SPECIAL
FOCUS: NORTH AMERICAN OUTLOOK
Mexico ponders cross-border strategy for deepwater
GOM fields
Mexico-US
boundary treaty set no agreement for border-field development.
George Baker, Energia.com
The existence of commercial, cross-border oil and gas fields between
the US and Mexico has yet to be established. Were such fields proved,
the fact remains that neither the US nor the Mexican governments have
done the preparatory work to make joint production feasible. Where
the US has a regulatory agency (MMS), that body has no authority or
mandate to deal with cross-border issues. The situation is worse in
Mexico, where there is no upstream authority at all, and where a constitutional
restriction prevents Pemex from operating as a partner in a joint-ventured
operation. For its part, the Mexican government is aware of this situation,
and, hopefully, will take steps to fill in the blanks.
In Mexico’s National Development Plan that was made public on
May 31, 2007, the government of President Felipe Calderón noted
that “Pemex lacks the technology to develop the yet undiscovered
resources in ultra-deep water; Pemex also faces restrictions in the
development of cross-border fields.”
Speaking to a forum convened by the Energy
Committee of the Mexican Senate on June 18, 2007, Carlos Morales,
head of Pemex’s
upstream unit, noted the drainage risk from Mexican fields, if production
began on the US side close to the maritime border. He called for
a review of existing treaties.
The moral leader of the Left, Cuauhtémoc Cárdenas, in
an address to the Mexico Chapter of the Club of Rome on May 15, 2007,
insisted that efforts need to be taken by the Mexican government on
the issue of transnational oil and gas fields, noting that the ten-year
moratorium on drilling in the “Western Gap” will expire
in the year 2010.
These three parallel observations build
on the case developed in Pemex during the Fox administration. In
their briefing to the Lower House of the Mexican Congress on Nov.
22, 2006, Pemex’s top executives
reviewed progress since 2001 and provided an outlook for 2007-2015.
The most arresting topics were the set of initiatives for addressing
the development of cross-border oil and gas fields.
Until now, Pemex had said nothing in public,
as, strictly speaking, it is not its job to suggest reforms in Mexico’s energy policy.
As we shall see, some of Pemex’s suggestions, to be implemented,
would also require changes in US-side regulatory institutions, laws
and even the boundary treaty.
WHY THE CHANGE?
This 90° change arises from five causes.
One reason is the possibility that lease-holders in deepwater areas
of the US Gulf of Mexico (GOM) could, within a few years, begin production
in reservoirs that straddle the border with Mexico.
Pemex has not carried out drilling operations
in waters adjacent to the MMS’s Alaminos Canyon leasing area,
which extends to the Mexican border. The existence of commercial
deposits on the Mexican side of the border has not yet been established,
Fig. 1. Pemex itself, however, has little doubt that such deposits
exist; but, the resources are lacking for such high-budget projects.
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Fig.
1. In commercial fields, development on one
side of the border could drain oil and gas from the
other side. |
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A second reason is a belated recognition by Pemex that it lacks sufficient
execution capability, which, coupled with a lack of experienced managers,
makes it too risky, financially and environmentally, to attempt to
operate, single-handedly, a deepwater exploration and production project.
Embedded in this second reason is a quiet rejection of the official
line, promoted by former Pemex directors general as well as by oilfield
service companies, that anything that Pemex needs for exploration and
production can be bought on the open market.
Pemex proposes that it be allowed to enter into strategic alliances
in which it assumes the role of partner, allowing the US-side lease-holder
to be the operator in a joint development project in deepwater areas
along the US-Mexican border. (In the US system, of course, the lease-holder
may be of any nationality.)
A third reason for the change of tune
is Pemex’s
need to begin to put into production what it believes are 30 billion
boe of undiscovered petroleum resources in the Mexican side of the
GOM, Fig. 2. Pemex hopes, by the year 2013, to have some oil and
gas flowing from deepwater wells. These volumes are needed to keep
the average oil flow during the period at 3.3 MMbpd and average gas
flow at 6.5 Bcfd.
