

The reach and scope of ASEA is quite vast and it goes from industrial security to environmental protection. For De Regules it is not only about creating the rules of the game but supervising their implementation as well, from the drilling to the very logistics.

Throughout the presentation, De Regules pointed out the four main elements that constitute the institutional model of ASEA. He explained that the first element is the Strategic Framework that aims to guarantee the safety of people and the integrity of the environment. “We want to make the hydrocarbons industry cleaner and safer. There are four main values ASEA holds close to its core: professionalism, transparency, impartiality, and opportunity.” The second element is the administrative processes. ASEA carries out integrated processes in order to bring in added value to the sector, and these range from planning, regulations, management, permits, programs, and inspection to data that tracks the work and performance of the sector.

De Regules delved in depth to explain the Risk Management Model, which is the third pillar of ASEA. “When one speaks of people safety and environmental protection it is important to address risk management,” he added. ASEA will help the industry manage risk through two main tools: administrative systems of industrial security and environmental protection. In this endeavor De Regules highlighted the importance of financial responsibility, because unfortunately accidents do happen and the agency has to be prepared. The authority will have to supervise that all these regulations are upheld and that they are aimed at minimizing risk. “This is an industry that lives and breathes innovation, so it is impossible for the regulations to be rigid and unbending.”

With this in mind, De Regules explained that there are several layers in its inspection platform that is oriented to minimizing risk. The inspectors must be creative when drafting inspection models that are efficient and innovative. He also described the several actors involved in risk management. The first actor on the stage is obviously the company, as it knows that there will be inspections and it has to ensure that things are carried out correctly. Companies must communicate the inspection carried out by the agencies. The second layer of inspection pertains to insurance companies as these will see if the insurance cover is viable or not. De Regules notes that this information is shared with the authorities as well. The third layer is the verification from behalf of the regulators and the inspectors are well prepared, selected, and trained. De Regules explained the final fourth layer which is integrated permits. “This is a one stop shop that eliminates bureaucracy. It will be only one entity in charge of giving permits, rather than having several departments or actors.” De Regules concluded his presentation with the uplifting image that Mexico is at the right moment to seize all the opportunities to come in the hydrocarbons industry and ASEA will be a pillar to incentivize environmental responsibility and innovation.

International Practices in Deepwater

Moderator: Chris García, Mexico International Account Director and Deepwater Adviser of Schlumberger Oilfield Services
Panelist: James Buis, District Manager Mexico of Nalco Champion
Panelist: Bill Heiam, NSAM Sales Director of OneSubsea
Panelist: Oscar López Velarde, Partner, Mexico Oil & Gas Tax Leader at Ernst & Young

Chris García, James Buis, Bill Heiam, and Oscar López Velarde

The moderator, Chris García, explained some basic elements of deepwaters, mentioning activity in the US side of the Gulf to highlight the importance of this segment. He did point out that one in ten wells in Perdido results in a commercial success, so the investment risk is high. However, the US side has 70% success rates. Furthermore, a deepwater project creates close to 30 inland jobs to support operations in the rig. He proceeded to ask how Mexican deepwaters compare to those of countries like the US, Angola, and Brazil.

James Buis answered that the main element is infrastructure. “Things in Mexico will have to be built from the ground up to address challenges such as flow assurance.” He said his company, Nalco Champion, likes to be involved at the early stages of a deepwater project because it enables his firm to anticipate challenges, increasing the success rates. “Nalco Champion provides solutions for asphaltenes and paraffins, ensuring a quality output.  Chemicals have to be designed and selected with the movement of the fluid in mind.”

López Velarde spoke about the differences in the bidding processes between Mexico, Brazil and the US, saying that the US has a more mature deepwater segment with fixed royalties. He mentioned that Mexico still does not have fiscal terms for deepwaters, and companies have shown a preference for licenses over profit-sharing agreements. López Velarde then spoke about the environment in Brazil, which has more uncertainty regarding fiscal and regulatory matters, but these are mitigated with the contract models. In addition to signature bonuses, local content requirements are crucial in Brazil. “In Mexico the main challenges will be to find a way to account for or measure local content. All the equipment required for the projects is not manufactured in Mexico, so complying with a simple 13% will be difficult,” he stressed. García added that in order to comply with local content rules, companies need to comply with certain experience requirements.

