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Rising optimism in Brazil and Mexico

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Alexandre Imperial Alex Imperial
Managing Director, South America
Eckhard Hinrichsen Eckhard Hinrichsen
Country Manager, Mexico
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Oil and gas reserves and development potential in Brazil and Mexico
Oil and gas reserves and development potential in Brazil (pictured) and Mexico are compelling stories for long-term investors (Photo: Shutterstock)
Liberalized offshore oil and gas regulations in Brazil and Mexico look set to create large long-term opportunities for new players to boost reserves and production in both countries

Just before the oil price started slumping in autumn 2014, Brazil and Mexico were optimistic that opening up key aspects of their oil and gas industries to new entrants would attract foreign investment and technology to galvanize production.

These opportunities had previously been monopolized by state-owned national oil companies (NOCs) Petróleo Brasileiro (Petrobras) and Petróleos Mexicanos (Pemex).

Since then, offshore oil and gas activity in both countries has been hit by a combination of ’lower for longer’ oil prices and political upheaval.

A probe into corruption involving Petrobras continues. Political turmoil led to Michel Temer becoming Brazil’s new president in August 2016. Mexico’s president Enrique Peña Nieto appointed former deputy finance minister José Antonio González Anaya as Pemex’s chief executive in early 2016 to drive a restructuring programme to counter low oil prices and realize opportunities from energy reform.

That said, there remains much to play for in maximizing the economic opportunities of the two nations’ substantial oil and gas reserves (figures 1a and 1b), experts say.

Optimism rebounds in Brazil

Confidence in the outlook for 2017 rose 34% in a year among senior oil and gas professionals in Brazil, reaching 50%, according to opinion research for DNV GL’s annual industry outlook report. This is higher than the global average (+32%) as president Temer’s pro-business approach and reforms come into play. 

“The industry is not yet firing on all cylinders, and the business environment still needs improving. It has turned the corner though, and Brazil’s large reserves remain a compelling story for long-term investors,” says Alex Imperial, managing director, South America, DNV GL – Oil & Gas.

“Petrobras’s new governance and strategy are very positive signals for the industry’s outlook. Meaningful legislative reforms will increase transparency over bidding, long-term predictability, continuity and competitiveness.” 

Rules for production sharing agreements for pre-salt exploration and production areas have been revised to allow companies other than Petrobras to operate such fields. Pre-salt plays tempt foreign investors as production per well in developed pre-salt areas is much higher than in the North Sea and Gulf of Mexico. 

The federal government recently approved a three-year licensing round schedule (2017-2019) with a total 10 rounds contemplating both concession and production sharing blocks. Four of them are scheduled for 2017, two of them being in the pre-salt region in the Santos and Campos basins.

Figure 1a
Figure 1a
Figure 1b
Figure 1b

A more regulated market: demand for integrity management and operational safety

As a competence hub for both rigid and flexible pipes in Brazil, DNV GL is already seeing positive effects from the new regulatory environment. A new regulation addressing operational safety management of submarine systems has increased demand for the company’s technical assurance and advisory services for strategic projects involving pipeline integrity management by key local and international players, for example.

“We are working with operators and services companies on qualification of new technologies and materials for flexible pipes to overcome pre-salt challenges such as water depth and high carbon dioxide content,” says Imperial.

“Our work involves validation/optimization of design and integrity methodologies for rigid and flexible pipes, and integrity monitoring of flexible pipes during operations. Approaches include development and qualification of new technologies and methods through joint industry projects and technical qualification to international standards.”

This activity aligns with DNV GL’s survey finding that 46% of respondents in Brazil expect to spend more in 2017 on life extension of assets, while 58% anticipate higher costs aimed at increasing the efficiency of assets in operations.

“In another part of the value chain, reforms are creating room for new entrants and greater diversity in the gas sector,” adds Imperial. “Having been involved in all existing liquefied natural gas (LNG) regasification terminals in Brazil, we have the experience to support new players. We also capitalize on our international experience related to city gas projects to provide regulatory, strategic and technical advice to the industry. Our research found 40% of respondents in Brazil looking for new merger and acquisition opportunities in gas, compared with 27% globally.”

