CNH’s Zepeda: Mexico’s Licensing Rounds and What Should Come Next
Juan Carlos Zepeda, President Commissioner of CNH, opened Mexico Oil & Gas Summit 2018 on Wednesday at the Hotel Sheraton Maria Isabel, sharing relevant indicators from the past bidding processes and the opportunities the new administration could tackle, while also highlighting the upstream process.
Mexico has concluded 14 E&P bidding processes: nine licensing rounds and five farmouts. From these processes, CNH has allocated 107 contracts: 31 production sharing contracts (PSCs) and 76 licenses. Likewise, during Round Zero, the Ministry of Energy granted 21 percent of Mexico’s prospective resources (23,447 Mmboe in 66,000km2) to PEMEX and 93 percent of the country’s 1P reserves (12,448 Mmboe). Overall, PEMEX has 390 E&P assignations in an area of more than 100,000 km2. So far, operators have committed 138 exploration wells, 74 onshore, 64 offshore. From 2018 to 2021, Mexico will drill 26 offshore exploration wells and 50 percent of these will be drilled by new operators.
In terms of superficial recognition contracts or ARES, Zepeda said that “seismic companies have invested US$2 billion in the last three years. The Gulf of Mexico used to have a seismic coverage of 35 percent, but that coverage is now 100 percent. All this seismic data belongs to Mexico but the legal framework allows companies to market their products and services to promote better data that will allow operators to make informed decisions.” CNH enacted the regulation of the ARES contracts in 2015. Zepeda stressed that CNH had created an oil and gas information industry in Mexico from which CNH receives a royalty from each activity. “Since the Energy Reform was enacted, CNH has granted more than 40 ARES contracts and PEMEX has transferred all its data to CNH (87,096km2 of 3D-WAZ). Overall, Mexico has tripled its seismic activities in the past three years,” he said.
Zepeda also highlighted Mexico’s government take related to E&P contracts and compared it with the country’s major regional competition. Mexico’s government take from license contracts is 63 percent and 75 percent from PSCs, on average. In the US, the take is 55 percent for license contracts and in Brazil it is 59 percent from concessions and 75 percent from PSCs. Zepeda also said that “it is impossible to renegotiate the allocated contracts with CNH. If an operator does not fulfill its obligations, CNH will charge them the financial guarantees presented in the bidding process.”
After dissecting the E&P process and relevant indicators, Zepeda stressed the focal point for PEMEX’s future success: capital and reinvestment. “Today, if the NOC wants to raise capital for E&P investments, it needs to associate with other operators, but these operators will ask PEMEX to operate the assignations. Why? Because PEMEX has a specific fiscal regime that does not allow the company to raise capital in the financial markets.”
Zepeda also said that the change in the federal administration is a chance to capitalize on opportunities, particularly regarding PEMEX. Andrés Manuel López Obrador was elected Mexico’s next president on July 1. “PEMEX needs to be outside the budget’s control and must not be made responsible for the debt obligations of the Mexican government. PEMEX should not be obligated to give any more money to the federal budget beyond the taxes it pays.” Zepeda offered a simple resolution for PEMEX’s fiscal regime. “The NOC should reduce its fiscal regime to incentivize investment for strategic projects,” he said.
The President Commissioner also mentioned that natural gas is a priority for Mexico’s energy security. “Today, Mexico consumes around 8Bcf/d, from which PEMEX itself consumes 2Bcf/d with the nation consuming the rest.” According to Zepeda, Mexico is importing 85 percent of its national consumption. Ninety percent of these imports comes from the US. “This is an operational vulnerability for the country. Mexico needs to produce more natural gas. PEMEX needs to create competitive and attractive farmouts in this regard to boost Mexico’s natural gas production,” he said.
Zepeda also mentioned that “royalties from natural gas should be zero, because it is really difficult to compete against the US. Mexico needs to incentive the fiscal regime for natural gas and allow operators to deduct drilling costs.” Moving forward, Zepeda also shared with the audience CENAGAS’ strategic storage plan which, he said, should be revised and oblige big users to have a daily minimum level of storage.
Oil and Gas Policy Outlook: Industry Wish List
As Mexico prepares for another political transition following President-elect Andrés Manuel López Obrador’s victory on July 1, the country’s oil and gas industry is waiting to see which direction the administration will take regarding the sector. Mexico Oil & Gas Summit 2018, held at the Hotel Sheraton Maria Isabel on Wednesday, provided a platform for industry players to contribute to the discussion of what the industry needs and how to coordinate efforts between the new administration and the private sector to capitalize on the milestones already achieved by the industry.
In his capacity as President of AMEXHI, the Mexican Association of Hydrocarbon Companies, Alberto de la Fuente insisted the private sector has the will to establish a teamwork dynamic with the new administration according to four core principles: competition, continuity, transparency and knowledge. As López Obrador’s transition team takes up positions in key ministries and public offices, the industry is waiting for pronouncements on the next licensing rounds, scheduled for later in 2018.
De la Fuente said that AMEXHI and the new administration share common ground regarding the vision of economic growth propelled by the success of the country’s oil and gas industry. This includes a robust social agenda rooted in creating jobs. Private companies’ international experiences could also contribute to building on the achievements related to transparency, openness and dialogue that the incumbent administration put in place.
