Tenders for treasure

Mexico

Juan Carlos Zepeda, president commissioner of Mexico’s National Hydrocarbons Commission (CNH), talks to TOGY about Round 1.4, the agency’s response to industry feedback, the potential for farm-outs and developments across the value chain in the country. In August 2017, the CNH laid out a tentative plan for Round 3.1. The commission is considering offering 35 … <a href="https://theenergyyear.com/articles/tenders-for-treasure/" class="more-link">Continue reading <span class="screen-reader-text">Tenders for treasure</span> <span class="meta-nav">→</span></a>

Juan Carlos Zepeda, president commissioner of Mexico’s National Hydrocarbons Commission (CNH), talks to TOGY about Round 1.4, the agency’s response to industry feedback, the potential for farm-outs and developments across the value chain in the country.
In August 2017, the CNH laid out a tentative plan for Round 3.1. The commission is considering offering 35 shallow-water blocks: 14 in the Burgos Basin, 13 in the Tampico-Misantla-Veracruz Basin and eight in the southeastern basins. The contract model has yet to be determined and these areas can be changed by the Secretariat of Energy.
The CNH announced in July 2017 that Round 2.4 would offer 30 deepwater blocks in January 2018. Together, the blocks span 70,866 square kilometres and are estimated to contain around 4.23 billion boe. The blocks are located in the Perdido Fold Belt, Salina Basin, Cordilleras Mexicanas Basin and Yucatán platform.

• On the success of Round 1.4: “In the last auction for deepwater blocks, the SHCP adjusted the formula in the correct way. It gave more weight to work commitments and reduced the weight of royalties. That produced much better results. This was a very important success factor.”
• On industry feedback: “After we finished Round 1, we reviewed how we could improve and began receiving feedback from the industry. One of the most common and important comments that we received from the industry is that we could speed up the process and scale up the amount of investment in Mexico.”
• On farm-outs: “For Pemex to develop those reserves and explore those prospective resources, it has to go through farm-outs. The energy reform provides Pemex the opportunity to partner with international companies. Pemex has the exploration capabilities, but not the production capabilities, especially in deepwater, so the company needs to partner.”
• On shifts throughout the value chain: “As we are awarding contracts in the upstream, we are also looking at companies moving in the midstream and downstream. Recently, many major companies announced that they would develop petrol stations in Mexico. Major oil companies are moving all along the value chain in the whole industry.”

TOGY went in depth with Zepeda about the policy changes that have occurred throughout the Round 1 tenders, what E&P companies can expect from future auctions and how Pemex can move forward under the energy reform. Most TOGY interviews are published exclusively on our business intelligence platform TOGYiN, but you can find an abridged version of the interview with Mauricio Bejarano below.

How has the energy reform changed the way that block data is shared and used?
In the most recent tenders, companies had access to data packages that were very good. That was very important because the CNH offered the data for the whole seismic block and basin. The data packages were better, but something that was also very important and instrumental for the success of Round 2.1 was the development of what I call the information industry.
The constitutional reform not only opened the industry for oil companies, but also for geophysical and information companies. Before the constitutional reform, the only company allowed to shoot seismic was Pemex. Pemex could hire a services company, but the only company that was really sponsored and hired for projects was Pemex.
With the reform, any geophysical company can come to Mexico and develop a survey and shoot seismic. Those companies come to the CNH and ask for a permit. We grant a permit that provides exclusive market rights for 12 years for their information, because the information belongs to Mexico. After that period, the CNH will be able to open that information in its data rooms.

How did the CNH gather and respond to industry feedback following Round 1?
After we finished Round 1, we reviewed how we could improve and began receiving feedback from the industry. One of the most common and important comments that we received from the industry is that we could speed up the process and scale up the amount of investment in Mexico.
After receiving those comments, we’ve reviewed international experience and our numbers. There are two important statistics in support of this argument. The first is linked to the four tenders of Round 1: The acreage that we opened for bidding was 30,000 square kilometres. Brazil offered more than four times that amount in its last bid round. Colombia offered almost six times what Mexico offered, however, with a smaller E&P prospective. In the case of the USA, the two 2016 sales in the GoM [Gulf of Mexico] covered an acreage of 275,000 square kilometres, which is more than nine times what Mexico offered.

