Peak Oil is You

Donate Bitcoins ;-) or Paypal :-)

Page added on July 18, 2015

Bookmark and Share

The good oil boys club

The good oil boys club thumbnail

IT SHOULD have been a day of high excitement. A public auction on July 15th marked the end of a 77-year monopoly on oil exploration and production by Pemex, Mexico’s state-owned oil company, and ushered in a new era of foreign investment in Mexican oil that until a few years ago was considered unimaginable.

The Mexican government had hoped that its first-ever auction of shallow-water exploration blocks in the Gulf of Mexico would successfully launch the modernisation of its energy industry. In the run-up to the bidding, Mexico had sought to be as accommodating as its historic dislike for foreign oil companies allowed it to be. Juan Carlos Zepeda, head of the National Hydrocarbons Commission, the regulator, had put a premium on transparency, saying there was “zero room” for favouritism.

When prices of Mexican crude were above $100 a barrel last year (now they are around $50), the government had spoken optimistically of a bonanza. It had predicted that four to six blocks would be sold, based on international norms.

It did not turn out that way. The results fell well short of the government’s hopes and underscore how residual resource nationalism continues to plague the Latin American oil industry. Only two of 14 exploration blocks were awarded, both going to the same Mexican-led trio of energy firms. Officials blamed the disappointing outcome on the sagging international oil market, but their own insecurity about appearing to sell the country’s oil too cheap may also have been to blame, according to industry experts. On the day of the auction, the finance ministry set minimum-bid requirements that some considered onerously high; bids for four blocks were disqualified because they failed to reach the official floor.

The private sector often has a better understanding of subsea prospects than the public sector, but Mexico’s wariness about fully ceding control may have prevented the government from understanding the true value of the blocks. “They are still having trouble letting go of the old mindset of full control, rather than letting the market decide,” says one industry executive. One of the two blocks awarded to the winning consortium (comprising Mexico Sierra Oil and Gas, Dallas-based Talos Energy and London-based Premier Oil) was more hotly contested than the government expected; four groups offered well above the government-mandated minimum.

Because of historical sensitivities, Mexico awarded rare profit-sharing contracts between the state and private firms, rather than fully confer ownership of oil reserves to the private sector. It also required a level of corporate guarantee to cover spillages that went beyond international norms. Its potential ability to rescind contracts has alarmed some oil companies, too, lest their wells be expropriated without compensation in the future.

Mexico’s auction comes at a time when other Latin American countries—even socialist Venezuela—are rethinking their gut hostility to foreign oil firms, though still hesitantly. Falling prices have played havoc with regional investment plans, and have made the benefits of embracing a dose of private-sector efficiency look more attractive. With capital scarce, the competition for foreign investment has increased.

Pemex has cut its capital expenditure by $4 billion, or around 12%, this year, to $23.5 billion; figures for the next four years are, ominously, “under revision”. Mexico desperately needs to plug that shortfall to sustain oil production. Petrobras, Brazil’s state-owned giant, said last month it would slash its capital expenditure by more than a third over the next five years, to $130 billion. Investment this year in Colombia, once a darling of the mid-cap oil industry, will be half last year’s level, says Ivan Cima of Wood Mackenzie, an energy advisory firm.

Cutbacks will only exacerbate the region’s stagnation in oil output. Mr Cima says Colombia will fail to pump 1m barrels per day (b/d) this year. Continuing a decade-long losing streak, Mexico’s production, which was recently hit by two rig fires, has fallen to 2.27m b/d this year, well below government projections at the start of the year (see chart).

The biggest shock came in late June when Petrobras, plagued by a corruption scandal and huge debts, cut a whopping 1.4m b/d off its forecast for 2020. Venezuela, the largest producer and only OPEC member in the group, is also pumping substantially less than it had originally forecast. Pedro Joaquín Coldwell, Mexico’s energy minister, wryly notes that in the 1990s, OPEC and non-OPEC countries such as Venezuela and Mexico hammered out sensitive agreements to push up prices by curbing output. Now the cuts are coming all by themselves.

