George Baker
Mexico Energy Intelligence
Houston
Four lease auctions have taken place in Mexico since this author's last comment about the need for a sobriety check on that country's energy reform was published in Oil & Gas Journal (OGJ, Mar. 2, 2015, p. 34). The most recent auction, held on Dec. 5, 2016, featured deepwater leases: 10 government blocks plus the auction of 60% working interest in a Petroleos Mexicanos (Pemex) legacy block-Trion. Among the unusual outcomes was an award to a Chevron Corp.-led consortium in which Pemex is a partner.
The panel at the Offshore Technology Conference on May 4 in Houston featured speakers from winners of the deepwater auctions including Murphy Oil Corp., Statoil ASA, Chevron Corp., ExxonMobil Corp., and BP PLC. The provocative question as the panel's title was this: Will Mexico drive a deepwater renaissance?
The central insight contained in the remarks of the panelists was that if enough deepwater drilling activity could be generated in Mexico, then assets presently cold-stacked around the world could, by "economic gravity," as the Statoil speaker put it, be drawn to the Mexican portion of the Gulf of Mexico. There was a consensus that an annual average of 25 wildcat wells would be needed for this gravitational effect to materialize.
A panelist rightly insisted on the need for a "diversity of eyes" to look at seismic data in Mexico, usefully suggesting that "legacy data," shot in prior years by Pemex, be made available for free.
Speakers noted the differences between the US and Mexican portions of the gulf: on the US side, 3,000 deepwater wells, on the Mexican side, just 57; on the US side, a coherent sedimentation story in which the Mississippi River is the central character, while on the Mexican side there are reservoirs of carbonate breccia caused by the impact of the Chicxulub asteroid; in the US Perdido, there is extensive infrastructure, while in the Mexican Perdido, there is none.
That said, the story going forward can only be told by the drillbit, which may tell us of presently unknown rivers, sea shores, and hydrocarbon accumulations. For this story to unfold, however, panelists agreed that Mexico's Finance Ministry would need to reevaluate its priorities in the design of the biddable variables for an auction. The excessive weight given to "additional royalty" was at the expense of "work program." A panelist noted that awards were made to companies that, together, offered 8 fewer wells.1
The story will also be influenced by the outcome of the 2018 presidential elections. As Jose Antonio Gonzalez, Pemex's director general, observed in a public event at Rice University's Baker Institute on May 3: "The constitutional reform allows the government to auction blocks, but it does not require that the government do so." He speculated that if an antireform candidate were elected, as presently seems probable, "my successor will soon be asking himself about from where $11 billion for a deepwater development project are going to come." The implication was that the next government would eventually support the reform as the sole practical solution to funding the development of oil industry in Mexico.
During the question and answer portion of the panel discussion, this author observed that "there are two elephants in the room: the problematic offshore safety regime in Mexico and the fact that Pemex continues to be an agency of the Mexican government," noting that its director general is a short-term, presidential appointee.
Regarding safety, this author noted that Pemex is not a member of the Center for Deepwater Safety and that the offshore safety regime in Mexico is still in the start-up phase.
Regarding Pemex, this author claimed that Pemex uses "farmout" in a nonstandard way and that it would be useful to know if the farmout contract were for the commercial life of the reservoir or if there were fixed term limits.
In response, the Pemex panelist indicated, but without being specific, that standard term limits would apply to farmouts. The Statoil panelist observed that Mexico had not yet followed the example of Norway, which decided that better results could be achieved in a mixed-capital structure in which, in Statoil's case, the government owned 66% of the equity.
Returning to the theme of the panel, in the light of the discussion, its thematic question could be rephrased: Can Mexico drive a deepwater renaissance safely? The mandate of Marine Well Containment Co. is limited to US waters, putting in doubt the availability of a capping stack for any of the lease owners in the event of a Macondo-scale incident on the Mexican side of the gulf. There also is the matter of sovereign immunity in case of an incident, recalling that after the offshore Ixtoc-1 oil spill of 1979-80, Pemex invoked sovereign immunity in US courts to avoid financial liability.
A cautionary note made during the Q&A on May 4 was the reminder of an ironic complaint from the era of Mexican revolution of 1910: "Mexico: mother of foreigners, stepmother of Mexicans." The reminder served to raise another question: How to make a deepwater renaissance in Mexico a Mexican success story, not just one of foreign oil companies?
To find an answer to this more subtle question, an even greater diversity of eyes will be needed.
References
1. See "Philosophy of the Biddable Variable," Baker Institute Brief, June 29, 2014. http://www.bakerinstitute.org/research/philosophy-biddable-variable-why-bidders-work-program-important/
The author
George Baker is the managing principal of Baker & Associates Energy Consultants, Houston. His first of many articles published in OGJ about Mexico was "Eclipse of Mexican Light" (OGJ, June 22, 1981, p. 83). He is the publisher of an industry newsletter and manages Energia.com. He can be contacted at [email protected].