Mexico draws huge interestJuly 31, 2017
Alberto Galvis, CEO of Citla Energy, talks to TOGY about interactive consultation in the energy reform and the state of safety and environmental regulation. Founded in 2015, Citla Energy is an independent Mexican E&P company with offices in Houston and Mexico City. The company was awarded three shallow-water licences in Round 2.1 with partners Eni and Cairn Energy.
On the reform process: “This interactive process has been successful. It is much more participative than any other process I’ve seen, and I’ve participated in several throughout the world. Sometimes governments will not listen, but in Mexico they do, which I think is a guarantee that the process will be successful. Still, one can’t expect that they’ll be 100% successful on the first go, because it is a learning and continuous improvement experience.”
On implementing standards: “There needs to be a transition process for existing operations that were developed under a different regulatory environment. ASEA is regulating for everybody, including Pemex, and they have to take into account that for some existing operations, it will take time to get to a certain standard.”
Galvis also discussed the the reasons why Mexico is drawing rare levels of international interest and what the company seeks in a partner. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find the full interview with Alberto Galvis below.
What are some of the defining characteristics of the blocks that Citla was awarded in Round 2.1?
All of them were labelled shallow-water blocks and are between 150 and 500 metres deep, extending up to the limit between shallow and deep water. After 150 metres, you will have to use semi-submersible rigs to drill.
These are prospective areas that have been underexplored. In the past, Pemex focused on other areas. They make up part of a proven basin in the southeast of Mexico.
Based on the 3D seismic that is now available, we believe these are very viable blocks. Fortunately, those bids turned out as planned and we were able to secure those blocks.
What types of associations does Citla seek to gain more technical knowledge?
We are looking for the best operators in the particular area in which we’re going to participate. One of our interests is shallow water. We have joined first-class, world-class companies that have a proven track record in shallow-water exploration and production.
The same goes for onshore: We have partnered with operators that have proven track records operating in this kind of environment and who can offer the best likelihood of success in such rounds. If everything goes right, we expect to develop operating capability in the medium term.
The key is to partner with a world-class operator that knows how to explore and produce oil, and combine it with a company with very robust financial backing that has extensive knowledge about doing business and operating in Mexico, and a deep understanding of the Mexican geology and the Mexican experience. The combination of money, knowledge and experience, with a company that has done this elsewhere very efficiently, is strong. This partnership therefore has a very good chance of success.
What capabilities does Citla and its new partners Eni and Cairn Energy bring to the table?
As mentioned before, our objective is to partner with experienced and able operators. That is our way of ensuring success in our ventures.
Both Eni and Cairn are public companies, so their performance and track record is publicly known. Both companies have been successful worldwide. According Wood Mackenzie, Eni is the most successful exploration oil major in the past 10 years. Cairn has been very successful too in its ventures in Africa and other places in the world.
What Citla brings to the table is that it is fundamentally a Mexican company. It is not only incorporated in Mexico, but its primary shareholders are Mexican. Our investors come from a private equity firm called Acon Investments, which manages a number of international and national funds, the majority of which are Mexican pension funds. With the majority of Citla’s capital coming from Mexican workers, there is a strong link with Mexico.
We have other first-class investors such as the IFC [International Finance Corporation], which is the World Bank’s arm for investing in private companies. The IFC also administers a fund which is one of the main investors in Citla, the China-Mexico Fund. The China-Mexico Fund is incorporated by both governments to promote and develop activities that are associated with reforms happening right now in Mexico.
We have a Mexican identity that comes along with a deep knowledge about doing business in Mexico, Mexican geology, Mexican basins and operating in Mexico. We have a team of very experienced professionals in petrotechnical disciplines, projects and drilling, all in Mexico. Therefore, we can provide that perspective, which is so important for investing in a country. We believe that is valuable for somebody arriving to invest in Mexico.
Were the Secretariat of Energy and National Hydrocarbons Commission successful in streamlining bidding qualification and increasing participation in Round 2?
The Mexican government has done a fantastic job with this. They have taken a serious, professional approach to designing and implementing the reform. From day one, I think the government has looked at examples throughout the world and assessed what has worked and what hasn’t. They have taken their time in designing and implementing the reform.
The reform is huge and very ambitious. It’s the first time the country has done something like this in 78 years, and it is being implemented very professionally through institutions staffed with experienced professionals. You don’t see politics in the way these new institutions have been staffed. The National Hydrocarbons Commission, Secretariat of Energy, ASEA [National Agency for Safety, Energy and Environment] and the entire institutional framework is being managed by true professionals who have tried to succeed in achieving an interactive process of consultation.
They obviously have to make decisions, but they then go back to the industry for feedback on what worked and what didn’t. They don’t necessarily have to take the industry’s advice, but they listen and make adjustments as they see fit.
