Mexico is not on the radar of most small and mid-sized E&P companies. However, recent reforms could create significant opportunities in the Mexican exploration and production market for small and mid-sized E&P companies.
On the reforms, Mexico recently amended its Constitution, and is in the process of passing and implementing complementary legislation and regulations, to open its upstream O&G market to non-Mexican E&P producers essentially for the first time since 1938. PEMEX, the Mexican national oil company, has basically been the only company allowed to explore for and produce oil and gas in Mexico for the last several decades. With the recent reforms, non-Mexican E&P companies (and Mexican E&P companies other than PEMEX) will be able to bid on and sign production sharing, profit sharing, service, and “license” agreements to explore for and produce oil & gas in Mexico.
The aspect of these reforms given the most attention in the U.S. is the potential for “major” O&G companies to invest in multi-billion dollar projects, such as the development of Mexico’s deepwater offshore reserves in the Gulf of Mexico. Accordingly, and because Mexico has not been open to the U.S. E&P industry for so long, most small and mid-sized E&P companies are not paying close attention to the reforms, or the opportunities they could create.
However, while the potential multi-billion dollar projects grab the headlines, the reforms also are designed to attract foreign players in two areas that could be of interest to small and mid-sized E&P companies – “mature” fields, and shale.
On the “mature” fields, Mexico has many fields that have been in production for decades. PEMEX’s recovery rate from these fields is typically below 20%. This is below the average achieved from U.S. fields, and well below the even higher rates some companies achieve from similarly mature fields in Louisiana and the Texas Permian basin. Small and mid-sized E&P companies with experience in this area, such as those that have taken over mature fields in Louisiana and Texas from “major” O&G companies, could find significant “low-hanging fruit” in Mexico.
On shale, the Eagleford formation extends essentially across the border from Texas into Mexico, and geology elsewhere in Mexico is similar to geology in parts of the U.S. where shale reserves have been found and successfully exploited. PEMEX has done almost no shale exploration or production to date, and Mexican officials are eager to exploit this opportunity, including finding affordable natural gas to feed Mexican industry. Small and mid-sized E&P companies that have successfully exploited U.S. shale deposits could find an essentially untapped new market in Mexico.
For both of these opportunities, the initial RFP’s and bidding should begin next year, with additional acreage becoming available over the coming 3 to 5 years, and beyond. Essentially, the Mexican reform legislation will force PEMEX to determine which fields it wishes to retain and focus on, and then to develop those fields through an agreed upon development plan. The initial acreage PEMEX is willing to relinquish, or that the Mexican Ministry of Energy forces it to relinquish, should come up for bidding in 2015 and 2016. Then, the acreage for which PEMEX is not able to develop and execute a development plan should become available around 2017. Thereafter, PEMEX will have to retains its acreage by production, just like any other lessee; the acreage it is not able to retain by production will begin to become available around 2018 or 2019, with more such acreage becoming available each year thereafter.
Small and mid-sized E&P companies interested in expansion, and planning their investments for the next 1, 3, and 5 years, could consider adding opportunities in Mexico’s “mature” fields and shale plays to their portfolio. Given the realities of entering a new market, and of navigating this unfolding process, companies interested in these opportunities should begin to explore them, and to lay the groundwork for this market entry and bidding, within the next few months. Gordon Arata, in consultation with Mexican firms on the ground and contacts in the relevant Mexican energy agencies, will be monitoring these developments and is prepared to assist any company interested in these opportunities.
This post was prepared with the gracious assistance of Messrs. Carlos Moran and Juan C. Serra of respectively the Goodrich Riquelme Asociados and Basham, Ringe y Correa, S.C. law firms in Mexico City.