Will Mexico be Competitive? Part 1: Resource Potential

Will Mexico be Competitive? Part 1: Resource Potential

14th August 2014

Mexico’s ambitious program to attract foreign investment into the oil and gas sector took important steps forward this week with the enactment of secondary petroleum sector legislation and the announcement of the areas to be awarded to Pemex in Round Zero.  GCA provides an overview of the resource potential in Mexico, and how that potential compares to some of Mexico’s regional competitors for upstream investment.  

Key Facts

  • A December 2013 Constitutional Reform ended Pemex’s 75-year monopoly on Mexico’s oil and gas sector.
  • Secondary legislation passed in August 2014 outlines tax structures for license concessions, profit sharing agreements and production sharing agreements.
  • Round Zero awards to Pemex announced August 13, 2014.
  • Round 0.5 competitive process to establish initial Pemex Joint Ventures begins, August, 2014. 
  • 2015 Round One will include deep water, unconventional and conventional opportunities, utilizing an array of contractual forms.

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The legislation includes details regarding the fiscal and regulatory regimes that will be used to implement the reform program.

The Round Zero announcement indicates what areas Pemex will be allowed to retain[1] and identifies the initial areas where Pemex will seek joint venture (JV) partners.  According to Chief Executive Officer, Emilio Lozoya, Pemex will seek JV partners for operations in the deepwater Perdido and Lakach field areas and in heavy oil and mature fields.  The National Hydrocarbon Commission (CNH) will now conduct a competitive bid round (Round 0.5) to select companies proposing to form JVs with Pemex in these areas.   

With these developments, the foundation is in place for expanding investment in the Mexican petroleum sector.  But achieving Mexico’s petroleum reform objectives will require more than a few early high profile deals.  It will require a substantial level of foreign investment that can be sustained over decades. 

Will Mexico be competitive in attracting the long-term levels of investment needed?  Gaffney Cline & Associates (GCA) believes the answer to that question will depend on how companies assess conditions in Mexico in three areas:

  • Resource Potential

  • Fiscal Balance and Stability

  • Ancillary Factors

This week GCA provides an overview of the resource potential in Mexico, and how that potential compares to some of Mexico’s regional competitors for upstream investment.

There are a variety of sources and methods available for ranking resource potential.  One example of such an assessment, based on a probabilistic assessment of expected ultimate recoverable resources, is provided in figure 1.

Figure 1

Figure 1Yet-to-find potential of resources.  Source: The Boston Consulting Group September 2012 “Benchmarking Report”.

This ranking shows that Mexico, with an estimated 88 billion boe undiscovered resource potential, ranks among the top five in a comparison with regional competitors and number 11 globally.  Pemex’s self-assessment of Mexico’s resource potential is somewhat higher, with Pemex estimating that 112.8 billion boe remains to be discovered: 60.2 billion boe in unconventional resource areas, 27.8 billion boe in deepwater areas and 24.8 billion boe in shallow water and onshore areas, as shown in figure 2.

Figure 2

Figure 2.  Pemex's self-assessment of Mexico's resource potential.  Note: The information on the 2P and 3P reserves as of January 1st, 2014 is preliminary and it is subject to external certification, this information has not been formally delivered to the National Hydrocarbons Commission for its technical opinion, so it could suffer modifications according to the revision process that is still being undertaken by Pemex Exploration and Production.  Source: www.pemex.comwww.sener.gob.mx

Attracting investment into the exploration and development of the deepwater prospect potential has been identified as an early priority of the reform agenda.  The opportunity to acquire interests in the lightly explored deepwater area will likely be a strong drawing card for companies with deepwater experience; strong enough to overcome the Mexican disadvantage of limited existing offshore infrastructure.  Pemex will retain only a small portion of the deepwater areas, in and around the light oil play in northern Perdido and the Lakach gas field.  Pemex will seek JV partners for operations in these areas through the Round 0.5 competitive bid process in late 2014.

Mexico’s unconventional resource potential is expected to be the focus of a 2015 offering. 

The U.S. Energy Information Administration estimates Mexico’s technically recoverable shale gas resources to be 681 Tcf, ranking Mexico slightly behind regional competitors USA (862 Tcf) and Argentina (774 Tcf), but well ahead of Canada and other South American countries.    

Approximately two thirds of Mexico’s shale gas potential, including an extension of the U.S. Eagle Ford play, is thought to be present in the Burgos Basin (figure 3).  Once again, access to large areas of unexplored territory will be the primary competitive advantage Mexico will be able to offer to offset competitive disadvantages associated with a lack of infrastructure, limited water access, unsettled land rights and security issues. 

Figure 3

Figure 3.  Onshore shale gas basins of Eastern Mexico.  Source: World Shale Gas and Shale Oil Resource Assessment, US Energy Information Administration

A 2012 USGS ranking of conventional resource potential also placed Mexico high in comparison to its regional competition, trailing only the USA, Brazil and Canada.  However, over 70% of the prospective Mexican resources are thought to be in place within the Cuencas del Sureste Basin, where Pemex is expected to retain large areas through Round Zero awards, as shown in figures 4 and 5

Figure 4

Figure 4. Areas granted to Pemex in the Cuencas del Sureste Basin. Source: www.energia.gob.mx

Figure 5

Figure 5. Mexican reserves and prospective resources (billions of barrels oil equivalent) Source: www.sener.gob.mx

The reform legislation has left open the opportunity for investors to acquire interests in non-productive formations lying within Pemex operating areas, but operational and liability complexities are likely to add to the challenges of investors who might be interested in such opportunities.  Service companies and/or independent companies willing to consider service contract awards may be the primary beneficiaries of higher levels of Pemex activities in their undeveloped and producing areas, if the five-year use it or lose it provision of the legislation spurs an increase in Pemex investments.

For more information on the nature of Mexico’s petroleum potential, contact Alan Cunningham or Scott Monette.  Download an invitation to the September 3, 2014 GCA-Squire Patton Boggs luncheon seminar, “The Mexican Energy Reform: Interested in Doing Business Under the New Rules?”.  

Check the GCA website next week for an overview of the fiscal regime issues that will also impact Mexico’s competitive position.


References:

[1] Secretería de Energía 

Authors

Will Mexico be Competitive? Part 1: Resource Potential

Alan Cunningham

Technical Director: Commercial - alan.cunningham@gaffney-cline.com

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