Service contracts offered by Mexico's state-owned Pemex for development of 22 new oil and natural gas fields set aggressive terms but can be met, say the contractors.
"The contract model is challenging," Ricardo Reyna, project coordinator at Mexican services company Grupo R told Argus recently. "There is no risk for Pemex because they are not financing the works up front, they are just supervising."
Pemex has tendered five well drilling and two infrastructure service contracts — totaling Ps3.8bn ($200mn) — to develop 22 new fields in an effort to reverse a decade-long decline in oil output that saw production fall to 1.66mn b/d in May from a high of 3.45mn b/d in October 2004.
Rather than open additional upstream auctions for outside investment in exploration and production, President Andres Manuel Lopez Obrador expects Pemex to go it alone in ramping up production. The company will employ private-sector expertise under integrated service contracts rather than the production-sharing or license contracts made available under the 2014 energy reform that dismantled Pemex's monopoly.
Contractors will be required to finance all works up front and will be reimbursed once they hit certain minimum production targets for the wells or once the platforms are installed, a situation that "is not normal, but it is the new way, we have to work," Luis Castro, business manager at QMax told Argus recently.
Global oil services company QMax, in association with Mexican company Perfolat, won two drilling contracts — one for 20 wells in the Ixachi onshore field and another for a cluster of 20 wells in shallow waters in the southeast basin. The initial contract period runs for three years.
Some of the companies consulted by Argus expressed concern at the financing risk they were assuming under the contracts, particularly given Pemex's huge debt burden. The company has more than $100bn in debt with repayment obligations next year totaling $7.7bn, saw a recent credit rating downgrade and has a history of delayed payments to contractors.
"Pemex has a cash-flow problem and that has clearly affected all companies in the sector," Castro said.
But Monterrey-based conglomerate Grupo Protexa says the companies that qualified for the tenders were selected because they could comply with the terms.
"There are some companies whose strength is renting equipment to Pemex and for those companies the contract regime change is difficult," Sergio Charles, Grupo Protexa's commercial director told Argus recently.
Grupo Protexa, which won contracts to drill 12 wells as well as the two infrastructure packages tendered so far, has worked under integrated services contracts with Pemex before, as well as equipment leasing agreements.
For Charles, the challenges for the service providers are the tight execution periods and equipment availability, not financial issues.
"The time periods are optimized to the maximum and so it will be a really big challenge to comply with those," Charles said. "Pemex wanted to achieve economies of scale and so our challenge is that we are working on 13 fields simultaneously. That is a challenge in terms of the amount of equipment needed."
In total, Pemex will tender the drilling of 128 wells and construction of 15 marine platforms and 16 marine pipelines, with the first production from the Xikin shallow-water field expected in August.
All of the contracts awarded by Pemex were subject to invitation-only tender processes, justified by the government on the urgency of reversing declining production.
Pemex expects to increase production to 2.6mn b/d by 2024 and hopes to close out this year with crude output of 1.83mn b/d, up by 5.7pc on previous projections. The company is investing Ps43bn in the new developments out of its total Ps211bn exploration and production budget for the year.
Despite the aggressive terms, QMax is optimistic about the uptick in work, especially given the slump in drilling activity in recent years as Pemex's E&P budget declined in line with weakening oil prices.
"The energy reform did not bring as much drilling as expected," Castro said. "Before the reform we had about 28 platforms providing drilling services but now we have four or five."
"The panorama looks a bit better than we originally thought, it looks like there will be more work but, until the work starts, we will not know the reality," Castro said.
Mexican company Grupo R, that secured one well drilling contract and one infrastructure contract worth Ps1.2bn is keen to continue working with Pemex but hopes that the operators that secured contracts in the upstream auctions will start to hire more drilling services from Mexican companies.
Grupo R has already secured contracts for onshore drilling services by Servicios de Extraccion Petrolera Lifting de Mexico and Perseus Fortuna Nacional — companies that won contracts in the upstream auctions — and the new contract with Pemex will be the company's first foray into shallow-water drilling.
"We are hoping that companies that won contracts in the auctions get good results in the evaluation periods and that there will be new development on those fields too," Reyna said.
Lopez Obrador has paused any additional upstream auctions until existing operators start to increase their output.
