Mexico’s rigs need modern financingMay 11, 2015
Mexican rig operating company Oro Negro CEO Gonzalo Gil White describes how modern financing structure is needed to replace Mexico’s ageing rig fleet. The global offshore sector is facing an influx of low cost jack-up rigs constructed on a speculative basis with limited oversight. Mexican rig operating company Oro Negro is obtaining higher cost assets with higher reliability.
Aside from the many changes ahead owed to the Round One tender, Mexico is facing an impending upgrade of its fleet of jack-up rigs. 48 out of the existing 2015 fleet of 53 rigs are getting to be very old – 21 rigs are over 29 years of age. These ageing rigs represent significant risks from both an environmental and occupational standpoint.
Efficient operating companies typically choose to evaluate the cost of equipment based on the comprehensive cost of potential lost opportunities due to underperformance. These lost opportunities are generally attributed to maintenance issues and equipment malfunction.
This is in direct contrast to traditional methods of assessment that typically evaluated business costs based on the marginal expenses associated with the service provided.
COST ASSESSMENT: This new method of assessing costs highlights the importance of directing investment towards the highest quality rigs available, in order to foster growth in Mexico’s energy industry.
Premium rigs built by leading Singaporean shipyards such as PPL or Keppel Fels are more predictable in terms of their performance in the field. This is a critical issue for companies that are focused on value.
The quality of a rig is the primary factor determining its productivity. A number of rigs in the market are manufactured by production yards that have no previous track record.
Given the highly specialised nature of these assets, operators should thoroughly research which production yards to employ and closely monitor manufacturing and production activities. Immense quantities of long-term capital gains rely heavily on a rig’s continued operation.
The increasing numbers of lower-cost jack-ups entering the market are typically attributed to China, as the Chinese state is funding the development of these shipyards. Because these rigs are being built on a speculative basis, there is very little construction oversight.
No project management teams monitor the quality of the construction, the rigs’ commissioning or testing.
FUTURE EXPANSION: Pemex plans to expand its fleet, sourcing the new rigs from reputable production yards. Mexico has a lot of demand for additional rigs, due in large part to the goals set by Pemex and President Peña Nieto’s August 2014 Energy Reform. The national oil company plans to reach a production target of 3 million barrels per day by 2018 and 3.5 million by 2025.
These production targets are very aggressive. In order to achieve these targets, Pemex will need to acquire a significant number of drilling assets. According to the company’s estimates and other independent analysts, 90 rigs must be operational in the market by 2020.
The domestic industry must secure high-quality rigs with a proven history of minimal downtime as a result of maintenance or malfunction issues. With 53 rigs in operation in 2015, that means an additional 37 rigs will need to be added to the company’s fleet.
Taking into account the roughly 25 rigs that will need to be replaced in the coming two years, Pemex will need to acquire a further 63 rigs. These numbers don’t take into account the needs of operators entering the market as a result of the Round One tender and the subsequent bidding rounds for shallow-water fields.
PRODUCTION TARGETS: Despite this upcoming increased demand for shallow water rigs, low oil prices will pressure rig contractors to lower day rates. This could influence asset-financing strategies in the country.
Unfortunately the domestic banking market cannot meet the financing needs of our industry. There is some discrepancy between the lifecycle of an asset and the tender of the contracts.
Banks tend to place rigid amortisation profiles on the contract holders, making it challenging to reach advantageous financial conditions. Contract holders have had to seek financing on the international market, where investors tend to have more understanding of the offshore industry.
The capital markets in Mexico are still not sufficiently knowledgeable to support the upcoming oil and gas market expansion. The banking sector must develop greater expertise about the offshore industry.
The hydrocarbons industry must have access to teams with the correct expertise. Such teams should efficiently manage financial strategies that are tailored to the needs of individual industry participants. This will happen in time, but there is still a lot of ground to be covered.