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Deputy Minister Maciel Torres Outlines Energy Prosperity Plans

Miguel Ángel Maciel Torres, Deputy Minister of Hydrocarbons at the Ministry of Energy
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Just one day after the publication of the eagerly awaited PEMEX Business Plan, Miguel Ángel Maciel Torres, Deputy Minister of Hydrocarbons at the Ministry of Energy, opened Mexico Oil & Gas Summit 2019 on Wednesday at the Mexico City Sheraton María Isabel Hotel.

In his presentation, titled The New Government’s Energy Vision, Maciel Torres highlighted the challenges that face the new administration in delivering affordable energy solutions and future energy prosperity to the country, while securing the health of PEMEX, currently the world’s most indebted oil major.

Maciel Torres began by outlining the steep fall in Mexico’s oil production, which he said was due to the way investment had unevenly risen and fallen throughout the last several decades. This situation, he said, has not been sufficient for the needs of the country. In December 2018, Mexico produced 214Mb/d of gasoline while imports reached 603Mb/d to supply the national demand of 791Mb/d.

According to Maciel Torres, the government is working to resolve this. “Investment into exploration has risen to 30 percent of the federal budget from 15 percent, which has helped us replenish our production reserves,” he said.

He also underlined the need for Mexico to move away from relying on foreign nations, particularly in the area of national gas, saying that “high dependence on any foreign market could be catastrophic.” To ensure that populations in diverse areas of the country have sound access to fuels, Maciel Torres said that strengthening Mexico’s national pipeline network would be a focal point of the government in the coming years. Private companies would be involved in this development, he added. “Areas that are lacking in infrastructure, including Oaxaca, the Baja California Peninsula and the southeast of the country, will be a center for pipeline development.”

Speaking just a day after the launch of PEMEX’s Business Plan, Maciel Torres said what was published yesterday was “only a fragment of the 100-page document.” The plan, which covers the first four years of President Andrés Manuel López Obrador’s administration up to 2022, announced financial support of US$6.6 billion over the next two years. The government’s intention to reduce PEMEX’s financial burden, set to free up an additional US$7.2 billion across the next three years, was also announced.

Maciel Torres also spoke about hydraulic fracturing, better known as fracking, as a method that could be used to reach Mexico’s copious unconventional resources. While he did not dismiss the potential of fracking, Maciel Torres said the method was not part of Mexico’s current production plan. “To be clear: all of PEMEX’s cards are on conventional resources,” he said, adding that unconventional resources has not been ruled out entirely. “Unconventional investments are being contemplated.”

The Deputy Minister blamed the free market for preventing the government from lowering energy prices, but also pointed out that the administration had successful achieved a drop in fuel theft. In 2019, PEMEX hopes to recuperate 80 percent of the MX$40 billion losses that theft inflicted the previous year, he said.

Maciel Torres also explained that the government is pushing the role of technology in Mexico’s energy sector. He said the country has six specialist institutions and two universities producing technological advances and “human capital of over 25,000 scientists that we are now taking advantage of.”

Offshore Fields: Promised Land for Exploration

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Mexico’s bidding rounds opened the doors to previously unexplored areas both offshore and onshore. According to Oscar Roldán, former Head of the National Data Repository at CNH, around 130 exploratory wells are scheduled to be drilled following the latest rounds.

On the first day of the Mexico Oil and Gas Summit held at the Sheraton Maria Isabel hotel, speakers on the panel Inside Mexico’s Exploration Activity, moderated byRoldán, agreed that Mexico is a greenfield in terms of exploration activities. “We are excited about the opportunity Mexico presents to the global industry,” said Adam Seitchik, General Manager of Exploration and New Ventures at Murphy Oil. “Offshore exploration, in particular, is unique in Mexico and it was very sought after in Rounds 1 to 1.3.”

The country has become a hotspot for exploration and there are still many areas to be explored. According to Alejandro Scheffler, Commercial Director of Schlumberger Mexico and Central America, years ago IOCs did not have Mexico on the radar. However, the country is now in many of Schlumberger’s clients’ prospects. “It is not only offshore. Onshore exploration is also attractive, especially after the Ixachi discovery in 2018,” he said.

Exploration, however, entails risk and while some projects may be immediately successful, others may not be. According to Seitchik, the best way to mitigate risk is by generating and analyzing information to identify the best opportunities. “There is a learning curve and we need to take advantage of the information generated at all drilled wells,” he said. Rossy Pérez, General Manager Mexico of Beicip-Franlab, highlighted Mexico has invested in data generation for the most important fields in the country to get the best results and, according to Scheffler, the country is among those with the most data to make decisions regarding well planning and development.

Naturally, when drilling exploratory wells, there may be some that turn out to be unsuccessful. However, these ventures should not be dismissed, according to Scheffler. “Even unsuccessful wells can generate important data for future decisions through the necessary investment in data collection and analysis,” he said. James Buis, District Manager Mexico of Nalco Champion, added that analysis of early samples can help to understand the investment needed to reach a successful production design.

