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Energy Reform in Mexico
OPPORTUNITIES FOR
CANADIAN OIL AND GAS
SERVICES AND EQUIPMENT
COMPANIES
MARCELA SERRATO, AMERICOMPASS SC
CONGRESO MEXICANO DEL PETRÓLEO
GUADALAJARA, JAL.
JUNE 11, 2015
Introduction

Canadian and Mexican oil and gas industries have one thing in
common: great challenges ahead.

Your presence here today is a testimony of efforts to seek opportunities
abroad using a worldwide recognized technological leverage.

Mexico is a very good choice. The ER has ended close to 80 years of
state monopoly in Mexico’s oil and gas sector.

The ER has advanced at an amazing pace. In less than 12 months
Mexico moved from a Constitutional reform to the passage of
secondary legislation, the formation of regulators and the presentation
of bidding and contract terms for Round One.

ER opens a wide array of opportunities across the entire oil and gas
value chain. Allow me to review them briefly.
1. Offshore

The deep waters of the Gulf of Mexico hold the most important
opportunity for foreign companies.

Mexico is believed to hold considerable recoverable hydrocarbon
resources of roughly 29.5 billion boe located in deep waters.

Pemex exploratory campaign has rendered only 30 wells and only one
major discovery near U.S. border.

Best shot for IOCs because: a) profitable, b) infrastructure on other side
of the Gulf already in place, and c) it allows to avoid social conflicts
that may arise in works onshore.

Likely that consortium requirements of contracts will be modified for
deep waters.
2. Onshore

Contracts in onshore mature fields have a lot of potential.

As Pemex lost interest in some of them in the past, it abandoned the fields
before many of them had reached maturity.

Mexican private sector has already voiced publicly a significant interest in
mature onshore fields. Financial requirements of tenders could be lowered to
allow more participation of Mexican private sector.

Many innovations in oil and gas exploration and drilling have allowed for new
techniques to exploit existing conventional oil and gas assets.

Deploying new technologies may help older fields to become more productive.

Succesful partners for these plays will either have superior recovery technologies
or the right operating margins to be profitable.
3. Shale

One of the most meaningful opportunities for International players
lies in the shale frontier.

Mexico has the 6th largest shale gas and 8th shale oil reserves
worldwide, and 2/3 of the most productive shale basins in the U.S.
extend across the border.

Despite vast shale reserves, Pemex has only drilled 6 shale
exploration wells in the Eagle Ford play.

In the short term, do not expect a wave of enthusiasm because of
lack of infrastructure (pipelines), disfunctional municipal
governments, property rights, insecurity, insufficient water resources
for fracking.

But shale will eventually take off. Technological innovations, derived
from low oil prices, may become a detonator.
4. Midstream

Rapid expansion of the oil and gas market can lead to infrastructure
challenges.

Mexico will need substantial infrastructure to produce the new
resources.

At the end of 2012, Mexican gas pipelines reached their capacity
limit.

Increasing demand and the very limited transport capacity provide
a major opportunity for midstream companies to engage in
developing the logistics and distribution requirements across the full
supply chain.
5. Downstream and petrochemical

In the past structure, the Mexican government burdened Pemex with
funding retail price subsidies and, as such, Pemex did not have the
funds to invest in expanding or properly maintaining refining capacity.

The ER will unburden Pemex from funding the retail subsidy.

Pemex will be able to reinvest in the downstream infrastructure.

Making the retail subsidy scheme transparent and directly funded by
the government will motivate Mexican and international companies to
invest in reconfiguration of existing refining capacity.

When shale production comes online, Mexican refineries will be able to
process shale more efficiently.
6. Downstream retail

With the ER there is a real opportunity for retailers to enter the
Mexican retail market and brand their sites.

There are 10,000 service stations trhoughout the country and no
Mexican group owns more than 400 stations.

The market remains fragmented and consolidations in the market
are likely.

Focused retailers with ready capital could enter the market,
become aggressive in mergers and acquisitions, and position as
leaders.
Round One

Through an independent body (CNH), Mexico is conducting 3 tenders
for oil and gas E&P contracts for international bid.

Shallow waters: 2 rounds, bids to be presented on July 15 and Sep 30.

