MSCs mark first step toward natural gas independence for Mexico

By OGJ editors
HOUSTON, Dec. 2 -- The multiple service contracts recently awarded by Petroleos Mexicanos, Mexico's national oil company, to international oil companies "mark an important step on the road to freeing Mexico from its growing dependence on gas imports," said officials at Wood Mackenzie Ltd., Edinburgh.

MSCs came about as a direct result of Mexico's strategic need to increase gas production so as to stem a rising tide of expensive imports, they said. As "controversial as they are" among Mexicans, the MSCs are necessary because "of the awkward fact that Mexico, a gas-rich country with huge resources, actually has to import 25% of its gas needs from the US," WoodMac analysts said in a report released Monday.

'Lackluster' bid response
The strategic gas plan launched by Pemex last year is designed to increase Mexico's gas production to 8 bcfd in 2008 from 4.4 bcfd in 2002. Pemex officials expect gas production from the seven MSC blocks offered to increase to 1 bcfd by 2008-09 from the current 30 MMcfd level.

"The four MSCs awarded in recent weeks are unlikely to boost Mexico's gas supply to any significant degree, and the country will have to work much harder if it is to significantly reduce, let alone end, its dependence on foreign imports," WoodMac analysts noted.

Although the bidding round generated huge interest within the oil and gas industry because of its historic precedent, it didn't generate much enthusiasm among potential bidders. "Significantly, only one of the four blocks awarded attracted more than one offer," WoodMac analysts observed.

Pemex received no bids for the larger Corindón-Pandura and Ricos blocks, but the company is scheduling workshops "to reexamine the technical data, reevaluate the terms and conditions offered, and determine the suitability of a second bidding round" in 2004 (OGJ Online, Oct. 29, 2003).

Meanwhile, the bidding deadline for the Olmos block was extended to Jan. 14 at the request of an interested party for more time to assemble necessary data, Pemex said.

"This lackluster response was widely anticipated long before bidding took place, a result of the rather onerous contract terms," said Matthew Shaw, senior Latin America analyst at WoodMac. "In particular, many companies dislike the fact that the upside potential is minimal. Moreover, the system disallows the contractors from booking any reserves, an important stumbling block for many companies," he said.

Successful bids
Repsol-YPF SA, the Spanish-Argentine major oil and gas company, bid more than $2.4 billion for a MSC on the Reynosa-Monterrey block to become the first foreign company authorized to participate in exploration and development of Mexican hydrocarbons since that country nationalized its oil industry in 1938. The company plans to invest $170 million for E&D in the next 3 years in Mexico's Burgos basin (OGJ Online, Oct. 21, 2003).

Pemex selected a consortium led by Brazil's Petróleo Brasileiro SA (Petrobras) to develop the 371 sq km Fronterizo block in northeastern Mexico under a $265 million. The 15-year contract includes the drilling of 100 wells, infrastructure installation, and maintenance on the block in Nuevo Leon state (OGJ Online, Nov. 25, 2003.)

The other group bidding for Fronterizo—Houston-based oil field services company Amistad Energy along with a subsidiary of China National Petroleum Corp. Ltd. and the Chinese firm Tiainjin Dagang Shengkang Petroleum Technology Development Co.—was disqualified because some required documentation was missing.

The Petrobras-led group, which includes Teikoku Oil Co. Ltd. of Japan and Diavaz Group subsidiary D&S Petroleum of Mexico, also won a $650 million contract Oct. 23 to develop the Cuervito block, also in Nuevo Leon (OGJ Online, Oct. 22, 2003).

Tecpetrol, a unit of Techint, was part of the consortium that won the 20-year contract for the Misión block in the third MSC contract.

"Four blocks have now been awarded to well-respected international oil companies, including Repsol-YPF, Petrobras and Tecpetrol; hence, in this respect, the bidding round has not been a complete failure," Shaw said. "Many market observers had predicted an even lower turnout, so Pemex can afford to be fairly relieved about the result."

Based on its own "bottom-up" analysis of future Mexican gas supply, WoodMac projects Mexico's gross gas production will average 4.5 bcfd in 2003. However, after subtracting 1.8 bcfd of oil field consumption and other "losses," they project the net amount of gas reaching market will be 2.7 bcfd.

"We also forecast that demand will be 3.6 bcfd. Hence, imports will average 900 MMcfd, which is 25% of demand," said WoodMac analysts. "We expect imports to peak at around 940 MMcfd next year. After that, a combination of the MSCs kicking in to boost supply and a slowing in gas demand growth will have the effect of reducing Mexico's import requirements."

"The irony is that Mexico has ample gas reserves to not only meet domestic demand but even to export gas to the US," Shaw said. "However, far more sizeable investment will be required if Mexico is ever to achieve this dream."

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