Sergio Pimental Vargas, commissioner of the National Hydrocarbons Commission

It is fundamental for this country that the tenders that will assign the contractual areas for exploration and production are conducted in a transparent way.

Sergio PIMENTAL VARGAS Commissioner National Hydrocarbons Commission

in figures

Number of areas awarded in phases one through three:30

Number of areas to be offered for farm-outs:10

Measure of success

July 28, 2016

Sergio Pimentel Vargas, commissioner of the National Hydrocarbons Commission (CNH), talks to TOGY about the developments in Mexico’s historic Round One bidding process, from phases one through three, as well as the direction that the tenders will go in the future. He says that transparency is absolutely key to the success of these tenders. The CNH is responsible for implementing the bidding process and managing exploration and production contracts signed with the state.

In 2015, the CNH granted two blocks out of 14 offered in Round One phase one, three out of five in phase two and 100% of the 25 blocks offered in phase three. Can you assess the progress made in the past year?
It’s very important to keep in mind that in the implementation of the energy reform, the job for the CNH in the final stage is to execute the tendering process. For the national and international press, there was a need to see the success of the rounds according to the number of blocks assigned. It’s hard to steer away from that perspective. I think they were successful beyond the fact that in the third round, 25 were assigned, a 100% success rate.
The design of the reform has come after many years of waiting for the right political conditions in the country, when the president launched the initiative and Congress passed it, and so did the state legislatures, which is not easy. To have the design in which the weights and counterweights were presented, many entities took part: the Secretariat of Energy [SENER], the Secretariat of Finance and Public Credit [SHCP], Secretariat of Environment and Natural Resources, Secretariat of Economy, the National Agency for Safety, Energy and Environment, the Mexican Petroleum Fund and the CNH.
It would seem that the CNH is responsible for carrying out the processes of tendering, and we are, but we are related to so much more. We are technical advisers of SENER. The contractual areas are a proposition of this commission, as was the five-year plan. There’s a relationship and permanent co-ordination between SENER, SHCP, the Secretariat of the Environment and us.

How successful has Round One been, and does the issue of transparency play a role in this?
In the field of tenders, we have to conduct those processes and we did this under a rule we consider indispensable, which is transparency. It is fundamental for this country that the tenders that will assign the contractual areas for exploration and production are conducted in a transparent way. This has been the number-one condition and the most important element in our minds, and I believe that in that aspect, with no false modesty, the three first rounds have been successful.
I think it was successful on an international level. The companies realise that the rules were clear and the base was balanced. The objective of SENER, SHCP and the commission was to push the creation of a new national oil industry with Mexican oil engineers who have worked in Pemex and who knew the fields, as well as valuable people who didn’t have experience in medium-sized and big companies in exploration and extraction in water, but did have enough to form a new Mexican exploration and production company.
So, I say Round One has been successful because of the transparency, and because those three tenders had specific objectives that were ultimately met. Beyond the number of contracts awarded, it was successful because there was a great appetite from outside to join an industry that was closed for many years, and from Mexican people who had experience in onshore, mature fields, saw an opportunity, put together the required capital and are about to go into the field.

With regards to Round One phase three, what adjustments were made to the conditions, particularly to the minimum working interest?
Clearly, the conditions were different because they were addressed to different types of companies. The social capital required for Round One phase three was USD 5 million versus USD 1 billion required for shallow-water areas. The experience demanded was two years or two projects in shallow waters. Here, in Round 1.3, we thought more about the people than about the companies. Confirm that there is experience in the resumes of the people who will operate the fields, and the commission will prequalify you favourably.
Those were very important changes that resulted in great interest, as more than 60 companies prequalified, and in the end, 25 contracts were assigned to a majority of national companies, even small companies, as this industry has great variety. It’s not the same to extract from a mature field onshore as it is in shallow waters, or in deep waters, or from unconventional fields. Clearly, there are different sets of classifications under a broad umbrella on the matter of hydrocarbons.

