will mexico be competitive? - gaffney, clinewill mexico be competitive? 2 ... mexico conventional...

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© 2014 Gaffney, Cline & Associates. All rights reserved. Terms and conditions of use: by accepting this document, the recipient agrees that the document together with all information included therein is the confidential and proprietary property of

Gaffney, Cline & Associates and includes valuable trade secrets and/or proprietary information of Gaffney, Cline & Associates (collectively "information"). Gaffney, Cline & Associates retains all rights under copyright laws and trade secret laws of the

United States of America and other countries. The recipient further agrees that the document may not be distributed, transmitted, copied or reproduced in whole or in part by any means, electronic, mechanical, or otherwise, without the express prior

written consent of Gaffney, Cline & Associates, and may not be used directly or indirectly in any way detrimental to Gaffney, Cline & Associates’ interest.

Alan Cunningham

Gaffney, Cline & Associates

3rd Sept 2014

WILL MEXICO BE COMPETITIVE?

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Resource Potential

• Nature of Resources

• Size

• Oil or Gas

• Access to Markets

• Access to Resources

• Allocation Process

• Transferability

WHAT DOES IT TAKE TO BE COMPETITIVE?

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Resource Potential


• Size

• Oil or Gas




• Transferability

Fiscal Balance & Stability

• Defined vs. Negotiable

• Regressive vs. Progressive


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Resource

Potential


• Size

• Oil or Gas




• Transferability


• Defined vs. Negotiable

• Regressive vs. Progressive

Acceptable Ancillary

Risk Factors

• Country Risk

• Regulatory Environment

• Transparency

• Local Content & Services


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RESOURCE POTENTIAL

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MEXICO’S RESOURCE POTENTIAL

Regional Resource Ranking

1. USA

2. Canada

3. Brazil

4. Venezuela

5. Mexico

Conventional Shelf & Onshore

28.9 Bboe

- 16.1 Bboe in < 500m

- 12.8 Bboe Onshore

But

Development Risks

Economic Risks

Unconventional

60.2 Bboe

460 – 545 Tcf Gas

But

No Commercial Production

Exploration Risks

Deep Water

27.7 Bboe

- 16.1 Bboe in > 1500m

- 3.7 Bboe in 1000 – 1500m

But

No Commercial Production

Exploration Risks

TUDORPICKERING HOLT & CO. “MEXICO OPENING AND

OPPORTUNITIES..”, FEB 2014

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Source: USGS Map

MEXICO’S CONVENTIONAL POTENTIAL

28.9 Bboe Potential

Regional Ranking

• USA

• Brazil

• Canada

• Mexico

• Colombia

Four Onshore Geological Provinces

• South East

• Burgos

• Tampico

• Veracruz

Competitive Factors

• + Field Size vs. US Limited Access (Pemex Controlled)

• + Oil/Gas Ratio Onshore Security

• Technical Complexity

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MEXICO’S UNCONVENTIONAL RESOURCES

60.2 Bboe Potential

Regional Ranking

• USA

• Argentina

• Mexico

• Canada

• Brazil

Five Geological Provinces

• Burgos

• Sabinas

• Tampico

• Veracruz

• Chihuahua

$100 billion needed over next 10 years

Competitive Factors

• + Unexploited Potential - Water Access

• + Access to resources - Infrastructure

• + Gas price - Land/Security

•

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MEXICO’S DEEP WATER POTENTIAL

27.8 Bboe Potential

Success to Date

• 25 Exploration Wells Drilled

• Perdido Fold Belt 500 mmboe

• Catemaco Fold Belt 5Tcf Wet Gas

Other Prospective Areas

• Salina del Bravo

• Mexican Ridges

Competitive Factors

• + Unexplored resource potential

• + Access to rights

• No Infrastructure

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RESOURCE ACCESS

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d. No Pemex Entitlement

“Assigned Migrated” Contracts

Higher Risk/Tech/Capital

Pemex Non-operator

CNH/SENER Established Terms

“Entitlement” Contracts Lower Risk/Tech/Capital

Pemex Operator

Pemex Free to Contract

RESOURCE ACCESS

No Pemex Application

Pemex Round Zero Application SENER Decision (Aug 2014) Investor Access

Pemex Surrender

Pemex Awards

Service Contracts

Round 0.5 J.V.S

Unconventional 15% Pros Res

Deep Water 29% Pros Res

Shelf 63% Pros Res

Onshore 82% Pros Res

Round 1

Annual Rounds

How Will Areas Be Made Available?