Giving a voice to the companies further down the industry’s value chain, Jan Frowijn, Director General of ROSEN Group Mexico, highlighted the necessity to prepare for the new business reality in Mexico, with significant opportunities following the country’s accomplishments in offshore developments from the Licensing Rounds, specifically in liquid storage, refining capacity and pipeline integrity services. By aligning global best practices to Mexico’s industry specifics, the country’s private sector can develop healthy and beneficial competition, both for local companies and players coming from abroad looking for a market foothold. With an increased focus on injecting innovative technologies and processes, the country can seize the opportunity to build a strengthened industry on the basis of top-tier technology and effective safety and environmental practices.
Roberto Martínez, Head of the OECD Mexico Center, commended Mexico’s standing as the most active OECD country in pushing forward critical structural reforms, as well as the roles of CRE, CNH and ASEA, both as industry regulators and enablers. Looking ahead, regulators are called to coordinate performance criteria focused primarily on transparency and openness to private initiative, while the new administration should continue guaranteeing an equivalent level of independence and autonomy, as ASEA still lacks a full-fledged governing body in the image of its regulatory peers, CNH and CRE. Martínez also congratulated the regulators’ strategic planning with a long-term vision, critical for the industry. Equally important is for regulators to continue the coordinating efforts materialized with the creation of the Coordinated Assistance Office of the Energy Industry (ODAC) for in integrated, digitalized information and management systems, coupled with coordinated accountability mechanisms and strengthened consulting mechanisms with the private sector.
While regulatory transparency has been the name of the game during the Energy Reform’s consolidation, communication is the other side of the same coin. Carla García, President of the Energy Commission of the American Chamber Mexico, said the success and continuity of the licensing rounds and their inherent investment flows are rooted in effective communication of the benefits of such processes to the entire value chain and to the general public. Public access to all relevant information from the rounds, farmouts and contract migrations is essential for the industry’s prosperity and the general acceptance of the policy, aiming at the industry’s consolidation. Regulators must continue showcasing the same transparency shown so far, which has received international recognition.
Oil and Gas Policy Outlook: Industry Wish List Human Talent, Infrastructure: State Priorities to Detonate O&G
Tabasco, Tamaulipas, Campeche and Veracruz make up Mexico’s key oil and gas states due to their significant onshore and offshore resources. But at Mexico Oil & Gas Summit 2018 on Wednesday at the Sheraton Maria Isbabel hotel in Mexico City, Alejandra Bueno, CEO of R&I Solutions and Strategic Advisor to Access to Energy, said the next consideration is the availability of human talent. “Next to geological resources, the most important consideration state authorities must make is their investment in human resources,” she said.
Wilver Mendez, Minister of Economic Development and Tourism for the State of Tabasco, agreed. “The state is promoting specialized degrees for the oil and gas industry,” he said. “University graduates in Tabasco have a 70 percent absorption rate in the oil industry.”
With total deepwater E&P investment in Tabasco estimated at US$26.6 billion, shallow-water E&P at US$10.9 billion and onshore E&P at US$1.28 billion, it is easy to see why more human talent is needed. Mendez highlighted that 31 of the contracts awarded in the licensing rounds and two onshore fields awarded in PEMEX farm-outs are located in Tabasco, with 13 new companies already working in the state, including Statoil, Eni and Murphy Oil.
While Mendez highlighted the importance of training human talent to strengthen local content and the national supply chain, Ernesto Marcos, Partner at energy consultancy Marcos y Asociados, said the country should learn from mistakes made in markets such as Brazil and Colombia. During its energy transition, Brazil set extremely high local talent requirements that the country was unable to meet. “Best practices can be incorporated from both markets but the authorities should bear in mind that this process is a marathon, not a race,” he said.
Apart from setting obtainable human talent requirements, Andrés Fusco, Energy Commissioner of the State of Tamaulipas, emphasized the importance of facilitating business for the operators investing in Mexico by creating a body to oversee key issues, such as environmental permitting and social issues. “Tamaulipas created the State Energy Commission, which is the first of its kind in the country,” he said.
With almost one-third of the awarded blocks in the bidding rounds located in Tamaulipas and close to US$59 billion due to be invested in the state, Fusco believes infrastructure development is another aspect that the government could promote to help operators. “In terms of port infrastructure, we have the Port of Tampico in the south of the state and the Matamoros port is currently under construction,” he said. “This will be developed as a one-stop supply base for the energy industry.” Tamaulipas is expected to attract US$64.4 billion in E&P investment.
Given the high investment levels, Marcos agreed that the state plays half the role in the oil and gas industry. “This is the case firstly because the state owns the resources and secondly because the establishment of infrastructure will benefit the state,” he said. “Support is needed not only on the federal level, but also on state, municipal and across all levels of government.”
Fusco said that the development of Matamoros displays Tamaulipas’ commitment to the oil and gas industry. “We are very receptive to the transition,” he said. “We have designed state-level policies to accompany the reform in innovation, education, technology transfer and infrastructure development.”
Mendez said that Tabasco aims to contribute through its ZEE, which will be set up in Paraiso. “This program will target urban development, infrastructure development, support for investors, protection and conservation of the environment and training of human talent, among other issues,” he explained. “All these factors can be used to support the oil and gas industry in the state.”
Achievements of the Energy Reform and How to Consolidate Them
Energy Agency’s model for securing energy supply is an example that Mexico could replicate to address its own energy needs, specifically with natural gas, Rosanety Barrios, Head of the Industrial Transformation Policy Unit at the Deputy Ministry of Hydrocarbons, told the Mexico Oil & Gas Summit 2018 on Wednesday at the Sheraton Maria Isabel hotel in Mexico City.