There are still areas to be explored, both offshore and onshore, and according to Buis, there might be still ore surprises like Ixachi, especially considering the untapped opportunities in Mexico’s Gulf of Mexico. “Companies think Mexico is a very explored country but that is not the case,” said Roldán.

The oil industry in Mexico is mature but there are areas, especially in the north part of the Gulf of Mexico, where advanced infrastructure and technology are needed to support deepwater and shallow-water projects, according to Scheffler. “Companies have focused on the Perdido belt but mostly on the US side,” said Seitchik. “However, geology does not stop at country borders. The Salina basin offers great opportunities but it has barely been tapped into as a subsalt area.”

A Cross-Section of Upcoming Offshore Production

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As new offshore operators continue to settle into their awarded blocks and develop them into a stable production phase as quickly as possible, new models of collaboration between the public and private sectors must arise in view of the new administration’s focus on PEMEX, panelists at the Mexico Oil & Gas Summit said on Wednesday in Mexico City. 

According to Graciela Álvarez, CEO of NRGI Broker, both private operators and Mexican service providers are ready to collaborate with the government’s plans to strengthen the NOC while also building upon the many successes achieved in a short period of time within the fields awarded through the bidding rounds. “The number of new discoveries highlights the need for exploration activities to capitalize on the available opportunities in the country,” she said.

Álvarez made her remarks on the first day of the two-day summit held at the Sheraton Maria Isabel Hotel as part of her introductory remarks to the panel she moderated, entitled “Offshore Project Development: The Road to First Oil.” Four panelists from key public and private institutions provided a crucial mix of perspectives on Mexico’s offshore development, particularly in terms of achieving production in new shallow water fields.

Francisco Noyola, Country Manager of Mexico for Talos Energy, was the first to provide the necessary background with a chronology of Talos’ success with its Zama discoveries, of which the latest appraisal well, Zama-3, was completed this past June. He highlighted the historical breakthroughs made by Talos in the Mexican context, which have included the most core samples extracted (over 440m) and the first block unification agreement with PEMEX in Mexico’s history. The historical dimension of these milestones promoted a transparent relationship with regulators and authorities that he believes plays a key role in their current and future success. “Talos wants to have a positive impact in Mexico. The president has set his production goal and we aim to do our part to help,” Noyola said.

The panel then progressed toward the perspective of another private player whose successes have also been quite public as of late: Marinsa, represented by Chief Strategy Officer Sergio Suarez. After detailing the ways in which the crisis period during 2016 and 2017 prepared them for the road ahead, Suarez noted that “under the conditions established by the current administration, being a national player gives us a competitive advantage. However, we also have strong alliances with international companies.”

Fausto Álvarez Hernández, Head of the Exploration and Production Compliance Unit at CNH, provided a direct public sector assessment of the success factors for offshore projects looking for a quick launch procedure. He noted that CNH has had to experience “logarithmic learning” in order to perform its duties as a regulator as effectively as possible. He also praised the efficient path forward forged by ENI, Hokchi and Fieldwood toward first oil and eventual full production, which might total up to 220Mb/d from all three. “Optimization has been a key priority for CNH, particularly in approvals, as well as simplification in the documentation needed to present a project,” he said. He also made a point of specifying that CNH now could reach turnaround times for approvals as low as 34 days on average, which he considers an extremely important component of fast offshore development. 

The fourth and final participant in the panel was Alberto Sambartolomé, Senior Partner at ERM, which has participated significantly in the sustainability assessments of many of Mexico’s offshore production projects. Sambartolomé highlighted the chief importance of efficiently introducing new operators to the legal and social expectations of the Mexican environment. This not only leads to reduced downtime for drilling and development through quick regulatory compliance, but it also ensures the longevity of production once first oil is reached. Projects that engage with regulators and communities early and promptly can look forward to productivity uninterrupted by protests or shutdowns, he said. “Transparency and a long-term vision are key for sustainable social development projects. Being transparent and informing the local community of plans is important for operators to be good neighbors.”

Digitalization key to evolving industry, says Schlumberger expert

Javier López, Digital Consultant of Software Integrated Solutions at Schlumberger
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Despite the oil and gas industry’s reputation for being a late adopter of technology, Javier López Vargas, Digital Consultant of Software Integrated Solutions at Schlumberger, told the Mexico Oil & Gas Summit 2019 audience that the adoption of digital technologies and systems can help companies more quickly achieve their goals, as long as this adoption is carried out properly.

López explained that any system can be divided into two separate parts, the control component and the power component. The application of technology is the method of transferring those components from humans to machines, he said during his presentation at the Sheraton Maria Isabel Hotel in Mexico City on Wednesday.

Digitalization has been key in reducing the need for extensive work teams, thereby reducing costs to companies. “In the Industrial Revolution, we made power from the steam engine. Later, this became the electric motor. This was a significant change and removed human’s need for physical effort,” he explained.