This interactive process has been successful. It is much more participative than any other process I’ve seen, and I’ve participated in several throughout the world. Sometimes governments will not listen, but in Mexico they do, which I think is a guarantee that the process will be successful. Still, one can’t expect that they’ll be 100% successful on the first go, because it is a learning and continuous improvement experience.
What factors determine how competitive Mexico’s E&P sector is?
The competitive environment has two aspects. One aspect involves what’s happening across the world, but another involves what’s happening here. Very few opportunities around the world attract the entire industry.
First, 2016 was horrible for the oil and gas industry – that’s no secret to anyone. Companies have been in financial trouble, they’ve had to face huge challenges with the drop of oil prices. That affected the energy reform, but it’s not Mexico’s fault. It’s simply that the reforms were passed at a time when very few people could predict what would happen with oil prices.
Initially, there was very low participation in the first E&P tenders, but that was a function of the global environment. However, as the situation stabilises, you see companies refocusing and going back to business as usual. Although things are not normal yet, companies are going back to their original strategies in terms of access.
You can see a different environment in Mexico. There is a lot of participation in the prequalification process, particularly offshore. Participation in the deepwater and shallow-water rounds was fantastic.
The second thing is the type of companies you’ll see coming in once this environment is more stabilised. Mexico has basically attracted all of the oil majors, plus an important number of the serious, big companies in shallow water, and you can start seeing evidence of this in onshore fields as well.
This means that these companies have analysed the prospectivity in Mexico and see commercial opportunity, contracts and the legal standing of the reform. They have come to Mexico and are making big bets. That’s very reassuring. The big boys are looking at the opportunities here and putting their money at risk. They have done their homework and are convinced that this is a place of strategic and commercial interest.
Are the Gulf of Mexico’s existing logistics networks and infrastructure suitable for long-term offshore development?
It depends on the area. In the Perdido Fold Belt, there isn’t any infrastructure at all – most will have to be developed. In the south, there’s a lot of infrastructure, but we’ll have to determine its current state. I don’t know what is in good shape and what isn’t. If new developments happen in the south, people will have to decide what to use and where to build new pipes and facilities, but they definitely won’t be starting from zero.
Also, with the availability of contracts and professionals in the oil and gas industry, it’s not like you’re starting from scratch. There’s a lot already there.
What is the status of industrial safety and environmental policies being set by ASEA?
The regulations that have already been issued are adequate. Again, there is a learning curve concerning where to set the bar. In some cases it’s too high and in some cases it’s too low.
Having said that, the players coming to Mexico are all world-class and have very high standards. They operate in other places in the world where standards are also high. They’d be maintaining these very high standards regardless of the regulations. They self-regulate and make sure that their standards are world-class.
The authorities have set the bar high for prequalification, in terms of operator experience and having the safety management systems in place. The way in which they’ve done so ensures that they’re bringing in the right type of companies.
Local regulations will then have to develop through that interactive process of setting the bar at the right place. I do not believe that you can get there on the first day. There needs to be a transition process for existing operations that were developed under a different regulatory environment. ASEA is regulating for everybody, including Pemex, and they have to take into account that for some existing operations, it will take time to get to a certain standard.
What is the growth potential of Mexico’s oil and gas industry?
It has huge potential. The oil reserves numbers are widely known. Historically, Mexico has appeared as one of the main oil producers in the world. In development, an inflection point will occur with many players arriving, new technology, new sources of funding and a competitive environment that will create a virtuous cycle that will bring growth to the industry.
What is going on here is very promising. The reform does not only touch E&P, it also involves transport, refining, retail and even electricity generation. It covers the whole value chain, down to commercialisation, which means you will see investment coming throughout the value chain and creating a healthy and virtuous cycle.
How will the country’s offshore E&P sector develop, given the results of the past bid rounds and expectations for upcoming ones?
The prospectivity offshore is one-of-a-kind. It is very rare in this industry that a whole basin of such quality becomes available to the market. It may be something that happens every 20-25 years. When you compare the amount of wells and activity to those in the US, for example, the US is orders of magnitude larger, which speaks to the size of the remaining opportunity in Mexico.
These areas in Mexico are underexplored and underdeveloped. I imagine that this will become a huge activity and profit centre for companies that come and invest here, and that there’s going to be a significant flow of funds into this area in the future.
Where do you see Citla situated in the offshore sector in two years?
Citla’s strategy is to build a diversified portfolio, primarily in Mexico. Acquiring these three exploration blocks is a solid and robust first step on that journey. We would like to secure more assets. That is one of our areas of focus.
There are several bid rounds coming up in the next few months and years. We are also going to continue onshore, not only in exploration, but also in producing and developing fields in different parts of their lifecycles, to build a diversified portfolio.
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