Speaking on the first day of the two-day summit, Barrios said that “after the shale gas revolution in the US, which started in 2008, Mexico was not prepared to compete against the lower production costs that its northern neighbor enjoyed thanks to its technology access.” She pointed out that the US continues to have a comparative advantage in terms not only of E&P activities related to shale gas, but also in terms of its midstream infrastructure to market that production and even the US refining capacity compared to the Mexico, which, according to Barrios, “is inefficient given its lack of maintenance and specialization.”
Barrios referred to the IEA’s model to secure energy supply. She mentioned that “the incumbent administration had, since the beginning, implemented critical alerts related to natural gas supply because Mexico is a country used to importing natural gas from Texas’ basins. This comfortable reality never allowed the development of a local natural gas industry.” Barrios added: “This is why the Ministry of Energy’s priority is to incentivize the proper development of a local natural gas market. How? By liberalizing market prices, granting access to current storage, distribution and transportation infrastructure and consolidating symmetry between policymakers and regulators to have clear rules.”
According to Barrios, this mandate to create and consolidate a natural gas market should be everyone’s responsibility, referring to the Ministry of Energy, CNH, CRE and the industry itself. She mentioned that “Mexico is some years behind its northern neighbor but, nevertheless, the country is in the right moment to take advantage of the untapped opportunities present thanks to the Energy Reform.”
Barrios also highlighted Mexico’s first open season, related to infrastructure, that opened the door to private and public investment that was previously only in the hands of PEMEX and CFE. “Private players are able to invest, co-invest and develop strategic projects for the sake of the country’s energy supply,” she said, pointing out that “the incumbent administration built 7,521km of new pipelines, 66 percent more than was completed in the previous administration, and it is committed to the continued development of strategic projects to secure energy supply for years to come.”
Developing the country’s storage capacity is another area that requires attention, Barrios said, particularly in regions where fuels or natural gas are greatly needed. “CRE has announced 56 new storage projects. This does not mean that all these projects will see the light but, what we can project in the short term is that the industry in general is more conscious about Mexico’s lack of strategic storage installed capacity.” She also highlighted the opportunities further along the value chain. “In terms of retail fuelsl, Mexico has 46 new brands with 3,061 service stations across the country, representing 26 percent of the total number of service stations.”
Barrios concluded her presentation with a nod to the incoming administration of President-elect Andrés Manuel López Obrador. “Consolidating the achievements of the Energy Reform takes time,” she said. “Mexico has taken the first step and the country needs to continue moving forward. Every player involved in this industry needs to understand that this is a group effort and the president-elect’s new administration should understand this message and keep working to incentivize the growth and health of the country’s energy supply.”
ESIA the Difference Between a Successful and a Failed Project
Much of Mexico’s culture is enriched by its indigenous populations and heritage, and there are still large communities or ejidos whose homes stretch along the coast of the Gulf of Mexico. As a result, onshore oil and gas operators can run into difficulties with access to land, water and community relations, said Alberto Vega, Senior Partner at ERM Latin America and the Caribbean.
“A comprehensive Environmental Social Impact Assessment (ESIA) can make the difference between a failed and a successful operation,” he told Mexico Oil & Gas Summit 2018 at the Sheraton Maria Isabel in Mexico City on Wednesday. “Mexico’s regulatory framework related to E&P site access and safe sustainable operations is clear, but not every company understands the process to assess environmental and social impact studies properly.”
The largest onshore licensing rounds are currently open to bidders. Today, CNH announced that, for participation in Rounds 3.2 and 3.3, access to the data rooms will close on Jan. 8, 2019, prequalification deadline will be Jan. 29, 2019 and the presentation of proposals will take place on Feb. 14, 2019.
Thirty-seven onshore contractual areas will be up for grabs in Round 3.2: 21 within the Burgos Province, nine within Tampico-Misantla-Veracruz and seven within the Southeast Basin. In Round 3.3, nine contractual areas will be made available, located within the Burgos province in Tamaulipas, and the fields will include conventional and unconventional resources.
But Vega warns that without appropriate due diligence, operators face discontented communities, delays and legal implications. “It is vital to identify issues early,” he warned. “These include potential conflict with land use, potential conflict with other water users in the area, ensuring long-term access to the site and security.”
He pointed out that the last census was carried out in 2010, and with rapidly shifting landscapes, companies cannot simply rely on this information. “Companies need to visit the communities in person, understand what is expected from the project and explain the implications under the Free, Prior and Informed Consent model,” he said. “The community needs to be well-informed, and this consent has to be obtained without pressure, ensuring the community is given and understands all the information necessary.”
A robust SIA does not only consider community consultation. Among other considerations are identification of impact mitigation and compensation measures. He also stressed the importance of forming solid, binding agreements with the communities and registering them with the relevant authorities. “Land rights pertaining to derechos ejidales, communal property and private land should be respected and compensated according to fair land value,” he said. “But it is important to ensure the process is formalized and access is registered appropriately.”
