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Editorial/Opinion

Jeremy M. Martin & Juan Carlos Zepeda: Moving Mexico industry foward

 


Juan Carlos Zepeda, head of Mexico's National Hydrocarbons Commission, speaks at a news conference


On May 20, 2009, then-President Felipe Calderon appointed five commissioners to legally constitute Mexico's oil and gas regulatory body, the National Hydrocarbons Commission, or CNH for its name in Spanish. Just over four years later, Mexico's new president, Enrique Pena Nieto sent shockwaves across the global energy world as the country amended its Constitution to break national oil company Pemex's years-old monopoly and allow private companies to search for and develop its hydrocarbon bounty.

Barely out of its proverbial diapers, CNH was thrust into the pilot seat of the country's effort to usher in a new oil and gas future. Further establishing itself as an independent upstream regulator was critical. First and foremost was the requirement to develop capabilities to execute an aggressive campaign to develop opportunities for bid rounds and investment by private players, something that had not happened in Mexico for almost 80 years.

Today, as the second tender of private contracts under Round One is held in Mexico City we are witnessing the beginning of what can only be called a new Mexican oil industry. Indeed, financial bids will be opened to determine the winners of the five blocks offered to the private sector for extraction in fields in shallow waters off the coast of Campeche and Tabasco.

The first tender held on July 15 won plaudits for its process and transparency, but fell short in terms of contracts awarded and investment commitments. These processes, however, are organic and evolutionary. Indeed, the lessons from mid-July have greatly informed today's bidding.

What was learned from the first tender? First, transparency and execution are critically important. But so are competitive fiscal terms as well as clear and unambiguous contractual obligations and terms.  These elements are ever more important given the continued volatility and drop in global oil prices. Regrettably, the current price environment as the second tender is held has only gotten worse.

In an effort to emphasize that the government understands the need to continue to tweak the bidding process, several changes have been made in advance of today's bidding, beginning with announcement of the minimum value for each block. That change has already been implemented and on September 14, the minimum values of operating profit the government will receive corresponding to each block were announced.

In addition, a revised corporate guarantee has been developed. Companies will now be required to provide a $2.5 million bid security guarantee in total and not per block.

Further, the government has addressed a key concern from the first tender surrounding additional reserves. Specifically, new language will lend clarity and provide successful bidders additional exploration and production rights beyond previously discovered reserves.

Buy beyond the first tenders and Round One, the true backbone of what will constitute a major step forward and give form and function to Mexico's oil industry in the coming years is also being created. The cornerstone that will enable growth of the new Mexican oil and gas industry is the development of an in-depth knowledge of the country's vast subsurface.

Given the volatility and inherent high risk of the oil business, much depends upon information and particularly understanding of the country's geology. Indeed, the industry depends upon and invests in gathering data and acquiring knowledge to better understand a country's “below ground” opportunity.

Mexico is a notoriously underexplored oil and gas province. Moreover, the country has had a paucity of seismic and other key data. With an eye to the future and in its efforts to create a world class oil market in Mexico, the CNH is making a great deal of progress on overturning the country's chronic lack of oil and gas data and particularly modern, 3-D seismic information.

The Mexican Congress gave CNH the responsibility to develop and manage the understanding of the country's subsurface as it pertains to the oil industry. Indeed, the laws enacted in 2014 mandate CNH to create a formal system to deal with this issue. CNH has thus created the National Hydrocarbon Information Center. The Center already houses much of the information gathered by Pemex in the past, and it will receive the new data being generated by a wide range of companies that are currently carrying out seismic, geophysical and other studies.

To wit, CNH has granted 22 permits for 11 private companies to conduct assessments and in-depth studies of various subsoil basins across Mexico. In order to synthesize the information contained in the permit applications, CNH will integrate all the appropriate data into a single map. In short, this effort is aimed at creating a national map and profile to show the best expectation for the industry on areas with the highest prospectivity in Mexico.

All of these pieces are part of CNH's ongoing mission to facilitate investment at the same time as regulating and rendering the utmost transparency for the nation's hydrocarbons.

A broader, more in-depth understanding of Mexico's oil and gas potential will not only enable the government to continue to move forward on oil and gas bidding but also deepen the understanding across all of Mexico vis-à-vis the oil and gas sector. Information is increasingly available to anyone interested. In the oil and gas business, like many other technology driven enterprises, data is king.

Moving Mexico's oil sector forward requires indefatigable efforts and an understanding that today's failure often greatly informs tomorrow's success. The turbulence of today's oil market is not for the fainthearted and demands constant reappraisal of all facets of the bidding process. But Mexico is committed.

Today's efforts from bidding to historic data and information gathering are intended to provide a window and boost to the future of the Mexican oil industry.

Jeremy M. Martin, is Director, Energy Program, Institute of the Americas; Juan Carlos Zepeda, is President, National Hydrocarbons Commission of Mexico Petroleumworld reprint this article in the interest of our readers.

This commentary was published by Institute of the Americas, September 30, 2015. Petroleumworld reprint this article in the interest of our readers.

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February, 2016
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