In an excerpt from his exclusive interview with Mexico Oil & Gas Review 2016, David Enriquez, Partner at Goodrich Riquelme y Asociados explains why the general public’s conceptions about Round One L-04 and its impact on the economy are flawed and reviews the success of Round One L-03.
Q: What should Mexico expect in terms of the impact of Round One L-04, which will oversee the tendering of the country’s deepwater blocks, on the economy as a whole?
A: There is a misconception as to the outcomes of L-04 in the industry and the country. Mexico’s deepwater market will be mainly controlled by Houston, despite the national content element. More than direct investment into the country, it will bring money to the Ministry of Finance in the form of royalties. The main factor causing this is the geographical location of these blocks. Whereas onshore fields are in direct interface with the Mexican economy, calling for direct investment for the building of roads, hotels, restaurants, and other infrastructure, deepwater fields are offshore and require global procurement. The latter blocks will have semi-submergible rigs and vessels, most of which will come from different jurisdictions but will be mainly controlled from Houston both in terms of the economic model and business structure, and of the real implementation of the project.
Overall, the interaction with the Mexican economy will not be substantial. This does not mean that deepwater projects are detrimental for Mexico, but rather that the way in which money will flow will not contribute as much as expected to the economy. The royalties will be received by the Ministry of Finance, which will then decide how to allocate this resource within the economy.
Q: What can be done to counter this lack of direct investment in the general Mexican economy?
A: Despite these financial specificities, L-04 will bring considerably more investment into Mexico than L-03, where the level of investment is lower. The government took into consideration the lack of direct investment in the economy in R1.4, and compensated for it by including fields that have a more direct interface with the local onshore economy in the Five Year Plan. This includes heavy oil, onshore, and shallow water fields.
Q: Round One L-03, which will tender onshore fields, had a predisposition for having a strong impact on the economy, given the blocks’ location. Now that the blocks have been tendered, what is your opinion for this specific case?
A: The winning bidders of L-03 can be divided among three categories in terms of experience. On the one hand, there are the operators of various nationalities with experience in different jurisdictions, who offered a 35-50% additional royalty rate and were able to leverage their economic propositions particularly well thanks to their experience. As for the remaining bidders, we can divide them into two further categories. There are the oilfield service companies with decades of experience in the market that have partnered with funds and will be running non-sophisticated assets with a relatively low level of investment. The 85-95% royalty rates should not hinder these firms from being successful in their undertakings as they know how to be efficient in the way they structure their organization. The final category of bidding companies, however, may seem more unreasonable in submitting proposals, with no prior experience in the fields they were awarded and should thus be more cautious than the aforementioned companies when it comes to operations and controlling their cost structure. A bid of a 90% royalty rate added to the rest of the fiscal obligations leaves the companies with payouts of over 100%, which makes no economic sense. Unlike major NOCs or IOCs, these companies cannot subsidize this project or cover the losses using other, more profitable undertakings.
In all cases, the level of revenue that companies can generate from L-03 blocks is substantially low, and I am particularly skeptical when it comes to the success of this latter category. I believe the winners will be those that were awarded the larger Type Two blocks, as they have experience as oilfield service providers and have the necessary knowledge to substantially reduce costs, and it is these that will contribute most to the Mexican economy.
Exclusive interview with David Enriquez, Partner at Goodrich, Riquelme y Asociados
This is an exclusive preview of the 2016 edition of Mexico Oil & Gas Review. If you want to get all the information, plus other relevant insights regarding this industry, pre-order your copy of Mexico Oil & Gas Review 2016.
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