Heiam said that given the small differences between the US and Mexican side of Perdido, Mexico is likely to have attractive resources and now there is a framework to do so in place. García pointed out that a significant difference between Perdido and Brazil and Angola is that the latter do not have hurricanes, thus they can rely on FPSOs. Also, the US side of Perdido deals with sandstone basins, Brazil with pre-salt basins, and Angola has small reservoirs, making the use of FPSOs rather useful. Mexico should learn the lessons from the area it will work on, so it should look at the US, not Brazil. In addition, wells in Perdido have a lower recovery and flow rate than wells in Macondo because these two belong to different geological formations. “Perdido is one of the extreme deepwater areas in the world. Given the challenging depths and conditions, what innovative technologies are available today, and which will play a crucial role in the development of Mexico’s deepwater market?”

Heiman commented that Lakach has a water depth of 1,000m and is a gas reservoir. However, wells in Perdido have crude, which means a different well pressure level, and water depths of 3,000m. “Deepwater projects in Perdido have reservoir pressures that cannot handle flows of 3,000m. OneSubsea has a boosting pump for the seafloor that will be necessary from day one for any well in the Mexican side of Perdido. Boosting systems will be critical in Mexico.”

García stirred up some controversy by asking what would be the consequences, particularly in terms of local content rules, of using US infrastructure to accelerate production in Mexico. López Velarde said Mexico lacks infrastructure, so it makes sense from an economic perspective to use infrastructure in the US. “After all, most oil produced in Mexico will touch Houston at some point. However, the key word is ‘regulation’. If we do not work on regulation for sharing infrastructure, we will probably have a painful learning curve.”

Mexico’s Human Capital Development Strategy

Presentation: Carlos Ortiz, Director General for Research, Technological Development and Human Resources of the Ministry Of Energy

Carlos Ortiz, Director General for Research, Technological Development and Human Resources of the Ministry Of Energy

The Ministry of Energy, alongside other agencies such as the Ministry of Education, universities, academic bodies, and industrial players, is developing the much needed human capital, said Carlos Ortiz. He mentioned a heightened interest from all companies in the market to develop a strong strategy for human capital. The Strategic Program for Human Capital Development in Energy will be implemented across the whole of Mexico and it is tailored to those generations that need the support. There are six main points that form part of the strategy: background, prospective talent in the energy sector, analysis of volume in the value chains of the hydrocarbons sector, tools for the planning of the labor force, and a national system of identification of human capital specialized in the Mexican energy sector (FISH). The Ministry of Energy collated all the data and information from all agencies and companies in order to have in-depth knowledge of the human capital pool and address the challenges. “This program seeks to integrate all governmental agencies and identify main challenges in the human capital development and direct our efforts in the right direction. The program obviously has a normative framework and a general diagnostics,” Ortiz stressed.

“A successful sector needs trained human capital and one of the biggest ambitions is for the Mexican workforce to bring added value and drive innovation. The extraction of the hydrocarbon and the generation of power should fall second to the creation of innovation and added value services that drive the global energy industry,” Ortiz expressed. He mentioned there are strategic conditions that the program deals with, such as information for decision making, trained personnel, personnel that generates knowledge, and lastly, an energy sector that attracts talent. “During the analysis, we wanted to know which processes in the sector we operate in and which areas we should be dominating after the opening of the market. This means we need to have well-defined competencies and critical profiles in order to attend the challenges.”

Ortiz highlighted that the document is open to feedback and the Ministry of Energy has received support from the private sector. “The degree of openness is crucial in making sure that the development of human capital is aligned with the realities of the industry and those of the decision makers. With these initiatives we hope that companies, academic institutions, and governmental entities will use this information and tools in order to make strategic decisions based on the monitoring of human capital needs in the hydrocarbons industry.” Ortiz identified the program as the baseline of knowledge regarding the capacities of Mexico’s human capital in the energy sector. Companies can learn in a qualitative manner the actual offers, careers, study programs, and flow of graduate or undergraduate students. Ortiz concluded his presentation telling the audience the Ministry of Energy is calling for submissions in FISH, which unites universities and companies, which collaborate to create educational programs and support projects.