Vega acknowledged that some operators may not be aware of the intricacies and rules of the systems, so he provided some simple considerations to take away:
Negotiations, engagements and agreements should be communicated promptly to the Ministry of Energy and SEDATU, 180 days before alternative procedures
Although legal easements can be invoked to obtain land use priority for project sponsors, it is preferable not to arrive at this point
It is important to have a frank conversation and negotiation with the people affected
The official land valuation agency, INDABIN, provides valuation charts as an initial reference for compensation values for land in different parts of the country
The Hydrocarbons Law mandates that land compensation agreements between the project sponsor and landholders must be validated by a district judge or the Unitary Agrarian Court
Profit-sharing in the production phase is applicable. An additional compensation element may be required during production if certain parameters are met, and these can fall between 0.5 and 3 percent for gas projects, and 0.5 and 2 percent for oil projects
Mexico’s Natural Gas Supply, Demand and Infrastructure
Mexico is paving the way for natural gas to become the country’s standard, cost-competitive and environmentally friendly fuel source for bolstered economic activity, panelists told the audience at the Mexico Oil & Gas Summit 2018 at the Hotel Sheraton Maria Isabel in Mexico City on Wednesday. Representatives from CENAGAS, CRE, the Ministry of Energy and ATCO gathered to discuss the landmarks achieved for natural gas supply, demand and infrastructure as Mexico moves toward its long-term sustainability goals and the increasingly relevant role natural gas will play in that regard.
“The price liberalization for natural gas that CRE approved in mid-2017 ended the difficulty of competing with PEMEX. This shift allowed the identification of scarcity locations and to act on that, a significant advance for a country that spent 20 years in transition conditions with no additional infrastructure, subject to production drops and supply cutoffs,” said Rosanety Barrios, Head of Political Units of Industrial Transformation at the Ministry of Energy. This milestone enabled the identification of important regional gaps in terms of natural gas pricing, as Mexico’s southern region primarily depends on national production, given the lack of infrastructure available to import the fuel while the country revamps its production capacity. “We provided an pulse to an already over-diagnosed market with well-known issues. The previously used first-hand sale price methodology generated greater costs for Mexico’s southern region, inhibiting PEMEX from producing additional gas,” said Guillermo García, President Commissioner of CRE. With the entry of a permanent regime supported by CENACE, the Ministry of Energy and constant consultations with the private sector, CRE’s regulatory modifications unlocked 40 percent of national natural gas consumption to be procured by private suppliers, with additional pipelines in operation.
For CENAGAS’ third revision of the Five-Year Plan 2015-2019 authorized in March 27, 2018, CRE asked for different technical alternatives to bring natural gas to Mexico’s south and reach as far as the region’s homes. “We must keep in mind that 15 percent of Mexico’s households still rely on lumber, posing a health hazard, and leading to CO2 emissions and high-cost issues,” García said. Answering the call, CENAGAS is developing a bid to reconfigure the Zempoala, Veracruz compression station. “It includes two compression nodes and new capacities of natural gas flow regulation and metering to direct Zempoala’s compressed gas toward the southern region of the country,” said David Madero, Director General of CENAGAS.
Natural gas storage in Mexico presents two advantages: it fosters energy security for the country and an attractive business opportunity for private companies specialized in such a service. “The country showcases a major opportunity in natural gas storage but projects remain developed on the other side of Mexico’s northern border. Regulatory stability, coupled with an increasing penetration of natural gas in the market as more expensive options such as diesel and fuel oil are replaced can detonate a mature energy storage niche in Mexico,” said Elie Atme, Senior Vice President in Business Development of ATCO. Mexico’s private players want in on this window of opportunity and CENAGAS knows it. “Our data room now includes four depleted deposits and their inherent static and dynamic models. Interested companies are analyzing the information with the objective of succeeding in their nomination process by the end of July 2018 based on viable projects to store up to 10 bcfs in any of these deposits,” Madero said.
Barrios insisted on continuing efforts to recover the country’s national natural gas production, even though results will take time to manifest. “The only way to attend increasing demand is ensuring imported gas arrives on time, pipelines conclude successfully and the regulatory process in land access is improved. The new administration led by President-elect Andrés Manuel López Obrador was provided the sufficient voter-credibility to legitimately approach state and municipal governments to discuss the benefits of natural gas and its capacity as an economic trigger,” she said. “We need to bring natural gas closer to high-consumption points, which can take different forms. Chief among them, fueling public transportation with natural gas and residential use. To date, only 7 percent of residential consumption is fueled by natural gas, versus 70 percent of LPG. Is it justified that megalopolises have to deal with pipes?” she asked. Barrios invited the public and private sectors to reflect on reducing gas consumption costs in a natural way, without state intervention through subsidies.
Thinking natural gas infrastructure, CRE’s President Commissioner highlighted the social component of such developments. “At least two projects are dealing with significant social issues. We are developing the tools to address social requirements and develop human talent to answer them. So far, CRE has signed 17 agreements with public universities to train future anthropologists and sociologists to successfully deal with these issues,” García said.
Madero called on López Obrador’s impulse to tackle inequality to capitalize on the social project framework developed during the incumbent administration. “We need to close agreements with the Ministry of Finance, the National Infrastructure Fund, support the development of the Special Economic Zones (ZEEs) and zones with less productivity in general to bring natural gas to their doorstep and obtain more productive projects, resume economic growth and address our lagging education system.”
Oil and Gas as a Sustainable Driver for Mexico’s Economy
Unlocked niches, a revamped supply chain, new industry players, national content. These are but a few of the aspects which, added together, can propel Mexico’s economic growth to new heights, Rogelio Garza, Deputy Minister of Industry and Commerce, said in his opening presentation at the Mexico Oil & Gas Summit 2018 on Thursday. Mexico’s strengthened oil and gas industry is called on to conduct this drive, sustained by a bedrock of joint collaboration between the country’s key ministries and Mexico’s private initiative, he told the audience at the Sheraton María Isabel hotel in Mexico City.
