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Mexican reforms take shape 2013 constitutional changes launch bidding rounds, including 25 onshore blocks; officials promise ‘transparent, accountable’ process GARY PARK For Petroleum News
In its 22 years of existence, the North American Free Trade Agreement is supposed to have been a trilateral pact when it has really operated at a bilateral level between the United States and Canada.
Mexico has been the forgotten partner.
But that is changing fast in the energy sector, with Mexico and Canada emerging as fierce rivals as the so-called “three amigos” show signs of drifting farther apart.
The signs of deepening tension were evident in the last summit of the three national leaders almost two years ago when the best they could manage was an agreement to vaguely discuss “opportunities to promote common strategies” in areas such as trade, infrastructure and unconventional energy.
In the old conventional oil and gas world, U.S. and Mexican production was seemingly in relentless decline.
Canada was viewed as the supplier of the future, delivering safe supplies of oil, natural and electricity to the U.S.
Dynamic changes But that dynamic got rapidly turned on its head with the surge in shale oil and gas development, displacing both Canadian gas and U.S. coal used to fire power plants.
In the process the U.S. decisively regained its place as an energy superpower, racing past Saudi Arabia and Russia, while accelerating plans to export LNG to Asia and elsewhere, challenging Canada’s slow-moving attempts to enter the LNG market.
Then Mexico’s state-owned Pemex started to shake off its traditional role as a cash cow for the government, channeling 55 percent of its revenues into royalties and taxes, while being denied the chance to makes its own decisions in the absence of any independent directors and subjecting itself to a close, line-by-line vetting of its budget.
With 151,000 employees, Pemex’s output of oil before the reform process was well short of its foreign counterparts.
The result was a series of poor investment decisions, notably in its crown jewel Cantarell operation, a prolific shallow-water field where production has plummeted to 400,000 barrels per day from 2 million bpd despite US$70 billion being poured into exploration and production between 2008 and 2012.
Although foreign companies were allowed a limited presence in the upstream sector under fee-for-service agreements, Mexico experienced a sharp decline in production over a decade to 2.5 million bpd from 3.4 million bpd.
To reverse that trend, it has been estimated that Mexico needs to spend US$30 billion a year to regain 700,000 bpd of lost production from its 115 billion barrels of unconventional deepwater, tight oil and natural gas and shale oil and gas and US$100 billion to reach 4 million bpd.
Change underway But the long-demanded change in the structure of Mexico’s energy industry seems finally to be underway after changes to the constitution in 2013 that opened the sector to foreigners.
“This reform is the deepest transformation that the Mexican energy sector has experienced in the past 80 years,” Mexican Energy Secretary Pedro Joaquin Coldwell told the Calgary Petroleum Club in early December.
“During this period, the sector was essentially shut to private investment. Today, Mexico is one of the most open economies on the planet.”
The first taste of this transformation is a bidding round later in December for 25 mature, onshore blocks with proven reserves.
Subdued Canadian interest However, the interest among Canadian companies has been subdued so far, with only four companies - none of them household names - qualifying for the bidding round.
Two are public companies - Gran Tierra Energy and Renaissance Oil - and two are privately held entities formed specifically to bid - Torenco Energy and Sun God Resources.
Kevin Smith, a vice president at Renaissance, told the Calgary Herald that he believes Calgary companies are missing a great opportunity, rating Mexico as an “excellent place to do business and grow a company for years to come given all the deal flow we expect.”
A spokesman for Gran Tierra said his company views its qualification as a foot in the door, to evaluate prospects and participate in what is expected to be a steady series of bidding rounds in the next five years.
Juan Carlos Zepeda, president of Mexico`s National Commission of Hydrocarbons, told the Canadian energy leaders that the bidding rounds place a strong emphasis on transparency and accountability, requiring companies and bidders to pose any questions they have on a public website.
He said that more than 100,000 viewers watched the most recent bidding process, while conceding that officials were disappointed that only two of 14 properties were sold in the first round, prompting changes that resulted in three more blocks being awarded.
Zepeda said 79 companies have pre-qualified for the upcoming bids, 36 as individuals and the rest participating in 16 consortiums.
How far Mexico has gone in its pursuit of new beginnings should be more evident in two calls for bids that are scheduled in 2016.
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