Mexico attracts foreign oil and gas operators

Mexico’s sweeping Energy Reform introduced in August 2014 has already led to substantial investment by international oil companies and independents buying rights to explore and produce offshore Mexico for the first time in nearly 80 years.

This investment is needed to reverse a decline in total oil production, which in 2015 was 32% below its peak in 2004.1 Crude oil production that year was the lowest since 1981.

The reforms cover production-sharing, profit-sharing, licence contracts and contracts for services. Before, foreign firms could participate only in service contracts in which companies were paid for services. They were barred from holding shares or taking profit from the commercial exploitation of Mexico’s hydrocarbon resources.

Mexico is a net importer of gas as demand rises, particularly for power generation. Domestic production of dry natural gas has declined over the decade so far. Constrained by budgets and know-how, Pemex has been slow to exploit an estimated 545 trillion cubic feet of recoverable shale gas resources. Foreign investment and technical expertise can help.
 
“Pemex is gradually getting its act together amid restructuring,” says Eckhard Hinrichsen, country manager, Mexico, DNV GL – Oil & Gas. “This is creating opportunities for IOCs, independents and service companies. In the short- to mid-term, we expect Pemex will progress further with farm-outs, partnerships, and outsource as much as possible.”

IOCs in the new Mexican wave

Foreign companies already invested in Gulf of Mexico shallow water opportunities in Mexico include ENI, Fieldwood Energy and Pan American Energy. More information to partner Pemex to explore/develop the shallow-water Ayin and Batsil fields is expected in October 2017.

Mid-term, the headlines will be about companies awarded Gulf of Mexico deepwater blocks, Hinrichsen says. Foreign companies that bid successfully for these, most as consortia with or without local players, included BHP Billiton, BP, Chevron, CNOOC, ExxonMobil, Inpex, Murphy Oil, Petronas Carigali, Statoil and Total.
 
Pemex is still making discoveries in the Gulf of Mexico. In 2016, its main deepwater finds contained more than 300 million barrels of crude oil equivalent (mmbpce) of light crude oil (Lco). The principal shallow water discoveries added up to more than 380mmbpce Lco.

The challenge of change

Some imminent changes will bring short- to mid-term challenges for companies trying to maximize the opportunities from liberalization in Mexico’s oil and gas sector.

Pemex’s continued restructuring maintains uncertainty for some suppliers and potential partners. Constitutionally, Peña Nieto cannot run again for Mexico’s presidency in the 2018 national elections.

“Also, the regulations and regulators are new, so companies have no experience with them,” observes Hinrichsen. “There are practical logistical challenges such as long distances from shore and record water depth, and safety culture lags behind world standards.”

New entrants are seeking experienced advisors with good contacts in Mexico to assist them in its new energy era. “We believe that we offer this,” says Hinrichsen, who heads a 140-strong team across four offices. DNV GL has 20 years’ experience in the country.

“It helps that we are recognized and respected by the authorities without being too closely linked to them,” he adds. “Also, one benefit of DNV GL being global is that operators know us from elsewhere and can trust that they will find the same quality in our local operations.”

The long-term outlook remains favourable for investment, Hinrichsen emphasizes: “Demographic, geographic and economic advantages can underpin prospects for oil and gas in Mexico. It has a young population and workforce, and growing demand for gasoline and power. Economic growth is moderate and looks sustainable for the foreseeable future.”

Export potential and trade agreements

There is strong export potential because of Mexico’s location and its free trade agreements with 44 countries, he adds. Trade and immigration lie at the heart of one external source of uncertainty; future US policy towards Mexico under president Trump’s administration.

The US took some 59% of Mexico’s crude oil exports in 2015, according to the US Energy Information Administration (EIA); 36% of Mexican exports of refined petroleum products went to the US. Both types of export to the US have declined since the 2000s. The US provided most of Mexico’s refined products, 58% of it gasoline, in 2015. The two countries currently have an agreement covering development of oil and gas reservoirs extending across their maritime border.

“It is too early to say how the US policy story will play out for Mexico,” says Hinrichsen.

References

1 ’Country analysis brief: Mexico’, EIA, December 2016

Disclaimer:
DNV GL prides itself on providing accurate information but makes no claims or guarantees about the accuracy, completeness or adequacy of contents in this publication, and disclaims liability for any errors or omissions. The authors’ views here do not necessarily reflect DNV GL’s views.