Onshore mature fields: 1 round, bids to be presented Dec 15.

Rules and limitations intended to signal that Mexico is truly opening and
to guarantee multiplicity of actors.

Model contract in shallow waters replicates the Chicontepec
integrated services contract with a production sharing agreement and
fiscal formula.

Factors driving interest are: a) size of resources and b) the fact that
everybody is doing it.

The Mexican government wants experienced companies, to receive a
fiscal flow of revenue sooner rather than later, and to allow Mexican
companies to be part of the process.

Foreign investors are enthusiastic about how rapid things move forward.
Role of the Mexican oil & gas
companies

There are more than 10,000 Mexican companies in the oil and gas sector that
generate over 1 million jobs. Around 500 of them are mid-sized companies.

Many lack the scale and expertise for E&P but can participate in distribution,
storage, logistics, services and petrochemicals.

They understand the political and regulatory landscape and have established
relationships with the government and community leaders.

There will be a preference for bids that include Mexican companies and/or
create jobs for Mexicans (25% requirement of national content).

Foreign investors should take heed in developing their business models and
should consider engaging Mexican partners where it makes sense.
Role of independent oil and gas
producers

They have the skills and focus required for efficient horizontal drilling and
fracking.

They are well suited to establish profitable partnerships and JVs with
other Mexican oil companies.

They will bring their technical know-how, as well as quick turn
manufacturing style drilling that allows shale gas production.

If Pemex is not aggressive in its pursuit of shale, there will be a
proliferation of new JVs between smaller Mexican firms and foreign
independents.
Service and equipment companies

Many oil service companies had extensive operations in Mexico
prior to the regulatory changes.

Service companies have been in Mexico for a while and have a
wealth of seismic and geological information that will make an
important difference in an environment where data will be
uncertain.

Mexican service companies like Petrofac have already successfully
won contracts that give them first mover advantage.

Going forward, the service companies will be able to seek partners
for more than what their current cash service contracts allow.

A likely scenario would imply service companies partnering with
local companies to form new Mexican independent - a marriage of
technical expertise and local content.
Areas of opportunity for service and
equipment companies (1)


Seismic

Seismic, micro-seismic imaging

Seismic data processing and analysis
Tubing



Production tubing and casing
Service to wells

Oil and gas software (data management)

Oil and gas processing and well testing equipment
Drilling

Hydraulic fracking and horizontal drilling

Rig manufacturing and rig site products

Progressive cavity pump systems

Production optimization equipment

Flow control products

Offshore drilling
Areas of opportunity for service
and equipment companies(2)


Logistics

Proppants providing and transportation (sand and ceramics)

Helicopters

Technologies for inspection, monitoring and management of physical
infrastructure

Platform supply vessels and other marine services
Other

Shale services

Deepwater services

Capital equipment
Market entry strategies

Establish a joint venture or partnership with an existing Mexican
technology or service sector company (or an international providing
services to PEMEX).

Develop a relationship with bidders through Canadian equity
investment or through EDC.

Create a Canadian consortium of technical expertise that offers a
wide range of services to prospective clients.

Provide services through a larger service sector company that
already has existing client relationships (e.g. Halliburton,
Schlumberger).

Start a brand new Canadian-Mexican service sector company (e.g.
Petrofrontera).
Challenges ahead

The ER will take a long time to be fully in place and there will be delays along the way
(other 4 sets of tenders and then multiple rounds).

Important challenges:
→
Understanding the new rules of the game (national content requirements).
→
Overregulation and micromanagement. Material question about capacity of CNH
to oversee work programs and of Hacienda to audits costs.
→
Questions over property rights, rule of law, due process of justice system. Monitor
the commitment of the Government that it is working to make things better.
→
Pemex budget cutbacks derived from the fall in oil prices and their impact on the
cancelation or postponement of projects.
Conclusion

Canadian companies will need to strike a balance between being
bold and prudent.

Whether you are an independent, an oil field service company or a
provider of equipment, there are opportunities for all.

You just need to understand what your competitive advantage is,
find the play (and partner), plan and organize, and then execute.

The new Mexico should be a rewarding and interesting place to do
business.
Thank you.