What is the main objective of the Round One phase four tender, the results of which are expected to be announced in December 2016?
We won’t have a barrel from those areas for 10 years, so the price we see today in crude is not a reference for the tender. What are we looking for? The Gulf of Mexico is a very unexplored basin on the Mexican side. Pemex has some exploratory projects on our side, but if you see the US side of the basin, you’ll see very important projects already extracting. It’s an area with good prospectivity and that has undoubtedly created great interest.
We now have 22 companies that are about to get their documents for prequalification, and they are all major companies. We still have time because we received the documents on June 14, and now they’re in the stage of prioritising information regarding data, doing their analyses and studies, and if they’re interested, paying the registration fee.
Pemex is there, and we want the companies to do more than what Pemex did when the market was closed and explore this new basin, which we believe is one of the most important in the world. If you look at the US side, the borders are obviously nonexistent. There’s good reason to believe that the structure that’s being exploited there can continue on in the Mexican side and there can be new areas of interest.
The commission’s goal is to set contractual areas that are attractive to major companies. Eventually, we can have important developments in the production of crude.  

What kind of areas are being tendered in Round One phase four?
There are four contractual areas in the Perdido Ford Belt, which is off the coast of Tamaulipas and south of the border with the USA. Looking at the Gulf of Mexico, they are practically next to the border. That’s why we think that the geological structure continues, and if they are exploiting there, we could do so here. Those areas span 2,000 or 2,200 square kilometres, which is very big compared to the 20- or 22-square-kilometre fields onshore. To the south, off the coasts of Veracruz and Tabasco, we have six more contractual areas in the Salinas Basin. In total, 10 areas are being tendered: four in the north, and six in the south. The estimated investment required for project lives of these 10 areas is estimated to be USD 44 billion.  

What decisions have been made regarding national content requirements for these bidding rounds?
National content is comprised in the Law of Hydrocarbons and it is a responsibility of the Ministry of Economy. Regarding deepwater projects, nobody in the world takes on that task alone, and especially Pemex couldn’t do that on its own.
This was one of the reasons why we had the reform, because we had put Pemex into the entire value chain, from exploration to transportation of petrol to service stations. Deepwater exploration was one very risky and costly activity which, like I said, no company in the world manages alone, that was put solely into the hands of the company.
Pemex has more room to participate in deepwater areas now that it shares that activity and its risks, and as Pemex had little experience with deepwater plays, it was hard for the company to get national content experienced in that area, unlike in onshore areas. The legislation recognises this situation and establishes national content requirements for deepwater areas that are less than those for onshore and shallow waters.
There is a requirement for contractors to comply in terms of national content, but it’s a lesser percentage, and you can credit any team and not just a perforation team with filling those requirements. It could be Mexican engineers who know the area, thanks to previous experience with Pemex.

What role will the CNH play in the tenders for Pemex’s farm-outs?
With the farm outs, the CNH has the same role as we do with a regular tender. What needs to happen is that Pemex has a favourable opinion of the features of the companies with which it wishes to associate with, so for example, the NOC could request that bidders have at least five years of experience and three deepwater projects. The requirements established by SENER should be accepted by Pemex, and with those requirements in mind, we set the tender.
They will be transparent with straightforward rules, and Pemex will be an important part of it, because the NOC should have a say in the companies with which it associates. In the end, the selection of a partner will come as a result of a process that is competitive.


How does the CNH deal with the concerns that companies interested in farm-outs have brought up?
To be clear, under the conditions of the tender, we have established that we will not have contact with the companies. That’s very important to safeguard transparency. You can imagine that it would be a delicate matter if once we put out the tender, we met with two or three companies, but not with five or six.
The concerns of these companies are certainly expressed to the government, but through SENER. The secretariat, as the party responsible for the country’s energy policy, receives the comments and concerns of the industry and translates that into the conditions and clauses of the contracts which the CNH tenders, but we don’t deal with these clauses.