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RESOURCE ACCESS - Round One

Source: SENER

Type Volume

MMBOE Blocks/Fields

Area

Km2

Investment

Level in 4

years

MM$

Annual

Investment

Level

MM$

Exploration 14,606 109 25,903 19,000 4,750

Exploitation 3,782 60 2,597 15,100 3,775

Associations

w/Pemex

(Farm-Outs)

14 ND 16,400 4,100

2P

Reserves 1,557

3P

Reserves 2,664

TOTAL 50,500 12,625

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Resource Access - Mexico’s Contract Options

Contract Type Likely Use

Service Contracts

Pemex Entitlements

Producing Areas

Commercially Feasible

Developments

Profit Sharing Agreements

Conventional Exploration

Complex Developments

Production Sharing Agreements

Deep Water

Licenses

Unconventional

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RESOURCE ACCESS - REGIONAL COMPETITION

▪ Any contract form can be

used to generate the same

economic take under a given

set of assumptions.

▪ Primary differences are the

risk/reward relationship and

operational control which are

generally higher for the

investor under concession

contract regimes.

Concession

Contract

Type

PSC/PSA

Service

Argentina Argentina

Brazil Brazil

Canada

Chile

Colombia

Ecuador

Peru Peru

Uruguay

USA

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FISCAL BALANCE & STABILITY

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MEXICO’S CONTRACT & FISCAL REGIME


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Fiscal Factors Service

Contract

Production

Sharing

Profit

Sharing Licenses

Income Tax

Exploration Fee

Royalty (Price/Product Sensitive)

Signing Bonus

Contractor % of Operating Profit

(Bid Variable)

($/Bbl Fee)

(In Kind)

(Cash)

(In Kind)

Windfall Adjustment

Cost Recovery

Minimum Work Investment

(Bid Variable)

FISCAL REGIME COMPONENTS

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Fiscal Factor Applicable To Range

Royalty Oil

CP< $48 R= 7.5%

CP> $48 R= (0.125 xCP) + 1.5%

Assoc. Gas R = CP/100

Non Assoc. Gas

CP < $5/MMBtu R = 0

$5 > CP < $5.50 R = (CP - $5) x (60.5/CP)

Condensate

CP < $60 R = 5%

CP > $68 R = (0.125 x CP) – 2.5%

Exploration Fee

First 60 Months

Starting Month 61

$1,150 Pesos/Sq. Km

$2,750 Pesos/Sq. Km

EEHA Tax

Exploration Phase

Extraction Phase

$1,500 Pesos/ Sq. Km

$6,000 Pesos/Sq. Km

Land Use Fee Onshore 0.5% - 3% Post Govt. take revenue share

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Onshore Conventional

• 60% - 65%

Onshore Unconventional

• 45% - 55%

Offshore Shelf

• 70% - 85%

Offshore Deep Water

• 55% - 75%

FISCAL BALANCE & STABILITY - The Regional Competition

• Jurisdictions that move towards bonus/regressive fiscal systems

generally experience a decline in licence activity.

• Jurisdictions that move towards net profit/progressive fiscal systems

generally experience an increase in licensing activity.

Mexico intends to be at a competitive regime by emphasizing

progressive fiscal parameters and allowing investors to bid the

Contractor’s share of operating profit.

Range of competitive state-take

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Country Risks

Legal System

International Treaties

Internal Security

ANCILLARY RISK FACTORS - INVESTOR RANKING

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Country Risks

Legal System


Internal Security

Regulatory Environment

Transparent

Experience/Capacity

Some Regulatory Gaps

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Country Risks

Legal System


Internal Security


Transparent

Experience/Capacity


Transparency Defined Process

Checks & Balances

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Country Risks Legal System


Internal Security


Transparent

Experience/Capacity



Checks & Balances

Local Content/

Services

Realistic Targets

Service Company Presence

Water/Infrastructure Limitations

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Country Risks Legal System


Internal Security


Transparent

Experience/Capacity



Checks & Balances

Local Content/

Services

Realistic Targets

Service Company Presence

Water/Infrastructure Limitations


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COMPETITIVE SUMMARY

Mexico USA Canada Brazil Argentina Venezuela

Resource Potential

Conventional

Unconventional

Deep

Resource Access

Conventional

Unconventional

Deep

Fiscal Balance

Ancillary Risk Factors

Country Risk

Regulatory

Transparency

Local Content/Service

will mexico be competitive? - gaffney, clinewill mexico be competitive? 2 ... mexico conventional...

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