Now, however, digitalization is bringing about the transfer of control to machines too.  “Every system has a control component and a power component. We have already delegated the power component to motors and engines but we are now transferring control to machines,” he said.

In an industry like oil and gas, where data is closely guarded, this can deliver great advantages. “This is a change reflected in the world and, while it can be unnerving, it can also be very positive.”

One of the digitalization trend’s most known tools, the cloud, offers many benefits to companies willing to switch. The cloud makes the balancing of CAPEX and OPEX far easier and can deliver flexibility in mobility via new software like Digital Twins, he said.

However, the digital transformation expert warned that oil and gas companies should understand the problem they are trying to resolve with a system before designing it. López used the example of Renault’s successful F1 victory in 2002 to illustrate how companies should adopt digital systems. “The design team did not just demand more torque or more power. Instead, they found out what they needed to win and designed toward that,” he said.

User friendliness is also key and helps in the uptake of new technologies, said López. A high-level of technical understanding should not be necessary. “Technology adoption is not fostered by incentives but by a good design that makes the transition easier for the user,” he said. 

Environmental Protection Takes Center Stage

Luis Vera, Executive Director of ASEA
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In line with the social vision championed by President López Obrador’s administration, ASEA has revamped its strategy to ensure environmental integrity, justice for communities and safety in operations. On the first day of Mexico Oil & Gas Summit 2019, held at the Sheraton Maria Isabel hotel in Mexico City, Luis Vera, Executive Director of ASEA, outlined the agency’s new work plan to foster a more social and environmentally friendly industry.

Among its responsibilities, ASEA is in charge of safe and environmentally and socially responsible production, which means creating and supervising regulations to guide public and private extracting activities. As a branch of SEMARNAT, the agency must align to the ministry’s social vision, which is also shared by the new administration’s National Development Plan.

According to Vera, the idea is not to fight industrial growth or activities but to properly measure the impact that projects have on surrounding communities, not only in terms of revenue but in social and environmental terms. “Extracting industries have a huge impact on their communities and therefore have a responsibility to take care and give back to the environment,” he said.

Vera pointed out that, unlike PROFEPA, ASEA does not take a criminalizing attitude toward companies. However, the agency does have the responsibility to hand out sanctions and fines when companies fail to comply with social or environmental standards. Based on ASEA’s new assessment strategy, “sanctions are now determined in a way that companies can repay for the environmental impact they had on their communities,” said Vera.

ASEA gathered all players that could help it make better decisions regarding regulations and transformed its operations to address the needs of the industrial communities. “Our goal was to make this an active agency that does not only grant licenses left and right,” said Vera. “We analyze every initiative individually and find the best conditions for projects to work for companies and communities.” The agency even made agreements with players like the National Protected Areas Council to trade fines for investment in recovery projects to ensure sustainable development in communities and protected areas.

Vera also highlighted the work ASEA has done to boost efficiency in managing permits and licenses. “We received an agency with a backlog of 7,500 applications, plus over 7,000 we have received since December 2018,” he said. “Today, despite budget cuts, we are at a 98 percent on-time response rate for all applications received since December and we have resolved 5,000 of the backlogged applications we inherited.” The agency has also worked with its authorized third-party partners to ensure their inspections follow ASEA standards. “We may not have enough inspectors to follow up on all requests but we are trying to establish agreements with local governments to collect data and receive applications,” he said.

Vera has positive expectations for the industry and expects new discoveries will generate greater activity for ASEA. However, he is confident that there will be collaboration between the agency, operators and the scientific community and is even pleased about the response of companies regarding sustainability and environmental matters. “Although we do not have much about the Dos Bocas refinery yet, all interested parties are considering the environmental aspects of the project.”

Dos Bocas Only One Piece of the Puzzle

Marco Antonio Osorio, Director General of IMP
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Although the Dos Bocas refinery project continues to attract the most attention within the new administration’s portfolio of flagship infrastructure and development projects, this initiative can only be understood within the larger context that calls for a massive reactivation of Mexico’s National Refining System, Director General of IMP Marco Antonio Osorio said today in Mexico City.

Osorio conveyed this vision as part of a presentation entitled The Future of Mexico’s Refining and Storage Infrastructure, which took place in the afternoon session of Day 1 of the two-day Mexico Oil & Gas Summit at Sheraton María Isabel Hotel. Osorio began his remarks by addressing the doubts often repeated in the media regarding the centralization of fuel supply and availability in the new administration’s energy policy. “We understand that investing in fossil fuels seems contrary to the contemporary global trend toward renewable and clean fuels, but we must strengthen key aspects of our energy supply security while this long-term transition takes place,” he said.

While specifics can differ greatly, Osorio identified the best possible scenarios for this transition still call for 50 percent of overall energy sourcing in fossil fuels by 2050. “Taking this and other factors into account, such as Mexico’s ever-growing national automotive fleet, it is clear that we must position ourselves to take as much advantage as possible of our upcoming oil and gas production increases through the regeneration of our National Refining System.”

