Mexican Reform Creates Offshore Boom

The date is important – Aug. 11, 2014.

That was the day Mexican President Peña Nieto signed a package of laws designed to attract and encourage foreign investment into the country’s oil, gas and electrical grids. Before that – since 1938, actually – the country’s energy potential and riches were controlled by state-owned Petróleos Mexicanos, or PEMEX. With the reform codified, the country was open for business and companies like Shell, Total, BP, Petronas Repsol and BHP rushed in.

“The Reform has been amazingly fast (multiple bid rounds in a single year), transparent, and I think highly positive when compared to other Latin/South America exploration hotspots in Brazil, offshore Guyana and even Colombia.”

That’s Read Taylor, executive director of upstream for Sierra Oil and Gas, which advertises itself as Mexico’s First Independent Oil and Gas Company. Sierra was not only part of the early reform, it helped define its potential.

But more on that in a minute.

Taylor said the reform’s progress has been impressive.

“The government has delivered and received high interest from the industry, including all the majors and local Mexico companies as well. It has come to us at a fast pace. Sierra was able to respond and we feel very happy about what the government has done and how we were able to evaluate quickly and respond successfully,” he said.

He’s being modest.

Sierra’s Zama oil discovery, located in the Sureste (southeast) Basin, was one of the top ten discoveries in the last ten years in Mexico. Sierra, for its part, holds a 40-percent stake in it.

“What’s interesting to me,” Taylor said, “is the story behind each success. It’s always through a mix of hard work, smart people, good data, detailed technical work, some luck or good fortune along the way and perseverance. Zama’s story is just like that.”

Results of Reform

He could have been talking about any discovery, but this one happened in a place without a history of them.

Image Caption

The Zama-1 well in the Sureste Basin, drilled by the Ensco 8503 rig

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The date is important – Aug. 11, 2014.

That was the day Mexican President Peña Nieto signed a package of laws designed to attract and encourage foreign investment into the country’s oil, gas and electrical grids. Before that – since 1938, actually – the country’s energy potential and riches were controlled by state-owned Petróleos Mexicanos, or PEMEX. With the reform codified, the country was open for business and companies like Shell, Total, BP, Petronas Repsol and BHP rushed in.

“The Reform has been amazingly fast (multiple bid rounds in a single year), transparent, and I think highly positive when compared to other Latin/South America exploration hotspots in Brazil, offshore Guyana and even Colombia.”

That’s Read Taylor, executive director of upstream for Sierra Oil and Gas, which advertises itself as Mexico’s First Independent Oil and Gas Company. Sierra was not only part of the early reform, it helped define its potential.

But more on that in a minute.

Taylor said the reform’s progress has been impressive.

“The government has delivered and received high interest from the industry, including all the majors and local Mexico companies as well. It has come to us at a fast pace. Sierra was able to respond and we feel very happy about what the government has done and how we were able to evaluate quickly and respond successfully,” he said.

He’s being modest.

Sierra’s Zama oil discovery, located in the Sureste (southeast) Basin, was one of the top ten discoveries in the last ten years in Mexico. Sierra, for its part, holds a 40-percent stake in it.

“What’s interesting to me,” Taylor said, “is the story behind each success. It’s always through a mix of hard work, smart people, good data, detailed technical work, some luck or good fortune along the way and perseverance. Zama’s story is just like that.”

Results of Reform

He could have been talking about any discovery, but this one happened in a place without a history of them.

“This was in the early days of the reform. Sierra as a company could not qualify by itself so we had to reach out to several potential partners to collectively qualify. In addition, we had to teach them about the basin, the petroleum system of Mexico, the play types, the CNH guidelines, the commercial terms, the contract etc. All of which we had spent one or two years investigating before the reform started,” he said.

Sierra then put together a group, which included Glencore and Talos; unfortunately, just before the final qualification deadline, Glencore dropped out.

“This is when oil price was crashing from over $100 a barrel to around $50. We had to quickly go find another partner or we would not have been able to bid in the very first round of the reform,” said Taylor.

Luck, hard work, timing and one great contact later, the deal was in place.

“Fortunately, I have a good relationship with Premier, a world class global explorer, and over a week they accepted to join with us.”

How successful was it?

“The Zama feature is estimated to have up to 1.7 billion barrels of oil (stock tank oil-initially-in-place) perhaps up to 2.3 billion barrels STOOIP. We believe this has the potential to produce 150,000 to 180,000 barrels of oil per day. We are currently developing our appraisal plan and expect first oil early 2023.”

