Mexico Schedules New 'Multiple' Service Contract Debut

Abstract: Multinational oil companies may get a second chance to participate in Mexico's E&P arena--this time as service-providers only--but the more North American gas that's available, the better.

Analysis: By all accounts, Petroleos Mexicanos (Pemex) sometime next month and again in October will open bidding rounds for multiple service contracts (MSCs) that would enable multinational oil producers, among others, to extract Mexican natural gas. Not to own it, mind you, merely to drill for and produce it, for a fee. But the contracts would last for as long as 30 years, and the companies themselves probably would be among the first to get a shot at it in the export market, either by pipeline or by LNG tanker.

Were MSCs to be awarded to multinational producers, it would mark the first time non-native producing companies have been involved in developing hydrocarbons in Mexico since that country nationalized its petroleum industry back in 1938. Companies whose forebears were among those whose Mexican properties were nationalized are among those companies interested in the new contracts. They include ExxonMobil, ChevronTexaco, and Royal Dutch/Shell, among others.

According to recent reports, Pemex's E&P arm will call for MSC bids in two separate rounds on eight onshore blocks in the Burgos Basin of northeastern Mexico, nestled along the lower stretches of the Rio Grande River, Mexico's border with Texas. The blocks cover some 5,135 square miles (13,300 sq km), each averaging about 618 square miles (1,600 sq km) in area. Together, they overlie proved gas reserves of 800 billion cubic feet (bcf), with about 150 existing wells producing some 130 million cubic feet of gas daily (mmcf/d). But the MSCs are aimed at developing the area's potentially recoverable nonassociated gas reserves (not including gas trapped in crude oil) from beneath the area, which Pemex estimates at 3 to 4 bcf. The entire country holds tremendous volumes of both oil and gas in all directions, from border to border, from coast to coast.

It's no accident that the Burgos Basin area stands cheek-by-jowl with the South Texas Lobo and deep Norphlet gas trends on the U.S. side, which hold trillions of cubic feet of reserves and where a growing pipeline grid is taking gas to other parts of the U.S. The geology may be somewhat different, but what's on one side of a river you can walk across most likely picks up on the other side. And cross-border pipeline connections could be made inexpensively.

If everything goes smoothly, the awarding of such contracts in Mexico to foreign companies could be extremely significant. In the first place, there's at least the perception that a growing natural gas supply "problem," if not an outright shortage, looms over this country and others, including Great Britain and other Western European nations. So, an opportunity to invest capital and employ leading-edge E&P technology and management expertise to wrest potentially huge natural gas assets from beneath Mexican soil is more than just a fetching notion.

What's more, there is planning for a nonrelated LNG initiative in Mexico, and that also could involve an MSC type of participation by those same foreign companies, who conceivably could firm up long-term contracts to supply gas elsewhere around the world.

And Mexico itself, despite all the proved and potential gas reserves beneath it, is definitely strapped for natural gas supplies these days. Its crude oil reserves, also prodigious in size, have always been Pemex's leading target. But as with the rest of the world, Mexico finds that it now needs gas, and plenty of it, to fuel its burgeoning power market.

However, one of Pemex's biggest problems is that it is a true national oil company. All of its profits go directly to federal government coffers. A third, in fact--the equivalent in pesos of almost US$350 million a year--goes into the government's general operating budget, which among other things pays for the lion's share of the country's social services programs. The Mexican people, of course, are in favor of the status quo.

Nevertheless, Mexico's energy infrastructure needs a major fix. As head of the incumbent National Action Party (PAN) administration, President Vicente Fox plans to build some 16 new electric power plants during the next several years in a massive electrification program. However, new laws dictate that such plants must be fueled with a "clean" energy source, (i.e., natural gas). Building the new power plant system will cost an estimated US$58 billion over the next decade, and Pemex doesn't have that kind of money.

For that and other reasons, Pemex itself came up with the MSC initiative in a policy move calculated to avoid having to introduce the idea through the legislative process. The spirit of nationalism remains strong in Mexico, and it's most heavily reflected by the Congress, where PAN's chief opposition, the long-standing Institutional Revolutionary Party (PRI) and the leftist Party of the Democratic Revolution (PRD), are convinced that any move toward privatization in the oil and gas industry's E&P sector would relinquish control of the country's resources to foreigners, returning to the days before the revolution, when foreign corporations gripped the country's oil and gas resources, and profits, firmly.

But the MSCs might make the difference. Basically, they're similar to the service contracts that Pemex has awarded to non-Mexican companies for decades. Multinational service companies have had a long presence in Mexican oil and gas development. But they work through Mexican-chartered companies and are paid for their services only. At best, however, such a system is unwieldy. For one thing, typical Mexican oilfield service contracts last only one to two years. What results is a proliferation of such deals. For instance, according to published sources, some 1,100 such service contracts were written for services rendered in the Burgos Basin alone. All that for 150 producing wells.

Under MSCs, however, a number of services are combined under a single contract, and the deal remains in force for the life of the gas reserves in the block covered. That could extend the contract term to 10 or even 20 years.

The Burgos Basin initiative is no doubt a toe-in-the-water thing--an experiment--even though Pemex expects it to result in nonassociated gas production rising there to 1 bcf/d by 2006, which would satisfy about 15 percent of projected domestic demand.

Under that kind of timeframe, it wouldn't take long to find out if the concept works, and as mentioned earlier, there are scores of other basins from which to develop gas. Mexico's territorial waters in the Gulf of Mexico, for example, which already boast one of the world's largest offshore oilfields, are on trend with the heavily gas-weighted Texas portion of the Gulf. If Pemex can't afford to develop onshore gas reserves quickly, it's a good bet they can't cover the cost of an all-out offshore gas E&P effort.

But those who follow multinational oil company activity probably will be watching the Burgos Basin MSC bidding closely, particularly if any of the blocks are actually awarded to multinationals.

As a number of major oil companies can attest, there's many a bump between drill bit and pump, as it were, when a nation decides to allow outsiders to help it develop its domestic hydrocarbon resources. The long, drawn-out ritual between Saudi Arabia and several groups of multinationals over development of that country's gas resource is a telling example.

And, of course, all it takes is the stroke of a pen to change rules and contracts.