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Fig.
2. Pemex believes there are significant undiscovered
reserves in the Gulf of Mexico. |
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A fourth reason is money. Pemex, for all
the money it earns, lives on a shoestring budget, if judged by its
financial statements, which show razor-thin net profits if not outright
losses. There are two factors at fault here: a heavy tax burden and
an even heavier labor burden. Pemex has proposed fiscal reform for
itself for years, if not decades, but progress on fiscal reform has
been slight-and on labor reform
even slighter.
There is a fifth reason: In deep water, success in exploration does
not automatically translate into success in reservoir development and
production. In Brazil, IOCs came to have a role when production skills
were needed.
WHAT CHANGES DOES PEMEX PROPOSE?
Nestled in the proposals to the Congress
was language about the need for a unitization agreement that would
entail a “single operator” in
a joint project that would confer “shared benefits” to
the operator and partners.
Following Pemex protocol, the United States is not mentioned by name.
But the clear implication is that Pemex is recommending that the federal
government enter into diplomatic negotiations to modify the Continental
Shelf Boundary treaty with the United States.
The protocol to be negotiated should focus the need for changes in
the law, regulation and institutional mandates to allow issuing of
cross-border unitization permits. Such negotiations would have to be
initiated and carried out by the Mexican Foreign Ministry.
Mexican law would have to be changed, and responsibility lies with
the Congress. The main law to be updated is the Petroleum Act of 1958,
which regulates oil and gas provisions of Article 27 of the Mexican
Constitution (it is this article that reserves almost the whole of
the oil industry to the state).
ARTICLE 6
Pemex correctly identifies Article 6 of
the Petroleum Act as the source of the legal impediment to the joint
development of cross-border fields, and proposes changes. This article,
established at the very end of the presidency of Adolfo Ruiz Cortines
(1952-58), reflected the
anger and frustration in the Mexican Congress over a small number of
risk contracts that had been assigned to a half-dozen American oil
companies during 1949-51. The terms of Article 6 were devised
to prevent future risks contracts in Mexico.
Article 6 allows Pemex to enter into contracts
with individuals or corporations to contribute to the accomplishment
of its mission. But it is the restrictions that were crafted to eliminate
oil companies from operating in Mexico using the standard risk-reward
business model then (and now) in common usage. By the terms of Article
6, Pemex may pay only in cash, never in kind; moreover, payment may
not be linked to any “result” of the services to be contracted.
In other words, there was to be no upside reward linked to any measure
of performance by the contractor.
In its proposal of November 22, Pemex, without details or examples,
proposes to scrap these restrictions.
OTHER LAWS
Pemex also proposes to exempt such cross-border, unitized projects
from the restrictions of the Public Works Act and the Government Procurement
Act. These laws put a heavy burden on Pemex. But, as Pemex recognizes,
their enforcement would make any joint development project impossible.
WHAT DOES PEMEX NOT PROPOSE?
Pemex is silent on the subject of the
means or methodology by which it might come to have “strategic partners.” In the North
Sea, it was the state oil companies, BP, Statoil and Norsk Hydro, who,
operating within a competitive lease system, took on the role of “partner” with
companies who, for them, were the giants: Phillips in Norway, Shell
in the UK.
Pemex during 2002-2005 learned a lot about how lease systems
work-and don’t work. What Pemex mainly learned is that
a public tender of petroleum leases does not work without offering
a meaningful upside potential based on market values for production
and the right to post discoveries as reserves.
The awards issued for the Multiple Service
Contracts for gas E&P
in blocks in the Burgos basin were under the Public Works Act, and
the oil company that won the tender would operate under Pemex supervision.
In these tenders, Pemex designed scope and terms of work, method of
payment, received bids and awarded the contracts. Pemex, in other words,
made the laws, and subsequently served as both the judge and jury.