How can Mexico further expand the development of its oil and gas resources?
As a part of Round 0, we awarded Pemex most of Mexico’s proven reserves, but a small fraction of prospective resources. The state held onto 78% of the prospective resources. These areas are the oil and gas of the future of Mexico. There are still discoveries to be made.
We offered and awarded only 5% the state’s remaining prospective resources in Round 1. We can definitely scale up and speed up. We have to move from innovation to standardisation. We want to broaden the scale of resources that we can open for bidding. We want to make the process more efficient. According to the law, the government has a five-year plan that the CNH technically proposes and to which SENER [Secretariat of Energy] makes adjustments. The secretariat publishes the latest version of the plan.
We want to have more projects and more contract areas in the bid rounds. We’re asking the industry to nominate blocks and we are providing all the technical information to do that correctly. You can think of this as a huge crowdsourcing process. We are bringing in the whole international industry to tell us where the best opportunities are.

What are regulators doing to standardise Mexico’s bidding process?
As regulators, to make investment efficient, we have to be predictable and reliable. The CNH, along with SENER, is standardising the bidding process. From now on, before the release of any bidding guidelines, we’re going to allow for a three-month nomination process.
The nomination period for the second deepwater and unconventional auction ended in June. Now we will allow a six-month period for companies to analyse all the technical information and documents for the bidding to happen in December.
This is how we are going to run the bid rounds every year from now on. In the first semester, we will always have shallow-water and onshore tenders. In the second semester, we will have deepwater and unconventionals tenders.

How stringent is Mexico’s pre-qualification process?
We check and qualify for financial strengths, which are companies’ balance sheets. We check for technical experience. We ask companies to provide previous oil and gas contracts in other countries to show that they have experience. We review their manuals for safety and health procedures. We also check for lawful origin of resources.
This process is run within the CNH, but we get external support from ASEA [National Agency for Safety, Energy and Environment] as well. ASEA reviews the information that relates to the companies’ manuals and risk management processes. To check for the lawful origin of resources, we send information to the SHCP.
We run a very thorough pre-qualification process and we are proud of that. We recognise and have been told by the industry that it is very stressful to go through the process for every auction. We always listen and take recommendations from the industry very seriously. Part of the responsibility of the CNH is to listen carefully and pay attention to the industry. We are reacting to the industry.

What are the details of the shale fields that will be on offer for the first time ever in Mexico?
The most important area is the Tampico-Misantla Basin. It starts in the south and goes through a big part of Veracruz in the north. The importance of Tampico-Misantla is that it mostly contains shale oil. More than 80% of those prospective resources are oil.
We will also offer areas in the northern Burgos Basin, which is also part of the unconventionals of the Eagle Ford in Mexico. The blocks put up for tender will depend on the nominations received by SENER.

What is the importance of farm-outs to the future of Pemex?
That’s the future for Pemex. For Pemex to develop those reserves and explore those prospective resources, it has to go through farm-outs. The energy reform provides Pemex the opportunity to partner with international companies. Pemex has the exploration capabilities, but not the production capabilities, especially in deepwater, so the company needs to partner.
It is very common for companies to partner in deepwater, because they need to diversify not only the geological risks, but also the financial risks. The real opportunity for Pemex under the reform is to partner and bring in financial, technical and execution capabilities.

What kinds of companies are expected to participate in future rounds?
In terms of deepwater, we will see something similar to what we already saw: companies from Europe, North America, Asia and, of course, Pemex. In that sense, the first deepwater tender gave us a very good picture of the type of companies that will be bidding in Mexico.
In terms of unconventionals, we are expecting companies with experience in unconventionals mainly in the US. That’s the only country that has really developed the unconventionals sector. Canada also has some development, but nothing like the US.

Is the state of infrastructure in other areas of Mexico’s oil and gas industry adequate to support the expected upstream development?
We need to increase investment in storage and pipelines, but I think it’s moving forward. We have had successful tenders by midstream regulators, such as the CRE [Energy Regulatory Commission] and Cenagas [National Centre for Natural Gas Control] in terms of gas transportation capacity. Major oil companies are bidding not only in the upstream, but also for capacity to import and transport natural gas and petrol.
As we are awarding contracts in the upstream, we are also looking at companies moving in the midstream and downstream. Recently, many major companies announced that they would develop petrol stations in Mexico. Major oil companies are moving all along the value chain in the whole industry.

For more information on upcoming bid rounds in Mexico, see our business intelligence platform, TOGYiN.
TOGYiN features profiles on companies and institutions active in the global oil and gas industry, and provides access to all our coverage and content, including our interviews with key players and industry leaders.
TOGY’s teams enjoy unparalleled boardroom access in 35 markets worldwide. TOGYiN members benefit from full access to that network, where they can directly connect with thousands of their peers.
Business intelligence and networking for executives: TOGYiN

Read our latest insights on:

• Brazil
• Colombia
• Eagle Ford
• Mexico