Mexico is also poised to board the Industry 4.0 train to fully capitalize on the impact of technological megatrends in industrial processes and the oil and gas industry is no exception, Garza said. The country’s 4.0 Industry Policy was drafted precisely to that end, rooted in four fundamental pillars: human capital, innovation, value chain integration and industry clusters. The policy’s core lies in replicating the success of the country’s automotive and aerospace industries, the former reaching levels of national value chain integration of 40 percent, while the latter trains 4,000 engineers per year, to name a few landmarks. “In 1986, manufactured exports represented 38 percent of total exports, while in 2017 they represented 83 percent. We want this know-how and growth to be mirrored in Mexico’s energy industry,” he added.
A prosperous industry is characterized by an efficient equilibrium between supply and demand, at a moment where Mexico is striving to find the optimal way to connect the bevy of upstream projects sprouting from the licensing rounds to an integrated supply chain with local service companies and technology providers. Here is where the Ministry of Economy comes in. “For the energy industry, the Ministry of Economy has three clear mandates: supplier registry, securing the development of national suppliers and observing compliance with the national content provisions stipulated by the Energy Reform in the licensing round contracts,” Garza said.
Driven by a three-pronged methodology, including regional development, investment attraction and institutional linkage, the Ministry of Economy can locate suppliers and gauge development levels to bring them up to par with the industry’s needs, either with equipment, providing better human capital or improving internal processes on the supply side, while detecting opportunities, integrating requirements and ensuring national content provisions on the demand side. Garza said that national content standards act as a bridge between both sides of the industry.
The Ministry of Economy drafted a national content policy using a calculation methodology to simplify compliance and ensure it is to the benefit of both suppliers and operators. The Deputy Minister of Industry and Commerce highlighted the importance of this requirement, for which the Ministry of Economy regularly organizes workshops. These target operators to allow them to seamlessly integrate national content requirements, as stipulated by law, into their operational processes. For supply to meet demand in the more literal sense, the Ministry of Economy also sets up regular business meetings for both ends to discuss what they offer and what they need. On the demand side, Garza said 1,559 supplier companies are registered, with 953 in hydrocarbons and 606 in the electricity sector. He also shared with the audience the publication of two Industry Standard Guides relating to national content compliance: one for corporate management minimums and another for hydrocarbons technicians. As an additional boost directed toward the industry, the creation of ProEnergía, a MX$1 billion fund to finance viable, supply-chain strengthening projects, has allocated MX$75 million to 29 approved projects in 11 states. “This amount is less than 10 percent of our total fund, so a lot of potential within existing projects remains untapped,” Garza said. The depth of the potential of these projects becomes apparent when considering Mexico’s hydrocarbons sector is ranked 6th in greatest potential unconventional gas resources, 7th in greatest potential unconventional crude oil exploration and 4th in unconventional gas reserves worldwide, according to Garza.
Deepwater Outlook: Ambitions, Challenges and Timelines
A panel of leading industry experts took the stage at the Mexico Oil & Gas Summit 2018 on Thursday to discuss the country’s outlook for its nascent deepwater activities. On Day 2 of the exclusive event at the Sheraton Maria Isabel in Mexico City, moderator Jesus Lamas, General Manager of Schlumberger Mexico and Central America, and panelists Monica Bøe, Director General of Statoil Mexico, Evelyn Vilchez, Director of Chevron Energía de México, Sergio Limardo, Country Manager of Repsol Exploración México and Erik Finnstrom, Senior Vice President of TGS discussed the ambitions, challenges and timelines related to deepwater exploration and discovery.
With the allocation of PEMEX’s first-ever deepwater farm-out, deepwater Mexico is just beginning to show the potential that lays hidden beneath the surface. According to data from CNH, approximately 25 percent of Mexico’s prospective resources are located in the deepwater Gulf of Mexico but before the Energy Reform it was almost impossible for the NOC to conduct exploration and appraisal activities in this sector by itself. This niche in the Mexican oil and gas industry represents a great challenge, and at the same time a great opportunity, for the country and for the companies that are bold enough to venture into an unexplored environment.
During Rounds 1.4 and 2.4, CNH awarded 27 deepwater blocks to major oil and gas companies. As these IOCs work to get their exploration plans approved, the challenge is to reduce CAPEX and OPEX, tackle technical hurdles, introduce state-of-the-art technology and apply best international practices to untap the enormous potential of deepwater Mexico. To ensure success, IOCs need not only top technology but a top-tier supply chain that contributes to reducing costs and delivering every phase of these contracts on time and on budget.
Deepwater exploration success stories take time to materialize as activities in these areas are slower and, internationally, are only just beginning to pick up after a long downturn. Nevertheless, major oil and gas companies are eager to place their bets on Mexico to discover the country’s true and full potential.
Deepwater Outlook: Ambitions, Challenges and Timelines Security Remains a Key Hurdle for Onshore Operators
Insecurity in Mexico remains among the top issues for the onshore segment and while the government needs to step up and strengthen security, onshore operators also need to understand what they are getting into, panelists at the Mexico Oil & Gas Summit 2018 said on Thursday at the Sheraton María Isabel hotel in Mexico City.
“The Mexican government needs to take a bigger role in guaranteeing security for private companies, whether they are national or international. Land owners should benefit but should not hold up business,” said Steve Hanson, President and CEO of International Frontier Resources and Director of Tonalli Energía, during a morning panel on Day 2 of the exclusive event.