Five years later, Pemex understands that none of these conditions
and constraints will have any place in future strategic alliances in
the deepwater GOM.
The solution to this insider dealing is the legal figure of an independent
upstream regulator. This agency exists in Norway in the Petroleum Directorate,
but it also exists in the United States in the Minerals Management
Service.
Pemex here also is silent. For the past
six years officials from the Energy Ministry and the Congress have
been flying off to Norway, Brazil, Canada and other destinations
for a look-see at the offices and operations of upstream regulators;
but Pemex has never supported the idea. How Pemex’s strategic
partners are to be chosen remains unaddressed.
Pemex proposes that it be allowed to enter
into unitization agreements, but there are two awkward points: 1)
on the US side there are blocks and leases, but in the Mexican federal
waters, there is nothing similar; 2), both sides need to document
proved reserves, but on the Mexican side with Pemex’s expertise
alone, this cannot be done.
WHAT PEMEX DID (OR DOES) NOT KNOW
Another awkward detail that Pemex did not tell the congressmen is
that on the US side the MMS does not have authority to issue cross-border
unitization agreements, and that the topic is not even being addressed.
On land, the Texas Railroad Commission also lacks authority to issue
such permits.
OBSERVATIONS
It is a peculiar choice of words for the Mexican government to say
that Pemex has shortcomings in ultra-deepwater, when, more basically,
it has not put into production any oil or gas field in water depths
beyond 300 ft.
Pemex’s solution for cross-border fields and the need for strategic
associations are relevant to all Pemex’s shallow- and deepwater
operations in Mexico. Such associations, if authorized for cross-border
fields, could subsequently be applied to other areas inside Mexico;
and, in this way, serve Pemex as a safety net in case its development
plans for KMZ and Chicontepec do not materialize as advertised.
The need for diplomatic savoir faire in
oil matters may help explain the choice of Jesús Reyes Heroles as the head of Pemex. Dr.
Reyes Heroles, an MIT-trained economist, is a former official in the
Foreign Ministry, who in the late 1990s, served as Mexico’s ambassador
to the United States. Also working in the background is his prior service
as energy minister during 1996-1997. Another factor of possibly
even greater weight is that his father-35 yr before-was
director general of Pemex, and the one who bought out the last of the
controversial, 25-yr risk contracts that were awarded in the early
1950s.
NEWBUILDS
Pemex recently secured a contract with
SeaDragon Offshore for the SeaDragon Offshore I (SDO I “Oban B”). The $958 million,
5-yr project will produce a deepwater, harsh-environment semisubmersible
capable of drilling in up to 10,000 ft of water. SDO I’s first
well will be in GOM field NEN-1 in 5,000 ft of water. Drilling should
begin in January 2010.
Construction has begun with the first
hull being built in Sevmash yard, Russia, with completion expected
in 2008. SeaDragon will build the vessel’s topsides in Teesside,
UK, at the Haverton Hill yard used by the Tees Alliance Group. Module
construction will begin in October 2007.
CONCLUSIONS
The Maritime Boundary Treaty of 2000 has a mechanism for bilateral
consultations that can be activated with only a 60-day lead time, so
cross-border fields could become active quickly.
But before very much can be done on the
Mexican side, the US side needs to be prepared, legally and institutionally.
At present, boundary treaties, laws and the institutional mandates
of regulators all fail to provide for the legal and fiscal figure
of a cross-border mineral deposit. The US side, in short, is not
yet ready for Pemex’s
proposals.
The Mexican side is far from ready for joint-ventured associations
in which Pemex would be a partner, but not the operator.
Pemex has rightly called for a policy review.
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THE
AUTHOR |
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George
Baker earned a BA and PhD from Duke University, as
well as an MA from California State University, Fullerton.
He is the author of Mexico’s Petroleum Sector and many
articles in energy journals and trade publications in the US
and Mexico. Baker is research director of Energia.com, a Houston-based
consultancy following Mexican upstream issues. |
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