PEMEX’s New Procurement Model & the Future of Local Content

Moderator: César Vera, Region Manager of GE Oil & Gas and Surface PC Latin America
Panelist: Arturo Henríquez, Chief Procurement Officer of PEMEX
Panelist: Hugo Espinosa, Vice-President Mexico and Central America Geomarket of Baker Hughes
Panelist: Héctor Márquez, Head of the Procurement Unit at the Ministry of Economy
Panelist: José Luis Pérez Meseguer, Project Leader and Coordinator at UTCAM

Arturo Henríquez, César Vera, Hugo Espinoza, José Luis Pérez Meseguser, and Héctor Márquez

The panel began with a presentation by Arturo Henriquez, who wanted to give the audience an idea of the magnitude of PEMEX’s procurement operations. “PEMEX spends close to US$30-40 billion in procurement. This number is even larger than the NOC’s budget because the expenses are spread out throughout many years,” he explained, adding that PEMEX signed an average of 300,000 contracts in the 2012-2013 periods. Henríquez talked about PEMEX’s new procurement model, which is based on three axes: strategic sourcing and category management, strategic business procurement, and suppliers. “The Procurement Division was created in 2014 and has resulted in US$6.2 billion savings by implementing strategic sourcing.” He told the audience that procurement was historically focused on low prices, but the new model emphasizes elements such as quality, availability of spare parts, maintenance, etc. to avoid unnecessary long-term expenses. Finally, the relationship between PEMEX and its suppliers was mainly transactional. Now, as a result of the supplier base, PEMEX can establish long-term relationships, while gaining a deeper understanding of what each supplier offers.

César Vera proceeded to ask Hugo Espinosa how the private sector has reacted to PEMEX’s new procurement model. The Baker Hughes representative responded by admitting that his company has implemented a similar model. “Our new approach to procurement has eliminated redundancies that were preventing us from taking advantage of economies of scale. Now we know our suppliers better, and our relationship with PEMEX has improved as well.”

The microphone went to Pérez Meseguer, who told that UTCAM has been working for PEMEX for ten years under the public entity legal figure.  “UTCAM students started working in the oil industry due to the university’s location. Then we saw an opportunity to provide training and system development services to PEMEX E&P.” He said that the impact of the drop in oil prices can be felt across PEMEX’s supply chain, thus the university is looking for ways to diversify. An option is to cater to the new players that will arrive in Mexico soon. For this purpose, UTCAM has opened offices across Mexico’s oil and gas states and an office in Houston to offer services to IOCs.

Márquez, who was representing the Ministry of Economy, talked about how his division is in charge of developing a methodology to measure local content inclusion in the oil and gas sector. “We opted for a neutral and unbiased methodology that would acknowledge different activities. The Ministry of Economy is looking at the consumption of national goods and services –labor- that a contractor used. We noticed that ‘services’ was an ambiguous and confusing term that distorted metrics, so we decided to go down the production chain.” Given the law’s emphasis on closing gaps in technology and training, the Ministry decided to include concepts such as training expenses, technology transfers, and even investments on innovation and new developments as ‘local content consumption’.

Vera then asked Henríquez how PEMEX integrates the local content requirements. The chief of procurement claimed local content is not new to PEMEX, and in fact, the NOC collaborated with the Ministry of Economy in defining local content rules, which apply to upstream only and are valid throughout the working life of a well. “Now that PEMEX has to create value, the focus is not to strengthen national content as a government entity, but as another player abiding to the rules. We look for ways to benefit local suppliers in a way that benefits PEMEX as well, forcing us to look for support schemes in our procurement.”

Espinosa asserted that the Mexican industry is comprised of local professionals and technicians even in the case of international companies like Baker Hughes. He claimed new procurement models and the entry of new companies will diversify the supply chain and force players to find their niche. “We will have to fight the large companies, but will also learn about smaller markets. Small operators will provide opportunities for suppliers and will give them the needed experience to grow.”

Future Outlook of the Mexican Oil & Gas Industry

Presentation: Edgar Rangel, Commissioner at CNH

Edgar Rangel, Commissioner at CNH

The CNH Commissioner began by noting that companies will have to present their reserves before CNH. He identified Akal as the field with the largest 3p reserves in the country, followed by Maloop and Zaap. After showing maps and tables with the country’s reserve inventory, he emphasized on the opportunities for improved reserve replacement, farm-outs, and contract migration. “On the production side, the State will keep 17% of the available blocks. The percentage for exploration, however, is much larger, as it consists of most of the national territory, mainly in deepwaters.” Rangel then said the authorities are working on schemes to allow geophysics companies to explore using different kinds of methods and technologies.  He mentioned that the largest deepwater exploration project entails a US$1 billion investment and will take place in two years. “A one billion-dollar seismic exploration project is probably the largest project of its kind,” he expressed, adding that this shows interest from service companies in the Mexican market. “Reserves continue to decline, so we need to think of new ways to replace them,” Rangel said as he showed a map of Mexico’s potential reserves.


