The financial stress of Mexican state-owned oil and gas company Petroleos Mexicanos (Pemex), which faces a wall of debt totalling over US$100 billion, is creating opportunities for one junior Canadian oil and gas producer and for a Calgary-based oilfield service company that entered the market last fall.
Vancouver-based Renaissance Oil won the rights to develop oil and gas assets in three fields that Pemex had previously operated during an auction late last year.
“Being one of the first private sector operators in Mexico gives us a tremendous advantage,” says Kevin Smith, manager of business development for the company, which won the rights to develop fields in Mexico’s Southern Basin in a land-based auction of 25 fields held in mid-December.
Although he wouldn’t comment specifically on the financial challenges faced by Pemex, which has debt of about US$80 billion to US$90 billion and pension liabilities of as much as US$90 billion, he suggests that the current malaise in oil markets is creating opportunities for his company.
Smith says the fact that the energy reform process is occurring during a low oil and gas price environment “is a benefit for us because there is reduced competition” for bidding on assets and for getting involved in joint ventures
Under the reforms, Pemex will be selling off large blocks of producing and prospective oil and gas assets, as well as midstream and downstream assets.
There have already been three auctions, and the first, which took place last July, was seen as a severe disappointment by observers, with only two of 14 shallow offshore blocks having been awarded. The second auction, which made five shallow offshore blocks available, was more successful, and three companies won bids.
Terms for the December land-based bidding, in which some blocks held reserves of more than 100 million barrels of liquid hydrocarbons, were viewed as extremely generous, with bidders only having to pay about C$200,000 to gain access to the data rooms, along with a registration fee of C$25,000. All 25 fields were awarded.
Renaissance, the only Canadian company to have won blocks in the auctions (there were a handful of other Canada-based companies bidding in December), has big plans for its Mexican operations.
Although it has no current production, the company has experienced management with a history of Mexican resource development. Ian Telfer, Renassaince’s co-founder and director, is also the chair and director of Goldcorp, one of Canada’s largest gold mining companies with a major presence in Mexico.
Smith says the amounts needed to secure the company’s rights to develop the three blocks are minimal by international standards—and even by Canadian standards.
Renaissance recently raised C$10.68 million and also arranged for a US$20-million lending facility, which it believes is enough capital to develop its three blocks. It recently was granted an extension of its lending facility, which was to mature in May.
Given Pemex’s current financial struggles, Calfrac Well Services president and chief executive officer Fernando Aguilar expects Pemex will play a much-reduced role in the future of the country’s oil and gas sector.
Aguilar, who has been involved in the oilfield service sector since 1981 and spent much of that time in Latin America with three occasions in Mexico, believes the company’s days as an all-powerful entity are numbered.
“The overhead of Pemex is killing them,” says Aguilar, who is originally from Colombia.
“The federal government was capturing the oil and gas revenue to pay for the country’s operations,” he explains, adding the government drain on funds plus a bloated workforce left Pemex with little ability to develop the expertise required to take advantage of the country’s offshore and onshore resource potential.
“The oil is there,” he says.
Calfrac, like others in the oilfield services sector, has responded to the oil price collapse and greatly reduced oil and gas activity by cutting its headcount.
While it employs 700 people in Latin America, most of those workers and most of its equipment are deployed in Argentina. In fact, Calfrac is closing its office in Colombia is “re-evaluating its business strategy” in Mexico.
But Aguilar, who says the policies of the new right-leaning Argentine government, aimed at boosting domestic gas production, are encouraging to the company, leaves little doubt he sees Mexico as having more long-term potential.
“Argentina is a growth market for us, but there is a limited resource potential in the country,” he says.
However, the resource potential in Mexico’s Chicontepec field, as well as other challenging reservoirs with potentially hundreds of millions of recoverable barrels and shale gas potential that rivals that in the U.S. and Canada, will eventually make Mexico an attractive area for producers, he says.
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