“One thing that I am proud of is that despite the Covid situation, both upstream investment and production has increased or been sustained in Mexico,” said Merlin Cochran, General Director of the Association of Mexican Hydrocarbons Companies (Amexhi), a non-profit civil association that brings together the main oil and gas investors and operators in Mexico.
Cochran, who spoke with NGI’s Mexico Gas Price Index as part of an ongoing question-and-answer (Q&A) series, added that Mexico plans to drill as many offshore exploration wells this year as all other Latin American countries combined.
“What we’re seeing in Mexico — which is something I’m also proud of — is that this year, as of October, Mexico has the largest number of exploration wells in Latin America,” Cochran said. “The number of wells being drilled in Mexico is the same number of wells expected to be drilled all across Latin America, and more than the number of wells being drilled in the northern side of the Gulf of Mexico.”
Cochran, the 42nd Mexico industry expert to participate in the NGI Q&A series, was appointed to lead Amexhi in 2019, following a two-year post as Deputy General Director at Mexico’s Energy Ministry (Sener) from 2016-2018. Prior to his time at Sener, Cochran worked as a rig manager for the Arabian Drilling Company in Saudi Arabia from 2014-2016.
Cochran began his career in the energy industry at Schlumberger, where he worked as a rig manager and engineer in Iraq, the United Arab Emirates, Brunei, Oman and Venezuela. He holds an MBA from Columbia University and the London Business School, participated in the Program for Leadership Development at the Harvard Business School and holds an undergraduate degree in civil engineering from the Instituto Tecnológico de Monterrey.
NGI: For our readers perhaps unfamiliar with Amexhi, what is the association’s role and what does Amexhi do to support private, public and foreign energy companies that want to work and invest in Mexico?
Cochran: Amexhi is the oil and gas trade association that focuses on upstream investment. As of today, we have narrowed our focus to solely operators. To become a member of Amexhi, you either have to have a field that was granted during the previous auctions, or you have to be an approved operator by the National Hydrocarbons Commission (CNH).
We are the link between the operators and the different stakeholders in the industry, such as the government, which is our primary stakeholder at this stage in the life of the contracts. We also engage in different activities, such as with community engagement, academia and with the media. As stated in our mission and our vision, we want to promote oil and gas best practices and to consolidate the industry as a development pillar for Mexico.
NGI: What would you tell a prospective oil and gas company considering the decision to enter and invest in Mexico?
Cochran: If it’s a prospective company, first of all, I would invite them to join Amexhi. By default, Amexhi has become the first stop for a company to get their feet wet in terms of what is happening in Mexico. It gives them a glimpse and sense of what other operators — such as those that have already been here for years and have reached first production — are doing and what has been working for them.
As for what I would encourage them to do today? I would encourage them to have a look at the secondary market. This is where the opportunities lie as of today. There was a 5-year plan that was published last week by Sener, and that plan does state that there could be future bidding auctions. But, as we’ve heard time and time again from this administration, this is not something that they want to consider in the near future.
We respect that, but that doesn’t mean that there aren’t any opportunities here. We want to emphasize that the secondary market is ripe with opportunities as the market starts to heat up with discoveries.
NGI: When you say secondary market, what does that consist of exactly?
Cochran: Two things. One is that, if you take a look at the size of the blocks that were awarded previously, they are actually large enough to hold or host an entire other field within them. So, when a company — perhaps as part of their investment portfolio — is only looking to develop one field and they relinquish the other half without really looking into the prospective resources located within the field, they could form either a joint venture with another company or look at opportunities to shift the operator for particular parts of the field.
The other part of the secondary market would be mergers and acquisitions, M&A. That would give the option for a company to participate in an actual field or go into a field that has no discoveries. It depends on the objective of the company.
NGI: In your opinion, where do you currently see the best opportunities for growth in the Mexican energy industry?
Cochran: Seventy percent of our contracts today are in the exploration phase, so this is where the vast majority of the activity is taking place. If you look at the time of maturity required between the time a contract is awarded to the time until you reach first oil, obviously deepwater takes the longest to produce.
So, in regard to investment, as of today, most of it is going towards development in shallow waters, as that is where we have seen the most discoveries and growth thus far. It is when you reach the development stage, as ENI has and Fieldwood is about to begin, that the majority of the investment takes place. If you are a service provider, for example, that is something to keep an eye on currently.
We have seen some deepwater discoveries and there will be investment opportunities there, they just take longer to develop. This is similar for onshore. There are already mature fields that are in a position to be developed. There are different opportunities for investment across the portfolio, in my opinion.
NGI: What about natural gas? Do you see any possible opportunities for growth in natural gas development in Mexico in the short term?
Cochran: Yes. If you look at some of the statistics in terms of millions of cubic feet produced as of September, what you can see is that, from the contracts awarded since 2016 to today, there has been increased natural gas production. The increases have not been that big, particularly when compared to the U.S., but what it is promising is that the different contract models awarded in Mexico from the bidding rounds are delivering results. There is a clear trend for that.
Of those contract models, the ones that have seen the most growth in terms of production are first, migrations with a partner, and second, associations. These are basically farmouts where the fields were already producing before and, by introducing a third-party that has that specific expertise, it is easy to ramp up production. This is low-hanging fruit here in Mexico. Why? Because the Recovery Factor of the fields is low in comparison to other fields in the rest of the world.
So, if you’re a company that specializes in enhanced recovery or mature fields for gas, there are areas of opportunities here, and that is what the data is showing us thus far.
Additionally, when people speak about gas, there are always questions about hydraulic fracturing (fracking). If you were to read the last report that the current administration published on the amount of prospective resources within Mexico that could be accessed with fracking, it represents 57% of all prospective resources available in the country.