Rangel moved on to Round One, saying the ideal scenario would be between assigning 15-30% of the contracts. In order to achieve a realistic percentage, the contract models should be revised, as well as the requirements and times companies had to comply with. “There are many factors that should be considered and incorporated into the model if we want to achieve better results.” He said CNH is already working on these matters, as reserve restitution is crucial. Rangel went on to talk about the second tender, explaining that large companies try to produce 1 billion barrels per year, thus reserve replacement should amount to a similar number.

As for the third round, Rangel said the onshore fields that will be tendered amount to 2,500 million boe. He stressed that all the tendered fields have certified 1p, 2p, and 3p reserves. Conversely, most extra-heavy oil fields tend to be certified for 3p reserves only, although Kaya, the fourth largest oil field in Mexico, has certified 1p reserves of 7 billion barrels of actual crude. Regarding heavy-oil fields, Rangel said that today only Ayatsil, which has an average output of 5,500b/d, produces extra-heavy crude.

Rangel told the audience it was important to go over a few aspects of Chicontepec. “Some of the fields in Chicontepec that will be tendered are already under production, which can be attractive for operators. Chicontepec’s reserves amount to 42 billion boe, although recovery factors will be small.” According to Rangel, farm-outs can help raise the 15% recovery factors stated in the development plan to 20%. “The idea behind a farm-out is to find an experienced partner, thus creating a transfer of knowledge, technology, and economic resources, while reducing risks,” Rangel commented and highlighted the potential of farm-outs with exploration and production rounds in increasing production.

PEMEX’s Ambitions as a Productive Enterprise of the State

Presentation: Gustavo Hernández, Director of Operations at PEMEX E&P

Gustavo Hernández, Director of Operations at PEMEX E&P

Gustavo Hernández said that before talking about PEMEX’s ambitions, we should look at the company’s work regarding its transition into a business-oriented enterprise. “The Energy Reform states that PEMEX has to compete with other oil companies in order to attain exploration areas, associations, migrations and more. We have to invoke the best practices for recruitment, procurement and all of this with competitive salaries.” Hernández admitted that managing a competitive human capital was a difficult area for the NOC, but important advancements are being made in this regard. He said PEMEX’s biggest problems at the moment are the low oil prices and a reduced budget, which makes the company more selective when it comes to investments and pushes PEMEX to look for partnerships. “Since capital expenditure has been changing after the Reform, it is important to take advantage from PEMEX’s competitive production prices that round US$8-9 per barrel. This is a key competitive advantage for the company, and projects that we have been tracing the right track,” Hernández commented.

At the moment, PEMEX is working on the migrations of contracts and establishing partnerships. “After Round Zero, we decided to do farm-outs in 16 blocks so that other companies can assist PEMEX. Some of the players that we had as contractors could now be competitors or partners in future rounds. It will all depend on the objective and the opportunities found during each round,” Hernández detailed.

Hernández then said PEMEX is seeking better-planned operations, which will improve its risk management capabilities, thus maximizing every investment. Part of PEMEX’s strategy is to further develop the deepwater and unconventional segments, which the NOC has not fully seized. Likewise, Hernández said the midstream segment should be given more attention, as it is the gate to materialize production into sales. “After the regulations were set, we have found around a US$100 billion in logistics opportunities,” he admitted.

The speaker invited the audience to keep in mind that the regulation has become stricter and the industry now has new and more competitive players. In this sense, the main topic to address, according to Hernández, is the administration of licenses for exploration and production. “Avoiding practices such as cross-subsidiaries, activity segregation, and multiple reporting is crucial. Different regulators tend to ask for the same information, so CRE, ASEA, and CNH, among others, will have to determine a unified information gathering platform.” Hernández commented that sharing regulatory information to any given entity will expedite procedures and reduce the workload for the parties involved.

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