Taylor sees Zama as more than just Sierra’s success, even though the company received an award from the Association of International Petroleum Negotiators in London for the discovery of the year.

“It’s great for our company as the clear first mover in Mexico, our investors who trusted us, our consortia members who trusted us and for the Reform and quite frankly for Mexico,” said Taylor.

The reform, clearly, was the catalyst, but pronouncements and hope are not the same as actualization and success and overcoming obstacles. To this point, Taylor mentioned the improved rules governing drilling and the flow of information.

“The government has instituted caps on bid levels, extended the contracts a bit and cleaned up several of the legal contractual challenges,” he said.

He has also been impressed with country’s openness and desire to get these things right.

“I was in Brazil with Devon going back to Round 0. I see a lot of similarities between the two and certainly see the promise of Mexico. I think Mexico has taken well the learnings from various countries and taken the best points of contracts and process from them and applied them.”

He believes Mexico may soon be, if it isn’t already, the place to be for such discoveries.

“Due to the attributes of the Mexican petroleum system, specifically its oil rich source rocks, its under-explored nature, high structural propensity, multiple play types, I rank Mexico offshore over Brazil offshore as far as an arena for new YTF (yet to find) exploration,” said Taylor.

Sierra, like the country itself, took it step by step.

“I think challenges change over time. In the early days it was about understanding the contracts, tax systems reporting, how to get VAT (value-added tax) refunded and how to deal with letters of credit or parent guarantees. We then moved into a stage of operational challenges. I think the Consortia handled that very well and we drilled a low cost well safe and environmentally clean with the highest technology available,” he said.

He said Sierra now looks ahead to contracting efficient low-cost development options, including offshore platforms and processing or floating storage production storage and offloading and or transportation through a new and developing offshore grid system.

“It will come down to managing timelines with permitting and approvals, getting our appraisal plan done in time working, etc. The government will play a role in these and they will be quite busy managing all the efforts of all of the consortia and interested parties.”

He welcomes its involvement.

“We will need their support and timely management.”

Unconventional versus Offshore Investment

As to the supply glut of recent years, the dearth of major discoveries, the very roll of offshore is a topic of discussion, but Taylor is still sanguine about Mexico.

“I think the news is good. It’s all about who can make the smartest capital choices (capital is competitive across the globe) have the biggest and the lowest cost discoveries and developments. Oil has stabilized and in fact rebounded to almost $80 dollars today. At CERA recently it was an interesting debate about where companies (will) push capital toward unconventional or offshore exploration,” Taylor explained.

The consensus was split.

“It was about 50-50 (percent), amongst the experts. Most majors have turned back towards expanding exploration budgets between 20 and 30 percent.”

Taylor thinks that’s the smart move.

“Companies realize they can’t cut exploration budgets and maintain balance sheets reserves or traction with their shareholders anymore without strategic stories. They need to explore and increase reserves production with high potential and low-cost developments or low capex per barrel developments. That’s perfect for Zama and Mexico. The Sureste Basin has the answer to that question.”

Sierra is not alone anymore in trying to find the answer, for there are now 26 or 27 new companies operating now in the Sureste offshore basin. That’s a tall order for a country that only a few years ago only had one player in the region – itself.

New Government

Prior to Mexico’s recent presidential election, there were concerns that the focus and commitment to the industry and the reform might change, which President-elect Andres Manuel Lopez Obrador has attempted to assuage by promising to “respect” the reforms, while also pledging to inject $9.4 billion (U.S.) into the state-owned energy companies with the goal of ramping up production.

“So, a couple of things. We are a business supported by large and highly expert funds in Mexico, U.S. and London. As a business entity it would not be appropriate to meddle in Mexico politics. We as a company spend a lot of time looking at the landscape the country risk issues and we have purposely hired ex-government staff to help us understand where any issues might be. We spend a lot of time in analysis and risk assessment on this,” said Taylor.

Still, he knows things can change for Sierra, specifically, and the industry, generally, with a new government.

Sure, it’s possible, he admitted, “but I believe in the sanctity of our contracts.”

The future can thank the past for that.

“As I understand, it took seven to eight years to move into the reform and the number of global companies and amount of investment committed by other majors in Mexico and specifically the last bid round tells me very smart people believe this is here to stay.”

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