In Osorio’s estimation, the threats to the security of Mexico’s fuel and energy supply were multifaceted; although fuel theft was mentioned, Osorio insisted on looking at the bigger picture: “For example, our reliance on US imports, specifically those from the Gulf Coast, put Mexico at the mercy of the weather emergencies that characterize this region.” Osorio’s argument also relied heavily on the contrast between Mexico’s 24 percent of energy consumed being produced nationally and Colombia’s proximity to 90 percent in this same metric, not to mention China’s 100 percent. 

As is well-known, Mexico’ refining systems operated at 40 percent of its installed capacity in 2018. Osorio explained the historical and petrochemical background of this particular deficiency of the system, while also using it as a central part of his argument that Dos Bocas must really only be one component of a strategy that calls for finishing the reconfiguration of the three (out of Mexico’s six) refineries that are not able to efficiently process the majority heavy oil produced by national assets. Osorio noted that of these three refineries, Tula is the one closest to being ready for this process of optimization.

Osorio made it clear that his goals covered not only supply security but also equity of access to energy products through lower costs and an expanded distribution network, in addition to ambitious fuel production goals to reduce fuel imports. “Our ideal scenario calls for reducing fuel imports from our current 620 Mb/d to 120 Mb/D,” he said.

Neglected Oil Giant Seeks to Regain Former Glory

José Antonio de la Vega, Minister for Energy Development of the State of Tabasco
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Although exploratory activities in the 1970s strengthened Tabasco’s position as an oil-producing state, the end of the oil boom in the 1990s relegated the state to a neglected position in the federal development plan. Now, Tabasco seeks to regain its position and become Mexico’s energy capital mainly through one of President López Obrador’s flagship projects: the Dos Bocas refinery in the Paraiso municipality.

Closing the first day of Mexico Oil & Gas Summit at the Sheraton Maria Isabel hotel in Mexico City, José Antonio de la Vega, Minister for Energy Development of the State of Tabasco, outlined his administration’s strategy to take Tabasco back to its leading position in the oil and gas industry. “Our goal is to become a key center for oil production and an oil development model for all kinds of fields – onshore, shallow water and deepwater,” he said.

According to de la Vega, Tabasco is still an important player in the oil and gas scene. Out of the 111 areas adjudicated through bidding contracts to private companies, 39 are located in Tabasco. The state expects direct investment of US$1.7 billion and de la Vega highlighted projects from leading oil and gas players ENI, Hokchi and Talos Energy as success stories for the state’s oil and gas development. From the public sector, Tabasco expects to receive part of the MX$50 billion (US$2.6 billion) budget that PEMEX will destine for E&P activities in 17 fields, most of which are located in the state.

However, the big opportunity will come from the construction of the Dos Bocas refinery in the Paraiso municipality. “The project will require an investment of MX$150 billion (US$7.9 billion), will generate 100,000 jobs and will have a capacity for 340Mb/d,” said de la Vega. Conditioning of the Dos Bocas port has already started and de la Vega said six packages have already been tendered for the construction of the refinery, all of them won by foreign companies except for one won by ICA in collaboration with Fluor.

De la Vega expects the refinery will bring better days for Tabasco and said the government is already preparing for related investments in terms of infrastructure, real estate, water and waste management to support the project, including a bypass for the city of Paraiso. The state government also has the priority of fighting corruption, boosting social development and solving the security issues hindering private companies’ and PEMEX’s development.

At the same time, there is a project to develop the port Frontera between Dos Bocas and Ciudad del Carmen to boost oil and gas trading activities, as well as serve shallow and deepwater oil rigs in the area. “The state government is already in talks with PEMEX to advance this project. Refineries will require hydrocarbons that are not currently produced by PEMEX, which means we need investment in ports to ensure the energy sovereignty sought by the government,” said de la Vega.

Tabasco is also aware of the changes in energy and sustainability strategies. “Even though hydrocarbons are a bet for the state, we cannot deny that new technologies are the future in terms of efficiency and environmental development,” said de la Vega. The state is considering other projects in wind, hydraulic, biomass and solar energy that can lead to the generation of 2,000MW. “We want to accompany President López Obrador in the transformation of the southeast into an empire of progress and development,” he said.

Energy Commission President says private sector vital to Mexico’s energy sovereignty

Manuel Rodríguez González, President of the Energy Commission in the Chamber of Deputies
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The President of the Energy Commission in the Chamber of Deputies, Manuel Rodríguez González, opened the second day of Mexico Oil & Gas Summit 2019 by saying the private sector would play a vital role in confronting the challenges Mexico’s energy policy must overcome to provide a long-term, accessible and sovereign energy solution.

Rodríguez González began his keynote presentation by pointing out the challenges the new energy policy, brought in under the current administration, faces. He noted that between 2008 and 2018, PEMEX production fell by almost 50 percent while by 2018, Mexico’s National Refinery System was operating at a rate of just 41 percent. Oil theft, a problem that has plagued Mexico for decades, was also underlined as a major problem to both PEMEX’s and the country’s financial position. “The theft of hydrocarbons between 2014 and 2018 represented a loss to PEMEX of MX$100 billion (US$5.2 billion),” he said.