Glyn Jones, General Manager of Petrofac Mexico, added that the onus is on operators to know the landscape. “Working with landowners in Mexico is complicated. There are also sindicato (union) implications, which introduce specific hurdles. Every operator interested in performing activities in onshore Mexico needs to understand the conditions that it will face after winning a contract with CNH,” Jones said. “Safety is not a culture that is well-positioned in the country. Financial risk is a real issue that every operator must face and project management is also complex and needs to be more functional.”
Petrofac has been operating in Mexico for about six years, Jones said, and is the first company to successfully complete a CIEP migration process with CNH. It has Production Sharing Contracts (PSCs). “We have two fields in Tabasco and have invested over US$1.2 billion since 2012,” he added.
David Enríquez, Energy Partner at Goodrich, Riquelme y Asociados, and the panel’s moderator had earlier set the stage for the discussion, hinting at the hurdles that remain in a newly opened landscape. “Onshore Mexico faces many challenges. Although the timelines for developing these projects are shorter than offshore, operators need to consider key factors to operate safely while being environmentally friendly,” he said
In addition to security, the panelists listed dealings with landowners and unions as main challenges that remain, even after the Energy Reform. “PICO Cheiron started operations in Mexico before Energy Reform, facing hurdles like insecurity in Tamaulipas, which forced us to work with very few resources and to be very strict with our production activities,” said Roberto Mc Leod, General Manager of Petrolera Cárdenas Mora, a Cheiron Company. “Cuota Sindical (Union Quota) is something that nobody has been able to control, along with vandalism. Mexico should grant security to companies, not the other way around,” he said.
PICO Cheiron has been working in Mexico for five years and holds the Altamira CIEP, which it is working toward migrating to a PSC, Mc Leod said, adding that Cheiron recently won the Cardenas-Mora farmout and initiated operations last March with PEMEX.
Hanson also stressed the need to focus on local talent to ensure success. “We have been proactive with local communities. We need to work with local contractors to be more successful. So far we have provided indirect jobs to over 150 people.” He also pointed out that, “we do not take jobs, we create the right conditions for local, skilled people to work with us. Understanding how we should work here is essential; we provide training for our Mexican crews based on international best practices to streamline all our processes.” Jones agreed: “Developing competitive local content conditions is clearly a noticeable component in Mexico’s oil and gas industry.”
Regarding current onshore infrastructure, Javier Zambrano, CEO of Jaguar E&P, said that, “the wells and the production lines are not well-mapped. We need to care for the environmental baseline that PEMEX left behind and we need to document all things the NOC failed to do, to be able to assume real risks and be prepared as best as possible for every factor that could delay our operations, such as insecurity.” Zambrano added that, “dealing with ASEA should not be difficult, it should be productive, and also with the other regulators. The permitting time it takes for regulators to revise and approve everything is quite long and ineffective. Regulators should improve these timelines so we can be more competent with our projects.”
Ultimately success will depend on cooperation. “Policymakers, regulators and the industry in general need to understand each other and adapt to changing conditions to be able to boost, not only the country’s onshore arena, but the entire oil and gas industry,” said Enríquez.
The Recipe for O&G Success: Continuity, Transparency, Competition, Knowledge Economy
With so much speculation on the potential changes that could be introduced by the new administration, according to Raymundo Piñones, Director General of industry association AMEXHI, it is more important than ever to rely on facts and figures based on solid research such as the 2040 Agenda. He shared some observations with the audience of the Mexico Oil & Gas Summit 2018 held at the Sheraton Maria Isabel hotel in Mexico City on Thursday.
Launched in 2015 to represent the new companies entering Mexico after the Energy Reform, the association now has 45 oil and gas members. According to Piñones, 37 of these companies have signed one or more contracts in the licensing rounds and farm-out processes.
He says the association’s differentiator is that, although it is focused in Mexico, its network is worldwide. “What makes AMEXHI really relevant is that our global network of members brings international experience to the table,” he said. “Authorities and regulators, through our association, can easily identify and disseminate best practices from other global jurisdictions.”
AMEXHI’s 2040 model is based on the time frames required to carry out oil and gas projects. “Around 25 years is a reasonable expectation for a project to be able to really bring tangible benefits,” he said.
Particularly with the changing administration, Piñones believes it is more important than ever to continue following the New Mexican Energy Model (NMEM). “If we follow this model, the IEA estimates our production by 2040 could rise to around 3.5 million b/d and could contribute around 4 percent to GDP,” he said. “But if we revert the reform and fail to follow the new model, it could cost the country US$1 trillion.”
To develop its plan, AMEXHI followed a wide scope, hosting roundtables, interviews, sending questionnaires and hosting consultations over the course of a year among different industry players, including academia, private industry, consultants and the government.
There are four main pillars for the Agenda: continuity, transparency, competition and knowledge economy. In terms of continuity, Piñones explained that oil companies already take a great deal of risk and must be given regulatory and legal certainty in return to incentivize investment. He added that transparency is the most sought-after element in the industry. “This not only means publishing fiscal and spending information, but it is also articulated through the existence of checks and balances in the system,” he stressed
Piñones said that healthy competition would involve ensuring the companies entering Mexico are operating on an even playing field and that the deciding factors for awarding projects are based on tangible execution capacity and willingness to take risks. “Finally, knowledge economy involves placing knowledge transfer and research at the center of the industry, not only among the industry but the example should be set by policymakers,” he says.
