WoodMac: Pemex going in right direction with MSCs

By OGJ editors
HOUSTON, July 2 -- Mexico's national oil company Petroleos Mexicanos has improved the terms and conditions for bidders interested in the second round of multiple service contracts (MSCs), said a research note from Wood Mackenzie Ltd., Edinburgh.

MSCs are intended to help Pemex boost its natural gas production from Burgos basin (OGJ Online, Apr. 23, 2004.)

Matthew Shaw, a WoodMac senior Latin America analyst, said in a July 1 research note that he believes the new terms should prove attractive to industry while also providing insight into how MSCs are evolving.

"In particular, the new terms are a test case ahead of a far more ambitious 3rd Round that Pemex plans to hold in 2005. Round 3 should offer a far wider variety of acreage, with oil projects potentially being made available for the first time," Shaw said.

Conditions, terms
The second round was changed to:
--Accelerate repayment of costs to contractors. This will increase available cash flow, which should be particularly attractive for smaller contractors, Shaw said. Pemex cannot link profits for contractors to either gas production or gas prices.
--Reduce bureaucracy. The administrative burden is being lessened in efforts to streamline daily operations. Round 1 blocks were "plagued" by cumbersome bureaucracy, he noted.
--Lower qualification criteria to attract smaller companies. Mexican companies in particular are being encouraged to participate through the elimination of a previous requirement for international experience.

Pemex is requiring fast progress on MSC work because it has a target that MSCs produce 800 MMcfd yet this decade. Some 350 MMcfd is projected to come from the Round 2 blocks, so timetables are tight, Shaw said.

"We consider the new terms and conditions to be a step in the right direction towards making MSCs more attractive. However, restrictions imposed by the Mexican Constitution and related laws narrowly confine the contract that Pemex can offer, and make it very difficult for all the demands of the industry to be met," Shaw said.

In addition, Pemex faces "political sensitivities" about MSCs and is taking a "very careful approach to attracting new investment" to the exploration and production sector, he said.

Industry still has concerns regarding what is offered, the harshness and complexity of the terms, and the bureaucracy.

"However, Wood Mackenzie believes that improvements have been made and is confident more will be made in the future. But, just as important, the industry keenly awaits results from the Round 1 acreage in order to ascertain how successful (or not) contractors have been in making money from their projects," Shaw said.

The second round involves simply a re-offering of acreage, with modifications, that received no bids during the initial round last year, he noted (OGJ Online, Oct. 29, 2003).

The three blocks being offered cover 3,443 sq km, and Pemex estimates that they contain 194 bcf of proven plus probable reserves, with additional potential of 184 bcf of possible reserves and an undiscovered potential of 416 bcf.

"This equates to a total resource potential of 794 bcf, but interested companies will no doubt be keen to make their own calculations," said Shaw.