He also highlighted the country’s high gas imports, which must be reduced, and low storage capabilities as areas that need to be improved. “It is worthwhile pointing out that 90 percent of the gas consumed in Mexico is imported from the US,” said Rodríguez González.

However, he said that the necessity to formulate a plan that will develop the country’s energy sector and guarantee the population has access to an affordable energy source is essential. “The establishment of a sovereign energy policy, low in emissions and high in efficiency, is of vital importance to guarantee both the national economy and the accessibility of competitive energy prices. This will lead to the energy security of Mexico,” said Rodríguez González.

As the private sector continues to chew over PEMEX’s Business Plan, released on Tuesday, Rodríguez González sought to reassure the private sector that it would have an ongoing role under the new government. He underlined the recent success of Italian super major Eni, which at the start of this month began production on its Mitzón field platform, and said that private sector involvement was essential to Mexico meeting its energy goals. “The participation of the private sector occupies a place of first order in meeting the challenges faced by the hydrocarbon chain, and in the Energy Reform, whose foundations remain intact,” he said. “As presented in PEMEX’s Business Plan, public investment will be complimented by private investment through long-term service contracts.”

He also pointed to the construction of the Dos Bocas refinery, to begin this year, as a moment of opportunity for private players. “The authorities have made very clear that during the distinct stages of the Dos Bocas construction, licensing rounds will be opened for the participation of national and international companies. That is to say, private participation is guaranteed.”

Collaborating Toward First Oil

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Bidding-round results and PEMEX’s goal to develop 22 new fields have put pressure on service providers to increase competitiveness in their operations. However, the cyclical nature of the oil and gas industry has provided companies with the necessary expertise to face these challenging conditions, said Luis Ocejo, Senior Managing Director Maritime Business of Grupo TMM and participant in the Drivers of Supply Chain Competitiveness panel at Mexico Oil & Gas Summit held on Thursday at the Sheraton Maria Isabel hotel in Mexico City.

“After the crisis of 2014, many projects were abandoned and close to 30,000 people lost their jobs. At some point, 60 percent of the Mexican ship fleet was docked,” Ocejo said. This forced companies like Grupo TMM to implement cost-reduction strategies to ensure continued maintenance and secure employment for workers, albeit with lower salaries. “If we had eliminated those jobs, we would not have been able to face the industry’s recovery when the time came,” he said.

Although the industry has somewhat bounced back from this crisis, there are still many issues that need to be addressed, especially to cover the energy demand in the country. “Energy is the main driver for social and economic growth and its development is the responsibility of both the public and private sectors,” said Juan Acra, President of COMENER. Electricity challenges, he said, include unbalanced distribution and a generation gap of 57GW that must be covered in the next 15 years. “Even though solar and wind power are gaining ground, fossil fuels are expected to keep growing in importance, at least until 2050.” Specifically for oil and gas, Acra highlighted that production keeps plummeting, while most of the 77 storage terminals have a zero-days inventory.

David Enríquez, Senior Partner at Goodrich, Riquelme y Asociados and moderator of the panel, highlighted the importance of national content development strategies to face these issues, particularly as new exploratory efforts herald increased operations. According to Acra, there are five key elements that must be considered to strengthen national content strategies: establishing proper limits for national content requirements based on a delimited value chain that can offer the necessary quality, providing enough resources to the National Content Unit at the Ministry of Economy to develop SMEs, creating a National Supplier Registry, developing a road map that incentivizes the proper use of human and monetary resources and eliminating trade barriers that work against the federal government’s priorities.

Promoting synergies and economies of scale is also a good strategy to boost competitiveness, according to Enríquez, including the use of common infrastructure solutions for neighboring fields and projects. However, companies must be mindful of the state of the infrastructure, said Sergio Charles, Director of Strategic and Institutional Relations at Grupo Protexa. “Mexico is among the biggest owners of marine infrastructure, particularly for shallow-water operations, but companies must follow strict inspections to ensure the infrastructure is up to the necessary standards.”

Cesar Vera, Chief Commercial Officer of Naviera Integral, said companies have for a long time focused on competition but what is needed now is interaction to establish proper due-diligence and elevate operations to the proper standards. “Competition is fine, as long as it is based on added value and not on price,” he said.

Enríquez brought PEMEX into the discussion, as well, and posed the question of how service providers can help the NOC increase production while preserving field sustainability. Ocejo said Mexican shipping companies are ready to serve the needs of PEMEX and any other company but under the right tariffs. “Tariffs are too low and they cannot be maintained at that level. There will be no service providers that can work under those conditions, which will weaken maintenance and eventually put contracts at risk,” he said.