To support these four pillars, AMEXHI’s 2040 agenda proposes 10 key issues focused on annual licensing rounds, interagency coordination, regulatory autonomy, infrastructure development, elimination of entry barriers, incentives for the development of PEMEX, a focus on digital platforms, guarantees of safety and security, priority given to unconventional resources and an emphasis on knowledge economy.
He concluded that the NMEM allows investment to come from different sources, maximizing the value of state-owned assets through competitive bidding rounds and strong execution capacity. “We know PEMEX has been very successful in shallow waters and some companies are efficient in onshore, some in deepwater,” he said “This allows other companies to come to Mexico and efficiently develop resources to the benefit of its citizens.”
The Consolidation of ASEA
April 1, 2015. Mexico wakes up to a fire at PEMEX’s Abkatún Alfa offshore oil rig, causing four deaths and several injured. The accident required eight fire-fighting vessels to be quenched. One month earlier, in March 2015, the National Agency for Safety, Energy and Environment (ASEA) was officially launched and the incident set the tone for the scope and depth of the challenges the agency would face, said Jimena Marván, Chief of Planning, Strategic Partnerships and Processes at ASEA, during the second day of Mexico Oil & Gas Summit 2018.
“In our capacity as ASEA, we are fundamentally focused on operational correction through regulation and inspection to raise operational practices to better levels, underlining the value of corrections over sanctions, to accompany the industry in their operative processes, detect gaps and bridge them,” said Marván at the Sheraton María Isabel in Mexico City on Thursday.
The agency is present across each link of the industry’s value chain, from exploration to service stations. “The oil and gas industry is a risk industry. The design of ASEA’s model is rooted in risk prevention, incorporating both preventive and corrective scopes. We are developing the adequate financial instruments to mitigate these risks as articulated, reflected and defined in ASEA’s regulation,” Marván told the audience. “Our regulation’s focus is rather objective-centered than prescriptive.” Taking a closer look, ASEA’s efforts in the upstream sector is rooted in an intricate system that includes operational and industrial security, environmental regulation and insurance guidelines developed in coordination with the international insurance industry. On the midstream side, ASEA has developed a regulatory framework covering petroleum products storage, pipeline transportation, environmental regulation, equally fed by guidelines provided by the international insurance industry.
ASEA’s process cycle is outlined by a virtuous circle where the implementation of a strategy and institutional design at the policy level produces the required regulation, which in turned is evaluated based on the control of its outcomes. In parallel, the agency administers the industry’s day-to-day risks and third-party services that serve both as ASEA’s boots-on-the ground team and data generator. The outlined cycle allows for an improved institutional evaluation. “Our exploration and production guidelines for the industry follow best practices in the US, Canada, Norway, the UK and Brazil,” said Marván. To foster increased seamlessness in ASEA’s process cycle, the agency is going digital. By adopting cloud technology, ASEA is aiming at administrative simplification and improved decision-making. It also developed a simplified, user-friendly online platform for the registration of online multi-administrative procedures.
To act both as regulator and enabler, regulatory pieces published in the Official Journal of the Federation for the upstream, midstream and retail sectors translate the regulatory language in operational and environmental security to the industry’s operational logic, fostering improved compliance. In 2017, the agency marked an important milestone with the design and launch of the Environmental Protection, Industrial and Operative Security Administration System (SASISOPA) for natural gas supply activities for the distribution and public supply of LPG and petroleum products. Despite its recent creation, ASEA is already producing results. “Forty months after its official launch, it published 24 industry-related regulations, evaluated more than 25,000 administrative procedures, concluded more than 2,500 inspections, experienced 10 percent fewer litigations over authorization procedures and habilitated 190 third-parties,” said Marván. Chief among the aforementioned statistic, the most critical is the following: Between 2015 and 2017, the accident frequency index per 1 million man-hours dropped from 0.38 to 0.13 in the E&P sector. During that same period, the accident frequency index in refineries per 1 million-man hours decreased from 0.61 to 0.24 accidents, Marván said.
To fulfill ASEA’s mission of guaranteeing the security of individuals and the integrity of the environment through legal, procedural and cost certainty in the hydrocarbons sector, the agency will continue working toward the reinforcement of the existing regulatory framework. Marván said ASEA has all hands on deck to transition from risk-management activities to an integral Risk Management System cemented on the SASISOPA. Among the priorities of ASEA for 2018, methane emissions prevention and mitigation will be at the center of the agency’s work, said Marván, adding that it will develop a six-step cycle: identification, quantification, goals and objectives, prevention and control measures and audit and reporting activities to counter the gas’ harmful effects.
What Climate Change Means for Oil and Gas Companies
Climate change is a reality that every nation needs to understand while adapting to local conditions, Hector Rocha, Deputy Leader Energy LATAM North at EY, told the Mexico Oil & Gas Summit 2018 at the Sheraton María Isabel hotel in Mexico City on Thursday. “Energy demand will grow around 30 percent in the coming 20 years and countries and companies will need to find a reliable and sustainable way to supply this demand.”
Rocha said that 2 billion people will come out of poverty in the next 20 years and “these people will have access to better life conditions, which translates into more energy consumption.” As a result, it is imperative to ensure all this consumed energy is efficient and clean. “Why? Because failing to do so will provoke a harsh change in climate phenomena across the world.”
