Eckhard Hinrichsen analyses the race for oil and gas reserves as the market liberalizes.
The Mexican energy industry is at last open to foreign companies. Investment opportunities abound as the important first licensing rounds loom.
The sweeping energy reform bill approved last summer is tipped to transform the country and boost oil production through a ‘Big Bang’ of investment in private sector exploration, development and production of oil and gas assets.
Bidding for the first round of shallow water fields has started and they will be awarded mid-2015. SENER, Mexico’s energy ministry, has announced that round one will include 169 blocks – comprised of 109 exploration blocks and 60 production blocks – and an additional 14 blocks, which will invite bids under joint ventures with Pemex.
Production rise beckons
Mexico’s finance secretary Luis Videgaray Caso described it as “a true change in paradigm” for Mexican energy. The government hopes that, by 2025, international entrants and new investment will see oil production catapulted from 2.43 million barrels per day (MMb/d) in 2014 to 3.5 MMb/d, a level last seen in 2004.
External analysts see oil production rising if reform is implemented successfully. In a near 75% increase on its previous forecast (EIA International Energy Outlook 2014), US Energy Information Administration predicted that Mexican liquids production (crude oil, gasoline, heating oil, diesel, propane, etc.) could stabilize at 2.9 MMb/d through 2020 then rise to 3.7 MMb/d by 2040.
This is in line with DNV GL expectations that private investment triggered by reform will increase gradually and surpass investments by Pemex within three to four years. There are attractive opportunities on- and offshore, particularly in deepwater, pipelines and mature fields. A continued low oil price will most likely delay bidding rounds for some of the fields with a higher cost structure, e.g. shale developments, which in turn will delay or cancel investments. The interest shown by international oil companies in the first shallow water blocks that are out for tender now has been a bit disappointing.
Collaboration opens doors
Joint ventures are seen as the most straightforward way to enter Mexico’s newly liberalized door and to get reserves on stream as quickly as possible. For Pemex, they preserve its stake in the action. Pemex CEO Emilio Lozoya has stated already that the company intends to set up 10 different joint ventures with private firms.
While energy reform invites investment, technical information is limited. Pemex currently holds the technical and seismic data. It is being encouraged by government to share its knowledge and turn it over to the National Hydrocarbon Commission (CNH) that will make it available to the companies participating in the bidding rounds.
Supermajors Chevron, Shell, ExxonMobil, BP and Russian company Lukoil, were said to be among those looking to firm up joint venture activity with Pemex.
Shale boom less sure
Despite holding the world’s sixth largest shale reserves, unconventional gas prospects are less defined in Mexico. There are approximately 600 trillion cubic feet (Tcf) of recoverable shale gas in the Burgos and Sabinas Basins, but the country’s energy ministry estimates that US$100 billion is needed over a decade to develop resources. Among a number of challenges are Mexico’s arid conditions, which lack water for hydraulic fracturing.
Security is currently a major challenge in the shale areas in northeast Mexico, where there is concern over the dominance of drug cartels and violence.
In addition, there is competition from gas pipeline projects such as the Los Ramones-Frontera EPC pipeline, which will import competitively priced gas 1200km (750mi) from Texas, US, deep into Mexico’s industrial heartland near Queretaro.
Very little shale activity has taken place so far and good quality geological information is currently lacking. For new companies, the obstacles are not insurmountable, but cooperation with experienced US operators would be required to make it viable.
Industry reaction to reform has been overwhelmingly positive, as the scope is broader than was expected. Although there are complexities to be addressed before it can fully take effect and the current oil prices will slow down some of the developments. Nevertheless, the energy revolution is expected to improve the long-term outlook for Mexico’s economic growth and it remains an attractive place for investments.
The potential benefits will become clearer once the the first few rounds of bidding get into full swing.
Eckhard Hinrichsen is DNV GL’s Mexico country manager. He joined Germanischer Lloyd in 1989, beginning in the pressure systems department and then the offshore department where he worked as a project manager and process engineer in the certification of international offshore and pipeline projects. He later moved to the company’s Mexican branch in 2005. Hinrichsen came to his current position when GL and DNV merged in 2013. He holds a Dipl. Ing. in Mechanical Engineering from the the Technical Academy in Hamburg, and a M.Sc. degree in Engineering Mechanics from Iowa State University.