Charles, meanwhile, highlighted that what the industry needs now is to understand PEMEX’s needs and how it wants to do things. “PEMEX wants accelerated development and it will now receive public funds to do so. We need to know how those resources will be used and how we can best align our interests as service providers with the true goals of President López Obrador’s administration,” he said.

Onshore Potential Must Not Remain Untapped

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As offshore development continues to occupy more of the spotlight with Tuesday’s publication of PEMEX’s business plan that shows the NOC focused almost exclusively on shallow waters, it becomes increasingly necessary to highlight the successes and potential of Mexico’s onshore fields, particularly those developed though previous bidding rounds, as highlighted by panelists on Thursday in Mexico City during Day 2 of Mexico Oil & Gas Summit 2019.

Gaspar Franco, former CNH commissioner and current UNAM professor, moderated the panel Onshore E&P Developments. He began by asking about the general experience that operators have had developing onshore blocks awarded through the bidding rounds. All panelists agreed on the experimental and evolutive nature of their initial operations, but were also quick to highlight the admirably quick adaptation process that they witnessed from regulators and suppliers. 

Director of Tonalli Energía and President and CEO of International Frontier Resources Steve Hanson put this adaptation in concrete terms. “Lawyers and the government were learning with us; our first drilling permit took 16 months to get. The second one took under 90 days; now we are selling crude on a daily basis.” However, he did compare Mexico’s regulatory environment to Canada’s in order to identify areas of opportunity in the former. “In Canada, I get a simple, five-page document that explains regulatory requirements and expectations. But it is issued by a firm regulator that does not accept negotiations on these standards. Mexico needs that: a tougher but also much more streamlined regulator. That will help address the chief criticism from the current government of the private operator model, which is that is does not appear to be increasing production as much as promised.”

Vice President of the Board of Directors Administration at Jaguar E&P Ángel Casán underlined the degree to which Jaguar’s commitment and vision in Mexico was enough to pull it through its initial failures; as he put it, “Jaguar’s successes in Round 2 are usually highlighted, but the truth is we lost all 12 blocks that we bid on in Round 1, and we used what we learned to show up again for Round 2, because our belief in Mexico goes beyond any one bidding round.”

As Franco steered the discussion toward present and future challenges, the community engagement issues that can notoriously generate downtime at onshore oil and gas worksites did get mentioned, although all operators were quick to portray their relationships with local communities as positive and supportive. Chief Business Development Officer of Perseus Yann Kirsch characterized the Macuspana area where Perseus operates a number of its awarded blocks as “very demanding in terms of community engagement,” but he also made it clear that Perseus was committed to addressing any issue in this area promptly. Added Hanson: “We treat the local community as an important partner. We are proactive in social efforts and in involving the community and landowners. This has been very central to our success. We are here to be a good corporate citizen; we have created many jobs and we pay our royalties. We want to continue to grow and benefit Mexico and its people.”


Operators agreed that the more pressing issue for them was technological and infrastructural development. President for Mexico and Central America of Baker Hughes Robert Pérez listed the numerous infrastructural elements yet to be built as part of the development of Baker Hughes’ Soledad block, while also commending authorities for the ongoing finalization of infrastructural requirements. “PEMEX is more than technologically capable on delivering results, it simply suffers from internal issues regarding the delegation of authority and the alignment of goals and objectives,” he said. Kirsch doubled down on the structural issue at hand. “Leaving infrastructure in the hands of PEMEX was the Achilles’ heel of the Energy Reform,” he said. “PEMEX tends to see us as contractors, but we are their partners and they are our medium to commercialization. For example, right now we cannot move production out of one of our fields because a compression station remains to be built. This distribution of economic and logistics responsibilities must be addressed going forward.”

Clarity Needed to Boost National Content

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In 2013 and 2014, industry players were worried about how the Energy Reform would impact the national industry. Now, investor worries are focused on the new administration’s plans for the industry, the cancellation of rounds and farmouts and the impact all this will have on the supply chain, said Francisco Vargas, Finance and Legal Committees Adviser at AMEXHI and moderator of the Procurement Strategy and Supply Chain Interaction panel of Mexico Oil & Gas Summit 2019 at the Sheraton Maria Isabel hotel in Mexico City.

According to Marcos Ávalos, Head of the National Content and Productive Chain and Investment Promotion Unit in the Energy Sector at the Ministry of Economy, one of the biggest challenges in the determination of proper national content strategies is the lack of verifiable information available in the current national supplier registry. “Nothing is verified, which can lead to overestimations in certain supply areas,” he said. The ministry calculates that approximately 30 percent of the companies registered in its portal as oil and gas suppliers could be fake.

To tackle this issue, the Ministry of Economy is redesigning its national content policy and building a new registry to properly assess the country’s capabilities. “National content is crucial because of the cashflow and economic development it can generate in oil-intensive regions,” said Ávalos. The ministry is in the process of developing a technological platform that will allow not only registration of new suppliers, but also the verification of all companies’ capabilities to participate in the industry. “It will be the first platform of its kind in Latin America. It will be georeferenced and will foster interaction between SMEs and large national and international IOCs,” he said.

