Upstream opportunities abound

Mexico

Fieldwood Energy president and CEO Matt McCarroll talks to TOGY about the progress made in Round One, Pemex’s role in the development of upcoming blocks, the significance of private equity in developing Mexico’s upstream sector and the best strategies to navigate complex market conditions. Fieldwood is a US exploration and production company that acquired a shallow-water licence in phase two of Round One.

What have been the most significant policy adjustments during Round One?
The government has been very responsive to our suggestions and ideas. There were two calls within Round One comprised of shallow-water Gulf of Mexico assets. Fieldwood only participated in Round One, call two.
Significant improvements to the contract terms were made from call one to call two of the Round One bid process. The government published the minimum profit-sharing numbers prior to the bid date in call two, rather than waiting until bids were submitted, as they did in call one. In call one, some bids were right under the minimum. If the companies had known what the minimum bid was, they might have slightly increased their bids.
One aspect of the contract that is significantly different than our US operations is the requirement to secure and sign a guarantee of the minimum work commitment during the appraisal period, which is the first two years of the contract. The government improved the contract in call two by reducing the required letters of credit required during the appraisal period. Additionally, the government is expected to decrease the threshold even more in the future, and potentially accept bonds over letters of credit.
Lastly, the original bidding qualifications restricted companies under common control or affiliates from bidding against each other. These restrictions have been amended and interest for the blocks has expanded. Several other improvements and adjustments were made from call one to call two, but the changes I’ve mentioned made the opportunity more compelling for Fieldwood.

What role will Pemex play in the development of fields, as there will be greater participation from foreign operators in the coming years?
The next shallow-water round is expected to consist of fields that Pemex would like to farm-out to foreign companies. These are fields that Pemex currently operates and doesn’t have either the desire or capital to pursue at this time. It is our understanding that Pemex would retain interests in these fields and companies such as Fieldwood would serve as operators. We are aware of some of these ideas, but do not know the specifics yet.
While we are excited about the opportunity to contract directly with Pemex on opportunities, a more certain aspect we will be working on with them is infrastructure. Currently, all of the offshore infrastructure in Mexican waters is controlled by Pemex. There are several opportunities to use existing structures to support Fieldwood and Pemex operations on a joint basis. These opportunities include sharing pipelines, logistics and possibly jointly drilling wells that overlap block boundaries.
We expect Pemex to take an active role in partnership with other companies. US operators have considerable experience in sharing infrastructure in a way that is beneficial to all parties. This will be a new concept for Pemex, but we expect that arrangements such as this will increase the efficiency for developing oil and gas assets for the benefit of Fieldwood, Pemex and most importantly, the Mexican people.

How does private equity fit the current international and local conditions to develop Mexico’s upstream sector?
As most people have seen, these are challenging times for the oil and gas industry. It’s a cyclical business and we happen to be experiencing a very low commodity price environment, which deters investment in the industry. Public sources of capital are either unavailable or very expensive. Private equity firms have been instrumental in providing the needed capital during this period.
This source of capital is often misconstrued as being short-term-focused investments. Cases of this exist, but in a capital-intensive business such as exploration and production operations in the Gulf of Mexico, we have to focus on the long term. The longer-term focus allows private equity firms to invest during a down cycle to capture the upside when the market swings back into favour. Opportunities in Mexico reflect the longer-term investment horizon.
The block we were awarded in Round One, call two will not see first production for the next four to five years, when we expect that oil and gas prices will have recovered. We run the economics at various prices, but something in the USD 70-80 range is very reasonable for this time horizon.
This is not about just looking to make an investment, then turn around and sell. Although that is a favourable outcome, we think that the market for selling assets from one party to another still needs to develop in Mexico. We are looking forward to operating these assets over a long period of time and creating value organically.

What is the best strategy to successfully navigate the drop in oil prices and the downswing of the current cycle?
If you look at the history of this business and have lived it over the past several decades, as many of us at Fieldwood have, you’ll see that no one has been successful at running oil and gas companies by predicting oil and gas prices. Living within cashflow and not over-extending debt is important in good times and even more important in bad times.
At Fieldwood, we employ a robust hedging programme, which helps us navigate the commodity price swings by mitigating sudden swings and movements. Instead of predicting the cycles, it is important to be prepared for them and maintain efficient operations.
Additionally, down cycles often present the best opportunities if you have the wherewithal to get a deal done. In this regard, Mexican properties present an opportunity for us to deploy capital in attractive oil and gas assets during a low commodity price environment. In any price environment, it is important to make sure that the contractual and regulatory environments make sense. We have been impressed with the structures the Mexican government has put on the table so far.

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