This dismal collective performance is a blot on Latin America’s credibility. The rot started in Venezuela in the early years of this century when Hugo Chávez, its late leader, turned PDVSA, a world-class state oil company, into a piggy bank for his free-spending populism, and then scared off foreign investors. After he took power, oil production fell by about a third, although for many years the effect was disguised by high prices. Now its energy officials are travelling cap-in-hand to places like Russia, China and India to beg for investment.

Brazil has also morphed from a potential energy superpower into a virtual pariah. When Petrobras discovered massive oil reserves in subsalt layers of rock deep beneath the Atlantic Ocean in 2007, Brazil’s government hoped the country would become one of the world’s top five oil producers. But efforts to sustain Petrobras’s home-team advantage, such as requiring it to hold a minimum 30% stake and serve as the lead operator on subsalt discoveries, have scared off many foreign partners.

In an effort to woo them back, boost oil production and increase royalties, Brazil’s Senate is analysing a draft bill to loosen these obligations on Petrobras. But Dilma Rousseff, the president, and members of her party remain opposed on patriotic grounds. She could veto it even if it does pass Congress.

Mexico’s first auction experience suggests that half-hearted liberalisation is not good enough to attract scarce capital. In coming weeks, Mexico will launch the bidding processes for deepwater fields that will be of most interest to the oil majors and for “farm-outs” in which Pemex will set up joint ventures with private firms. It will need to apply lessons from its first flop to attract more interest. Its challenge is to show that it is playing by the rules of a modern, open oil market, rather than a prickly Latin American one. If it is the former, the days of falling production should be numbered, and the region’s oil industry will have a better model to follow.


4 Comments on "The good oil boys club"

  1. rockman on Sat, 18th Jul 2015 2:11 pm 

    “The private sector often has a better understanding of subsea prospects than the public sector.” Really??? You mean companies that spend tens of $millions and deploy thousand of the most experienced explorationists for just the preliminary evaluation develop a better insight then a bunch of political appointees? I’m shocked!!! LOL.

    Lots of folks hate to see oil companies make profit but would much more prefer to see them risk their capital exploring then it be done with tax payer monies.

    I can offer one possibility why companies won’t rush even if Mexico sweetens the deal since prices are much lower. Years ago exploration in the DW GOM slowed down significantly due to low oil prices. So the feds lowered royalties in the next DW sales. So companies picked up the pace, discoveries were made and new production was brought on.

    And then, coincidentally, oil prices spiked up and the politicians and voters were outraged over the revenue the companies received. Of course forgetting that most of the new production would not have been developed without royalty relief. Fortunately being a country known for following the rule of law the deal stayed in place.

    Now imagine if in the next 10 years companies spent tens of $billions to find and developed offshore Mexican oil and prices spiked again. Who here would guarantee the Mexican govt wouldn’t rewrite the trade? I would expect them to and do would most of the companies. Some folks who cheer when oil company assets are nationalized and seized don’t look beyond the short term. Venezuela was fat and happy after they seized oil assets. And now with no outside help to maintain the industry the country may be on the verge of collapse that makes the situation in Greece not look that bad.

    For decades the Mexican people were told it was wrong for foreign companies to help develop their oil resources. No one believes that ingrained resentment has disappeared just because the govt wrote some new laws. I suspect most companies will continue to slow play the Mexican situation…even if oil prices were to rebound anytime soon.

  2. joe on Sat, 18th Jul 2015 2:28 pm 

    why invest in oil nobody wants? They cant even sell shale oil, why would I want oil from the deep blue yonder? That’s why its not working. Ok at 110 its attractive to the very greedy, but its a risk. Shale oil is finding that out.

  3. Northwest Resident on Sun, 19th Jul 2015 9:23 pm 

    I think that Shell is being a little overly optimistic with their expectations. That is, if by “recovery”, they mean back up to the comfy $100 per barrel range. Don’t hold your breath.

Leave a Reply

Your email address will not be published. Required fields are marked *