Methodologies and percentages in national content requirements will also be revised, according to Ávalos. Although contracts already established based on the original percentages will be respected, the ministry believes this update is necessary to truly consider the needs of the industry and better include factors such as technological transfer and training of human capital. Antonio Juárez, Director General of AMESPAC, said participation of the private sector in the definition of these new standards was key to ensure proper compliance. “Service providers can represent up to 50 percent of the expenditure in an E&P project, which makes these players key in the definition of industry policies.”

AMESPAC participated in the definition of the original percentages for national content and already has experience working with PEMEX, which will come in handy due to the new government’s strategy to make the NOC the leading force in Mexico’s oil and gas industrial growth. However, Juárez said private companies will also have a role to play in this new scheme. “These players will soon have a significant contribution to the national industry,” he said. The association is already capitalizing on its members’ experience in international best practices to help medium-sized players incorporate to the industry. At the moment, the focus is on exploration activities, said Juárez, but as operations evolve, drilling services, well determination and infrastructure development will gain importance.

As new companies start to participate in the industry, new opportunities will appear and Ávalos sees greener pastures in manufacturing activities. “The ministry is working on studies to understand the opportunities to locally manufacture components,” he said. However, Juárez warned players to keep a cool head when analyzing potential areas of development. “The market must develop enough for companies to delve into manufacturing,” he said.

Natural Gas Drives Down Energy Costs, Helps Environment: Panel

MOGS19_2dia_3panel

As energy prices rise and Mexico’s pollution problems worsen, natural gas offers the most affordable and realistic solution to cost and environmental concerns, according to the final panel at Mexico Oil & Gas Summit 2019 on Thursday in Mexico City, moderated by Ángel Sánchez, Business Director Performance Chemicals at BAS.  

David Madero, Director of Energy Solutions at Acclaim, began the proceedings by highlighting the growing demand for natural gas as an energy source in Mexican homes. Although current residential use is low, homeowners are making substantial savings by switching to natural gas, he said. “Savings of 40 and 50 percent are common,” said Madero.

Residential energy is not the only area in which natual gas presents savings for users. Luis Felipe Echavarría, Director General of natural gas station company Enco GNV, said that drivers can save 50 percent on every kilometer driven by switching to natural gas. However, he emphasized that the penetration of natural gas into the Mexican market is still very small, with only 38,000 of the 43.7 million vehicles on Mexico’s roads running on natural gas. Additionally, there are only 38 natural gas stations in the country. But, said Echavarría, the time for expanding natural gas use is now. “Natural gas use is growing across Latin America. Natural gas could foster the renovation of the national vehicle park and could reduce CO2 emissions from cars by 70 percent,” he said.

While critics of natural gas point to electric cars as a more environmentally-friendly alternative, the panel said that these vehicles are too expensive, and the infrastructure too poor, to be a pragmatic choice at present. Natural gas, via the national pipeline system, provides the best way to move cleaner fuels around the country, they said.

Vernon Murray, President Latin America of Emerson Automation Solutions, agreed. “Natural gas is today’s fuel to help us arrive to tomorrow,” he said. Murray underlined that the advances in technology in the last 20 years, including the arrival of ERP packages and wireless technology, have helped dramatically improve pipeline security and maintenance techniques. “Today these packets have the capabilities to manage most processes within a pipeline. Security has been dramatically improved and we can now visualize where leaks are occurring,” he said.

Jan Frowijn, Vice President USA, Mexico and Central America of ROSEN Group Mexico, added that safety was another positive factor. “Pipelines are the most practical way of transporting fuels over a long distance, and in general, an incredibly safe transport method,” he said. Frowijn also suggested that it is vital that Mexico makes use of its experienced workforce and those coming through the ranks, who bring technological expertise, like data analytics. While he agreed with Murray’s suggestion that preventative maintenance was critical for keeping Mexico’s legacy network functioning, he said that the application of technologies would provide the country with “predictive solutions” that would further drive maintenance costs down.

According to José García Sanleandro, Vice President of the Mexican Natural Gas Association, concerns that some natural gas critics have of the potential reliance on importing from the US were unfounded. Rather, the country’s proximity to its northern neighbor is beneficial. “Mexico must take advantage of the opportunity of being neighbor to the market with the cheapest natural gas in the world,” he said.

Private Operators Eager To Step In

Merlin Cochran, Director General of AMEXHI
Merlin Cochran

The new administration has made it clear that fulfilling ambitious production goals is its top priority, with PEMEX leading the charge. But production from private operators must play a decisive part in reaching these milestones as well, Director General of AMEXHI Merlin Cochran said Thursday at the Mexico Oil & Gas Summit 2019 in Mexico City.

