By José Pablo Rinkenbach
Throughout the last eight decades, the hydrocarbons energy sector of Mexico was developed through a State monopoly (i.e. Petróleos Mexicanos). The depletion of proven reserves and the gradual but yet constant production decrease of the large reservoirs, together with increased difficulties to discover and develop new reserves, as well as the limitations of the contractual models and the availability of resources to improve PEMEX´s capacity and quality of execution, rendered it impossible to sustain the monopolic model, giving rise to the Energy Reform of 2013.
The Reform opened up this sector to direct participation of the private industry through the so called Round One, where 109 exploration blocks and 60 production fields in different geographical areas, both onshore and offshore, as well as conventional and non-nonconventional reservoirs will be put out to tender.
In preparation for Round One, Ainda Consultores and CBM Ingeniería Exploración y Producción put together a multi-discipline team of experts in the industry (geoscientists, engineers, economists, attorneys, businessmen, among others) 9 months ago, to conduct an evaluation of the preliminary value creation potential of representative blocks and fields of the areas considered in Round One. The study was performed based on the public information available to date and on the experience and knowledge in the different areas of a group of experts.
The intention of this study is to answer a set of fundamental questions that future investors might have:
- How attractive the oil business is in Mexico and which are the most attractive areas or blocks for the different profiles and types of investors?
- What is the level of profitability expected from each block or field to be put out to tender and how to compare them vis a vis to other international projects?
- How do the different contractual schemes and levels of government take impact the profitability of the projects?
For that purpose, 12 representative blocks / fields (i.e. clusters) were selected from the areas chosen by SENER for Round One.
In order to facilitate the comparison of the evaluations of the different blocks and fields, a rating and classification system was developed based on the following parameters: (i) technical, (ii) economic, and (iii) sufficiency and quality of public information available. This approach would allow investors to have a better understanding of the appeal of the areas included in Round One.
The classification system was developed based on ranges of different parameters such as: profitability, economic risk, financing needs, operating complexity, operating risk, climate risk and social risk.
One of the areas of major interest in this round is the Area of Chicontepec, due to the fact that, it virtually represents 40% of the overall domestic reserves. For this area, a preliminary technical-economic evaluation of an average representative block was conducted. It is important to highlight that the Chicontepec area has high heterogeneity, as it can be seen from the sand discontinuity, the stage of the field in its production life cycle, the crude characteristics and grade, the initial production and well decline, level of reserves, among others.
Although it would not be until November that the SENER (Ministry of Energy) and the SHCP (Ministry of Finance) announce a blueprint of the contractual model and the economic-fiscal scheme, it is still feasible to make an initial estimate of the potential, assuming reference parameters both at the domestic and international level. The evaluation of Chicontepec was made assuming a joint production model, at a cost oil of 60%, which replicates the same parameter outlined in PEMEX allocation under the new fiscal regime.
Furthermore, a starting point regarding the Government take of production was set at 40%, ensuring that the oil income that belongs to the Government is maintained in the order of 85%, which is the current situation of the projects assigned to PEMEX.
Another key parameter in the evaluation was the definition of a reference price to appraise its production. During the last five years, the WTI price has varied between US$70 and US$110 per barrel, whereby 50% of the instances, the price was within a range of US$93 to US$107 per barrel, with a weighted average of US$100. Due to this uncertainty, a conservative price of US$85 per barrel was used.
The results of the evaluation of Chicontepec allowed an estimation of a value creation within a range of US$ -340 to US$ 600 million, measured as the Net Present Value (NPV), at an Internal Return Rate (IRR) between 9.5% and 42%, with an expected value of 14.5%.
In the joint production contracts, the percentage of the Government take of production is critical, since it does not only impact the profitability, but it is also one of the assignment variables for the tenders. Due to the importance of this parameter, scenarios with different levels of Government take of production were considered; in such a way that the potential investor can define its offer strategy in the tenders, always trying to maximize its value creation and its likelihood of winning the contract. It stands out that those scenarios where the production granted to the Government is 30% or more, there is the risk of losing the value creation potential if the investment increases over 20% of what was estimated.
Finally, and with the objective of increasing the level of certainty for investors, the study uses value creation and profitability ranges in a probabilistic manner, for which purpose a Montecarlo simulation of 5,000 scenarios was made. The results of the simulation show a likelihood of 67% for the NPV to be positive. The foregoing suggests the convenience for authorities to consider the potential economic attraction of certain blocks vis a vis the profitability of international projects. This could be achieved by means of the size of the blocks, sufficiency and quality of information, term of the contracts, among other variables.
In summary, the study developed by Ainda and CBM is of substantive importance and a reference point for any corporation interested in participating in the new Mexican E&P market.