Mexico's chief regulator hopeful despite disappointing bid round

Mexico's latest licensing round only the second in state oil company Pemex's long history, made possible by recent exploration & production contract reforms failed to draw a successful bid for the offshore blocks on offer. Russell McCulley talks to Juan Carlos Zepeda Molina, president of the National Hydrocarbons Commission, about the bidding round, offshore safety and how Pemex may evolve under a new administration in Mexico City.

In June, Pemex announced the winners of the incentive-based integrated E&P contracts offered on six fields in the northern region of the Gulf of Mexico, including four mature onshore fields. While the onshore prospects drew successful bids, the company was unable to extend contracts for the offshore Arenque and Atún fields because submitted bids exceeded the maximum limit of $7.75 per barrel set by Pemex a sum many observers say was far too low, even with the 75% cost recovery guaranteed under the bidding round's terms. A consortium led by Dragados Offshore came closest, with a $10.78/bbl bid on Arenque.

Mexico's constitution forbids production sharing agreements with companies other than Pemex, a condition that has hampered deepwater exploration and contributed to an overall decline in production over the past decade. Pemex has responded with increased efforts to squeeze more production from mature fields, with some success.

chief regulator

Oil sector reforms enacted in 2008 under President Felipe CalderÃn chipped away at the restrictions on foreign participation in E&P; president-elect Enrique Pe±a Nieto, of the Institutional Revolutionary Party (PRI), has vowed to continue energy reforms, but will lack a PRI majority in congress to pass new legislation without strong cooperation from the political opposition.

juan molinaI would like to see Pemex become a real company. Nowadays it's a government office. It's like a ministry. Juan Carlos Zepeda Molina

Zepeda, whose post was created under the Calderón reforms, calls the failure to award offshore contracts an important disappointment. Incentive-based contracts awarded last year in Pemex's first-ever bidding round only covered onshore fields. The objective of the second bidding round was to achieve the milestone of being able to award offshore contracts, Zepeda says. In my opinion, this maximum fee-per-barrel set by Pemex was too low.

Maximum bids for the four mature onshore fields on offer ranged from $7.57/bbl, at San Andres, to $11.88/bbl at the Panuco field. The offshore areas included an exploratory element. They were not mature fields, as the ones onshore, Zepeda says. So if you put together the fact that it is offshore, and additionally that you have an exploratory risk, it doesn't make too much sense to set a maximum fee per barrel so low, compared to the onshore field that you have awarded at $10 or more.

Arenque, which Zepeda deems the most important block up for bids, covers 2035km2 of coastal waters offshore the state of Tamaulipas. The area currently produces 5600b/d and 22mmcf/d of gas from the Arenque and Lobina fields. Production peaked in 1977 at 27,600b/d.

The question that remains open is, now what is Pemex planning to do? Zepeda says. Is Pemex going to launch a new bidding round for these two fields? These are fields that we, as a country, want to be awarded. We want activity there.

The incoming administration will not immediately affect the makeup of the hydrocarbons commission. The five members are appointed by the president, but to staggered five-year terms, guaranteeing continuity and shielding the group somewhat from political influence. The commission, or CNH, was established in 2009 and charged with regulation and supervision of Pemex and its subsidiaries in Mexico.

We are the agency that's responsible for the regulation and supervision of all exploratory and production activities, says Zepeda, whose term runs until May 2014. Legally speaking, the service contract is the responsibility of Pemex. Nevertheless, anyone that participates with Pemex has to follow and comply with our regulations.

The CNH also provides technical assessments of field development plans, among other duties. The agency has a staff of 61, a number Zepeda hopes to see increased to 100 by the end of 2012. We are looking to have more inspectors, he says. For comparison, the CNH's counterpart in the US, the Bureau of Safety & Environmental Enforcement, employs around 600, he says. So we are definitely understaffed.

mexican flag

After Macondo, the CNH turned much of its attention to spill response and containment. By the end of 2010, in December, the commission issued the first regulations for safety standards in the deepwater Gulf of Mexico, Zepeda says. The new rules require Pemex to maintain containment capabilities similar to those mandated in the US; in March, the company signed a contract with Wild Well Control to provide capping and debris removal equipment to bring Pemex in line with the new regulations.

The CNH has asked Pemex to provide an extensive list of safety procedures, updated regularly and certified by a third-party expert in safety issues, and to increase its financial coverage for a potential spill, Zepeda says. At this time, Pemex complies with our regulations. It was a major improvement from the situation that they had previously, in terms of containment, in terms of procedures, in terms of insurance. But in the future, the National Hydrocarbons Commission has a commitment to keep increasing our standards, and take the safety standards in Mexico to the same levels that are imposed by my colleagues on the US side of the Gulf of Mexico.

The commission has been involved in meetings with officials from the US, Cuba and other Caribbean nations to achieve a common understanding of safety issues in offshore fields, he says.

I would say there is a common objective to move to a common understanding of safety issues. I don't know how this is going to evolve, or how it will apply to regulations in each country. But at least there are conversations going on among all these countries, and there is a common objective to improve standards. We are trying to move a fast as we can.

Zepeda is reluctant to venture an opinion on how oil sector reforms might proceed under Pe±a Nieto and the PRI. But his wish list includes some items that came up during the presidential campaign, including the possibility of floating a percentage of Pemex shares on the market. The examples of Petrobras and Statoil come up often as successful NOC models that Pemex could emulate, with allowances for Mexico's unique constitutional and political restrictions. In the end, we need to tropicalize to bring to the reality of Mexico any of these models, Zepeda says.

I would like to see Pemex become a real company, he continues. Nowadays it's a government office. It's like a ministry. We would like to see Pemex become a real company, with clear objectives of creating value. We would also like to see new mechanisms to engage in real and standard-risk contracts for exploration and production. OE

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