Mexico's controversial Multiple Service Contracts, designed to attract foreign investment to exploration and development of natural gas in that country, may someday be utilized also for oil projects, according to an official of state oil company Petroleos Mexicanos.
That observation was made last month by José César Nava Vásquez, general counsel for Pemex, at a Houston seminar on energy investment opportunities in Mexico. The seminar was put together by Houston law firm Haynes & Boone LLP.
The MSCs have aroused political controversy within Mexico because they would allow the participation of operating companies in Mexican hydrocarbon E&D for the first time since nationalization. Ownership of Mexican oil and gas resources is constitutionally prohibited. However, the MSCs are designed to avoid that legal conflict by assuring foreign operating companies of a return on investment (ROI) without the government conferring ownership of reserves or production. And Pemex, short of capital and facing a drastic gas supply shortfall, will be allowed to involve foreign multinationals in exploitation of its huge untapped gas resources. Up until now, however, the MSC discussion has been limited to natural gas, specifically nonassociated gas in the Burgos basin of northeastern Mexico.
The current round of MSCs, expected to be awarded in late August, focuses on eight blocks in the Burgos basin. Bidding was expected to get under way at the end of June.
While the MSC program has generated a great deal of interest among foreign oil and gas companies for its prospect of participating in E&D in one of the few countries hitherto untouchable for upstream investment, it also has raised many questions. Chief among the concerns are the mechanics of the MSC tenders, MSC terms, and Pemex's assurances of an ROI. Nevertheless, interest remains high, and Pemex's expectations are for robust participation in the MSC program.
Some industry observers have speculated that even if MSC terms and conditions aren't a comfortable fit for multinationals used to conventional licensing terms such as production-sharing contracts, the program still represents an opening wedge in a highly prospective country that had been formerly off-limits (OGJ Online, Mar. 18, 2003).
One school of thought even holds that the failure of the MSC program might not be such a bad thing for all concerned, as it could force Mexico to seriously reconsider its constitutional prohibition against foreign ownership of its resources, given the severity of the country's looming energy crisis.
Other participants at the seminar outlined the scope of Mexico's energy crisis and some of the legal, regulatory, and financial hurdles for investing in the country's petroleum and power sectors.
MSC perspectives
The current MSC round is "only the first step" and likely would be followed by a second or third round, Nava Vásquez said during a question-and-answer session at the seminar.
"This model could be taken even to oil projects," he added.
Jay Park, partner with the Calgary law firm Macleod Dixon LLP, noted that "Pemex has taken a very conservative approach" in designing the MSC to avoid a conflict with the Mexican constitution's governing Public Works Law.
Park also cited a fair degree of flexibility within the MSC framework.
"The winning contractor can subcontract everything [within MSC listed activities] except the maintenance and operation of the the MSC," he said.
Interest in the program remains strong, Park said, noting that 70 companies have contacted Pemex about possible participation in MSCs; most of these are companies based in the US, Canada, and Europe. More than 160 companies have registered to view the online data room maintained by IndigoPool, Schlumberger Ltd.'s information services unit.
For the most part, the companies participating in the initial MSC round will be larger, multinational companies, according to Haynes & Boone partner Hunt Buckley.
Buckley pointed out that for the large blocks on offer in the Burgos basin, bidder requirements are high, limiting participation to large companies or consortia. For smaller blocks—100-300 sq km—Pemex plans to create reduced bidder thresholds and a simplified version of the MSC.
"Mexico's need [for gas] is urgent," he said. "Hence the reason to focus on the larger blocksUWe need IOCs [international oil companies] to do this at this stage."
Buckley listed some of the MSC terms and conditions, which include:
- The contractor must provide all resources to develop and operate nonassociated gas fields in the contract area on a turnkey basis in exchange for a monthly cash fee, payable in US dollars.
- This fee is based on a per-unit-of-work price for each contractor work unit and capped partly on the contract area delivery capacity.
- Pemex retains operational control of the work through an annual work program and budget approval process.
- The object of the MSC is to deliver enough gas to exceed Pemex's debt to the contractor—"paid on the basis of capacity, not on delivery" of gas, Buckley noted. Pemex can nominate daily volumes up to the contract area's delivery capacity; it is, however, not obligated to nominate the gas or to take delivery of the gas it nominates.
- Any discovery of crude oil must be handed over to Pemex, although the contractor is reimbursed for drilling and testing costs.
Resources, geology
The targeted Burgos resource is substantial, according to estimates provided by Houston consultants Netherland, Sewell & Associates Inc.
NSA Senior Vice-Pres. Dan Paul Smith provided seminar participants with a block-by-block breakdown of proved, probable, and possible reserves under Securities and Exchange Commission and Society of Petroleum Engineers-World Petroleum Congress definitions and according to estimated lifting costs based on actual Pemex yearend 2002 costs.
"A lot of these fields have a lot of development potential," he said. "Some of these fields have as many as 20 zones."
Smith described the Burgos basin fields as having "fairly complex geology, with lots of zones in each field vertically and a lot of fault blocks." He estimated the number of drillable locations identified under probable or possible reserve categories at 398.
Mexico's crisis
Mexico faces the possibility of a "severe energy crisis" in the near future, given expected shortfalls in natural gas supply and electric power infrastructure, according to Marcelo Páramo, partner, Haynes & Boone's Mexico City office.
Mexico's natural gas demand is expected to grow to 9 bcfd in 2010 from 4 bcfd in 2001, an annual growth rate of 7%, he noted. As a share of Mexico's total fossil fuel consumption, the natural gas share is expected to jump to 61.1% in 2010 from 22.3% in 2000.
At the same time, a projected electricity demand growth rate of 5%/year will require the addition of 27,400 Mw of new generating capacity in the next 10 years, most of which will come from gas-fired combined-cycle power plants. The gas share of power generation will soar to 52% in 2010 from 9% in 2000.
The essential problem, Páramo said, is that Mexico's energy infrastructure is inadequate to sustain economic growth. Capital requirements needed to increase energy supply to accommodate that demand growth are pegged at $140 billion over the next 10 years: $59 billion for electricity, $40 billion for exploration and production, $21 billion for natural gas infrastructure, and $19 billion for refining.
By 2005, Mexican gas production will meet only 75% of domestic demand.
Pemex is unable to meet Mexico's projected gas demand, said Páramo, "because the federal government relies on Pemex for approximately one third of its revenue.
"This leaves Pemex with inadequate funds to reinvest in new E&P projects," he said, adding that Pemex is directing more of its limited funds to expanding crude oil production, exports of which are one of the country's important sources of income.
But the worsening shortfall of energy supplies and infrastructure eventually will harm Mexico's burgeoning economic development, he noted.
"Energy reforms are urgently needed to foster private investment in production, transmission, and distribution of energy in Mexico," Páramo said.