And, even though they are the majority of the prospective resources in Mexico, you might think that they are the future of gas production in the country. Though, as we know, there is currently a bias against developing those fields through fracking.
Within Amexhi we believe the possibility exists to develop unconventional resources. There is modern technology available and we think we can benefit from the lessons learned from unconventional development north of the border, and that we can benefit from economies of scale that also stem from development north of the border.
There’s actually already legislation in place to do this. If you remember, there was a bidding round for unconventional resources that was halted when this administration entered office. That means that there is already a regulatory framework in place, and we believe that the opportunities are there. There is legislative framework is in place to ensure that development could take place in harmony with stakeholders, NGOs and members of the communities, as well as other parties involved in the process.
NGI: Within Amexhi, what are some of the principal concerns for energy companies operating in Mexico right now?
Cochran: The principal concern today is ensuring that rules are followed and that there’s a level playing field. I want to clarify that I’m not saying that we are seeing different rules or rules being changed within our sector, within the oil and gas sector, and specifically in upstream. But you do have to recognize what is going on with downstream, for example, where the CRE has played a different role. So that is a concern. It has made companies question what that might mean for our particular industry.
Again, things are going well and there has been a commitment from the main counterpart of the companies, which is the government. The government has kept their promises thus far. But you do have to look at what is going on in different sectors within Mexico and wonder if something similar could happen here.
NGI: We’ve seen so many changes in the energy regulatory bodies, such as the CRE, CNH, ASEA, and others, in the last two years. How have some of the changes to the regulatory bodies impacted the companies operating in Mexico?
Cochran: As for the CRE, as upstream operators, we at Amexhi don’t have to deal with them much directly.
As for ASEA, our relationship with them has been so far so good. We’ve had quite a number of meetings with their newly appointed (last year) director, Ángel Carrizales, and he brings a level of optimism and energy to the association that has been very well received. This includes ideas about combating corruption, to ensuring that we simplify regulatory needs. We actually have a work program that is already covering 2021 where we have had very good communication with all the different areas of ASEA. We are quite pleased with our work with ASEA.
Our main regulator is CNH, where I can state the same thing. So far, we’ve of course seen several changes, such as the chairman, and we’ve had a similar experience as with ASEA. The new chairman is very amicable with the industry and is also helping us streamline regulation, such as helping companies actually be able to submit paperwork faster. So, we’ve been working with them well, not only with previous regulation, but also with new regulation that needs to be drafted, which is part of the life cycle of companies shifting from exploration to production.
So, the CNH has been cooperative and so far, so good in terms of our relationship with them.
NGI: As for the fields awarded to upstream companies and developers in the previous administration, can you give us an update about how they are advancing?
Cochran: One thing that I am proud of is that despite the Covid situation, both upstream investment and production has increased or been sustained in Mexico. Recent figures published by the CNH depict that approved investment has increased $290 million just in the last quarter. Worldwide, that has not necessarily been the case, and not just because of OPEC and non-OPEC agreements. It’s natural that companies start to shift their already approved investment plans, and that obviously has consequences on where a company commits their resources and production. But that’s not what we’re seeing in Mexico.
What we’re seeing in Mexico — which is something I’m also proud of — is that this year, as of October, Mexico has the largest numbers of exploration wells in Latin America. This includes wells already drilled and that are expected to be drilled in Mexico this year. The number of wells being drilled in Mexico is the same number of wells expected to be drilled all across Latin America, and more than the number of wells being drilled in the northern side of the Gulf of Mexico.
That is impressive in and of itself, and I think speaks to the potential that Mexico has. To drill as many wells in Mexico alone as the total amount in Latin America is promising, without a doubt.
NGI: The unitization talks between Pemex and Talos Energy have been going on for some time now. Are there any updates on the status of those talks?
Cochran: What is important is that we stick to the rules of the game and the rules of the game are based on international best practices. This is part of a script that is drafted by the International Association of Petroleum Negotiators that has been tailored to Mexico and its law. This is to give certainty to the companies so that when things like this happen — because they certainly do and are part of the nature of this industry — that they will follow international best practices.
We would of course love to see this move faster, but it has moved within the timeframes denoted by the rules here in Mexico. We’re waiting for them to decide on who will be the operator and we wish them all the best. At the end of the day, what everybody wants is that the field maximizes its potential. That could be done by either Pemex or the Talos-led consortium. They are both members of Amexhi, so we’re not rooting for one or the other, but what we do root for is that the rule of law is followed.
NGI: Farmouts have been a topic of interest in the sector for years. Do you think new farmouts will be offered soon and, if so, do you see that as another way for exploration and production companies to enter and develop a project in Mexico?
Cochran: We’ve talked about this with the Energy Ministry. At the end of the day, farmouts are a commercial decision made by Pemex. The law today enables them to establish farmouts, so it boils down to Pemex deciding whether or not to seek additional farmouts.
So far, Pemex has commented that they are only going to offer service contracts when entering an investment agreement with an operator. We respect that decision, and it’s theirs to make. What we comment is that, whenever they do decide to seek another contractual route, there are companies willing to invest and give back to what Pemex has already invested themselves. One example of that would be Trion, where there was a down payment covered there.
Moreover, there are companies willing to take the lead on fields that Pemex might not be capable of, or be focused on, developing. This administration has been very clear that they aren’t willing to seek farmouts. We hope that, whenever the production results improve on some fields, that Pemex will reconsider and start seeing farmouts as a potential route of attracting investment, either national or foreign.
Editor’s Note: NGI’s Mexico Gas Price Index, a leader tracking Mexico natural gas market reform, is offering the question-and-answer (Q&A) column as part of a regular interview series with experts in the Mexican natural gas market.
© 2021 Natural Gas Intelligence. All rights reserved.
ISSN © 2577-9877 | ISSN © 2577-9966 |