To give the expected growth in consumption some perspective, Rocha likened it to China and India. “In the next 20 years, this 30 percent growth in energy consumption will be the same as adding the consumption of the population of China and India in today’s context.” In parallel, the world boom in oil and gas exploration and production suggests that fossil fuels will also be here for more years to come. “Today, the world consumes 31 percent oil, 21 percent natural gas and 28 percent coal, while the remaining percentage belongs to other sources, particularly renewables,” he said.
While Rocha believes the world has enough hydrocarbons resources to supply energy demand, he questioned what that means for everyone’s future. The answer, he said, might seem easy but actually it is not. “Today, the world produces between 80 to 100 million tons of CO2 per day. Since 1950, CO2 production has increased dramatically. We have had higher temperatures all over the world since 2001, when the world started to experience the hottest years ever.” In 2003, he continued, Europe experienced a heat wave that killed over 10,000 people. “We need to understand what is really happening.”
So then, what should oil and gas companies do to counteract climate change? “According to similar international studies, we are 14 years closer to reaching a 2oC increase in the world’s temperature. This means that natural disasters will multiply and the climate scenario will be worse than it is today. This is why major oil and gas companies are already diversifying their business portfolios to incorporate environmentally-friendly ways to produce natural gas, or even develop cleaner ways to produce energy, like acquiring smaller renewables companies,” Rocha said.
The best way to power the world in the future, Rocha added, is “by having inclusive and strong public policies that incentivize the use of cleaner sources of energy and adding more value to current E&P activities by developing better technology that allows operators to be, not only more effective, but also sustainable and environmentally friendly.” In the end, Rocha reminded the audience, “climate change is not a matter of killing your oil and gas business, it is a matter of understanding the reality, being able to diversify portfolios and adjusting mindsets to tackle energy demand in cleaner and sustainable ways.”
National Supply Chain Expertise to Bolster IOCs
There is no denying that shallow waters are Mexico’s forte. At the height of its production boom, the Cantarell complex was producing 2.1 million b/d, ranking it the second-fastest producing field in the world. The knowledge and experience of the service providers that worked with PEMEX in shallow waters will be invaluable to the new operators entering the arena, according to a panel of experts at Mexico Oil & Gas Summit 2018 at the Sheraton María Isabel in Mexico City on Thursday.
“We know what we know and we don’t know what we don’t know,” said Francisco Noyola, Country Manager Mexico of Talos Energy. “Working with companies that are experienced in Mexico is of tremendous value as they provide information that may not have otherwise been evident. We expect our service providers to guide us toward avoiding potential risks and mistakes because we just didn’t know any better.”
This sentiment was echoed by Luis Manuel Ocejo, President of CAMEINTRAM. “When companies enter Mexico, although they may be used to working globally, they may not be aware of the intricacies Mexico involves,” he explained. “We help our partners deal with these demands and, as a result, they trust us.”
This was in response to a question from moderator Leonardo Cuneo, Energy Director in Mexico at Capgemini, about how to balance responsibilities as an operator. “What is needed to increase shallow-water production in the fastest way while also overseeing safety and environmental issues?” he asked the panel, stressing that shallow water must be sustainable, as the lessons from Cantarell illustrate.
Joining them on the panel was Merlin Cochran, Deputy Director General of Exploration and Extraction of Hydrocarbons at the Ministry of Energy, who stressed the importance of understanding the country’s unique context. “There are carbonates, and then there are Mexican carbonates,” he said. “A company should not just assume that, because it was able to work internationally, it will be able to apply these methods to Mexico.” However, he highlighted the rewards of working in Mexico, saying it has one of the highest success rates in drilling wells globally.
This came as no surprise to Noyola. Talos was part of the consortium that drilled one of the first successful wells in Mexico’s liberalized market with the Zama-1 well, with around 2 billion barrels of oil. But he warned that the supply chain could play a vital role in how fast projects can be put into production. “There will be pressure on the value chain and bottlenecks here may limit how fast we see any development happening,” he said.
Noyola highlighted three distinct categories of companies: those that have spent many years working with PEMEX, and he warned they need to understand that the IOCs may work differently from the NOC and adapt accordingly; international suppliers that have been waiting for international operators to enter, and they too must adapt to Mexico’s unique context and undergo a learning curve to understand it; and finally, the international companies that have worked with PEMEX previously. These are the best positioned, he said.
However, he cautioned that this last group in particular must be prepared to deal with increased demand and bottlenecks. “We are fortunate that we are at the inception of what we believe will be a lot of activity,” he explained. “But there will be very strong demand for people to cover the gaps when we hit bottlenecks. They need to prepare ahead of time and realize what is coming.”
Cochran provided the audience with a tool to do so. He explained that the Ministry of Energy is working with CNH to plan supply chains to meet demand. The Plataforma de Bienes y Servicios is available online and, based on the approved work plans, the Ministry of Energy and CNH have projected how much demand will be experienced, categorized by each good or service. “We have mapped what industry will demand over the next five to six years,” he said. “It is in its infant stages and I would encourage feedback.”
However, he stressed that the platform is based on certain premises. “One of the main considerations is that it is only indicative, not exact,” he said. “In reality, we are only mapping demand and as a service provider this must be compared with supply.”
Although Cochran said the benefits of the Energy Reform have not yet been felt, Ocejo was optimistic about the future. “This year as a service company, business has been very slow and we believe the main reason for that was the change in administration, the uncertainty that brought about and the crude prices that have just started to bounce back,” he said. “Now I am confident things will move faster.”
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