As part of his presentation Priorities of Mexico’s Private Operators, Cochran began by narrating the origin of the association, now composed of 45 members that Cochran admitted was an “eclectic mix” of NOCs such as PEMEX and Petrobras, large recognizable entities such as Shell, Chevron and other flagship IOCs and also much more independent Mexican and American operators and investors, such as Talos and Jaguar, that have taken outsized advantage of the blocks awarded in the bidding rounds.

Founded in 2015, AMEXHI has always understood itself to be aligned with the interests and goals of the state. “Changes in administration do not change our status or the status of our members as partners of the state; we share their goals,” Cochran said. The integration of PEMEX into its ranks means that AMEXHI seeks to create a collaborative space with the state through which the entire industry can grow and develop according to the highest ethical standards at an international level.

After going over AMEXHI’s internal structure, Cochran shared its analysis of the EIA’s 2040 forecast for Mexican production, which predicts 3.4MMb/d through rising new fields offsetting declines from existing fields. In Cochran’s estimation, this is evidence that private operators have a strategic role to play in Mexico’s production future; “In this sense, EIA’s 2040 forecast really became AMEXHI’s 2040 agenda,” he said.

While Cochran did admit that AMEXHI has a vested interest in the bidding rounds being reinstated, he was clear that its plans went significantly beyond this one structure of industry stimulation. “What AMEXHI really has to offer and wants to help enact is a comprehensive development plan not only for the Mexican economy but of Mexico’s infrastructure, of which many elements benefit our members directly, such as the building of ports.”

Cochran concluded his presentation by presenting AMEXHI’s “Five-Year Plan,” which through ambitious investment targets has the explicit goal of reaching 280Mb/d by 2024 so as to reach AMEXHI’s current calculation of 500Mb/d of potential national production coming from private operators.  

PEMEX Need Not Be Alone

Sergio Pimentel, Commissioner at CNH
Sergio Pimentel

It has been six years since the implementation of the Energy Reform and for Sergio Pimentel, Commissioner at CNH, it is time to stop talking about it. “A reform implies something new, which is not the case for this legal framework anymore,” he said during the closing speech of Mexico Oil & Gas Summit 2019 at the Sheraton Maria Isabel hotel in Mexico City on Thursday.

The Energy Reform granted CNH, CRE and ASEA the same level of authority as any other ministry in the country, which avoided having a single dependency that centralized enough power to be influenced by corruption and have a negative impact on the national industry. According to Pimentel, this was decided to ensure that the hydrocarbons under the Earth remained the property of the nation, but would also serve the purpose stated in the Constitution of ensuring Mexico’s long-term development through effective exploration and extraction activities. This was also the reason why commissioners for CNH and CRE were no longer designated by the president but by at least two-thirds of Congress.

However, Pimentel highlighted a contradiction in CNH’s calling and the country’s reality. “Governments have a short-term vision. Campaigns are built on a social and economic plan that seeks to keep people in the government, but exploration and extraction activities require long-term planning,” he said.

Pimentel also referred to CNH’s responsibilities, which he narrowed to five: develop information and knowledge regarding the Mexican subsoil, regulate and supervise exploratory activities, tender and grant contracts, manage those contracts and all of PEMEX’s assignations and be SENER’s technical adviser. Based on these, it is incorrect to assume that CNH’s obligations stopped just because the bidding rounds were canceled and it is because of this that CNH is in the best position to share the results brought by the contracts and assignations following the Energy Reform.

According to Pimentel, all these schemes have translated to production of 73.7Mb/d as of May 2019 between private companies and PEMEX as a contractor. “This is 4 percent of the national production and represents US$3.4 billion in revenue for the state,” he said. It should be considered, Pimentel warned, that these results have been obtained while most of the 111 awarded contracts have been in exploratory and evaluation phases. As projects advance, estimations show the country could receive US$12.1 billion between 2019 and 2024. “Because of bidding round cancellations, though, the country has stopped generating more of these resources that cost nothing for the government or PEMEX,” he said.

Based on the approved exploration, evaluation, provisional and development plans and the reactivation of bidding rounds starting in June 2020, CNH has already made two estimates of how the national industry could develop by the end of President López Obrador’s term. The first considers no budgetary restrictions for PEMEX, which could result in 2.3MMb/d of production by 2024 and an average annual investment in PEMEX of US$25.7 million. “However, considering this year’s budget of US$13.5 billion, this seems a bit unrealistic,” said Pimentel. As an alternative, the commission built another scenario with a budget constraint for PEMEX, which resulted in production of 2.08MMb/d by the end of 2024 with an average investment in PEMEX of US$18.3 billion.

Pimentel does see an opportunity to reach President López Obrador’s goal of 2.6MMb/d but only by 2028. Furthermore, the only way for this to happen is to reactivate the bidding rounds and sharing the risk of exploration activities with private third parties, he said. “Asking PEMEX to do everything and to do it alone is a mistake. The legal framework allows PEMEX to ally with third parties, participate in tenders and use tools that were not accessible to the company five years ago. There is no longer a political cost for the reform. Talking about it right now is no longer of use; it is already the legal reality in the country. Why not use it?”

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