What regulations has the CNH put in place regarding collaborations or associations to fulfil exploration and production contracts?
The matter that we presented a couple of weeks ago is related to the cession of the contract. By law, the contractor can assign the operation or the economic interest of the contract. For you to carry out either, you’d need the approval of the commission, and those were the guidelines we recently released. For me to be able to assign someone the full extent of my contract, this new person has to comply with the same requirements that I did when it was awarded to me. That’s the rule.
There was also a rule that got some backlash, which was that if you had won a contract, but hadn’t signed it, you couldn’t associate with the second-place winner. That’s been clearly stated as an impossibility within the rules.

When can we expect to see a date for a tender for unconventionals?
Round One meant five tenders; the first three have already taken place, the fourth is for unconventionals and the fifth is for deepwater areas. The one for unconventionals has been suspended for now because, unlike in deep waters, where it can take you up to 10 years to come up with a barrel, unconventional areas can be obtained very quickly, in a matter of months, and the current conditions of the market are not the best for an unconventional development.
This was the fundamental reason the government had for postponing the tender. If it were up to me, I would place unconventional areas in Round Two, because I think it would be interesting to see the response of the market, despite the actual prices. It may stir up something relevant and the market will decide how attractive the offer is.
I would place it, just to see what comes up, and also to learn from this structure. This is not up to only one person, but to SENER. The CNH proposes areas. We could present an unconventionals round, but the decision will always rest with the secretariat.

How has the role of the CNH evolved over time and how do you see it changing in the future?
The big change we’ll see is that we’ll go from instrumenting the tender process to managing the contracts. We’ve been involved in the tendering and signing of contracts, but after the company signs a contract with the government, which is represented by the CNH, and can go on for 25 or 45 years, we will represent the counterpart of the contractor. We have two main roles: the authority, which regulates the hydrocarbons industry, and we also manage contracts. That’s a big challenge we’re looking at every day, in the short and medium term.
We will, of course, continue to hold the bid rounds. This is very important, but perhaps even more important, and a part that people might not be considering as such just yet, is carrying the project to term. The tender becomes a news event, and to me, the most important part is what happens when you sign the contract. You are presented the plans, we execute the assessment and that assessment covers what will be extracted, the contractor pays the earnings of the hydrocarbons extraction and pays taxes to SHCP.

Will the number of people working at the CNH increase in the future?
Certainly. In December 2014, we had 150 people, and in June of this year, we had 225. It has grown and I think we could grow more. This challenge requires not only more people, but very qualified people. A very important topic is our human development attached to a reform like this. I think that some of the most important universities have reacted to this matter very favourably, creating new degrees that didn’t exist before. It will take time, but we’ll rise to the occasion.

Will former Pemex employees easily be able to find jobs with international companies or energy institutions?
Working at Pemex gives people the advantage of having worked in the only company in Mexico that dealt with those activities. There are very valuable people, who I think will have no problem finding employment in new companies. It has actually happened already. The secretariat speaks about a new environment in the hydrocarbons industry in Mexico and these people will play a fundamental role.

Do you think there are some areas in the Mexican market where transparency needs to be further developed?
I can tell you that at the CNH, we are devoted to setting straightforward, transparent rules. I know that slowly but surely, we’ll earn the trust of the public and they’ll be able to believe and know that what the CNH is doing is being done right. The truth is that it really isn’t me who can tell you where we lack this transparency. We are engaged in what we’re doing in the commission and that’s the path we will follow, I can tell you that. We’ve set ourselves new standards, so I don’t think we can present a tender in the future that meets less than the requirements we are demanding now.

How important is diversity with regards to new companies that are entering the country?
They clearly have experience and have extended operations all over, but I can tell you that for Mexico, a project in the North Sea is not more important than one in Brazil, or Africa. Those projects are worth the same, so we’ll have to choose the company that gives a higher percentage of royalties to the state. They’ll clearly have experience in other parts of the world. What we want is for them to have experience and to bring it to the territorial waters of the Mexican Gulf.

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