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Pemex Hedges Oil For First Time In 11 Years

James Burgess

James Burgess

James Burgess studied Business Management at the University of Nottingham. He has worked in property development, chartered surveying, marketing, law, and accounts. He has also…

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Now Is The Time To Invest In Mexico’s Oil Boom

Drilling Mexico

On today’s global oil and gas scene, nothing is more exciting than Mexico right now. Only here can you get in on the ground floor of major plays that already have discoveries and proven reserves and can be developed profitably in a low oil price environment. After the doors suddenly flew wide open to foreign companies for the first time in nearly eight decades, the competition is starting to heat up.

The nearly 80-year-old monopoly on Mexico’s oil and gas wealth by its state-run giant is over, and the scramble is on to get a foothold in this cheap-to-produce playing field that defies the depressed market.

“Right now we’re in the early stages of an oil and gas opportunity that will be bigger than anything in history,” says International Frontier Resources Corp. (OTQB:IFRTF) President and CEO Steve Hanson.

That’s what happens when a huge country de-nationalizes its entire energy sector, removes a state-run monopoly on oil and gas overnight and ushers in top foreign companies with advanced technology to unlock all the oil that’s been left in the ground.

The U.S. Energy Information Agency (EIA) has jumped on board this super oil express, revising its 2040 forecast for Mexican oil and gas production upwards by a whopping 76 percent.

While the supermajors have their radar locked on massive deepwater discoveries offshore auctioned off successfully on December 5th, juniors such as International Frontier Resources Corp. are focused on Mexico’s onshore bonanza. As first-movers, IFR is setting itself up for success with aggressive oil field development. It’s also setting the stage for an advantage in the next auction round.

International Frontier Resources scooped up the Tecolutla Block through Tonalli Energia, a 50/50 joint venture with Mexican petrochemical leader Grupo Idesa, in Mexico’s first onshore licensing round and signed a historic contract with the Mexican government on August 25th. This propelled Canadian IFR to its coveted "first-on-the-scene" position, giving this small-cap a very large-cap strategic operating presence.

Expansive Interest and Intensifying Competition

The playing field here is wide open. And while many were initially skeptical when Mexico held its first auction right after implementing its sweeping reforms, the atmosphere changed quickly. These are now the hottest auctions in the world and bidding is intense.

From the supermajors to the small-caps, the interest is expansive and the competition is only set to intensify further.

The December 5th auction saw the who’s who of oil and gas giants bid, with Australia’s BHP Billiton outbidding British Petroleum (BP) to become Mexican state-owned Pemex’s first private partner in deep-water exploration and production in the massive Trion oilfield, discovered in 2012 and believed to contain 485 million barrels of commercial reserves alone. And this Gulf of Mexico offering was only a small part of the deep-water sale—another 10 deep-water blocks estimated to be worth $10 billion were up for auction, and the winning bidders included Chevron Corp., France’s Total SA and Exxon Mobil Corp., Norway’s Statoil and BP Plc, and Murphy Oil Corp., Ophir Energy and Malaysia’s Petronas Carigali.

Onshore, the competition is also heating up quickly, and this is where the small-caps can become very big.

Mexico just announced its next auction round—round 2.3—where it’s going to put eight of 14 blocks in Veracruz, near Tecolutla, up for grabs. These blocks will be larger than those that were won in the previous round, with the average size being about 71.4 square miles. In total, we’re looking at four gas and 10 oil fields in Tamaulipas, Nuevo Leon and Veracruz.

(Click to enlarge)

The data room will open its doors on December 15th, and International Frontier Resources is set to aggressively take its Mexico operation further.

Mexico’s ‘Golden Lane Trend’: Unlocking the Riches

Mexico has multiple large conventional onshore oil fields. And we're looking at significant upside once we start applying modern technology brought in by foreign partners, and the ability to take exploration farther into tighter reservoirs to increase recoverable reserves.

(Click to enlarge)

Mexico was producing around 2.8 MMOBPD in 2014—87% of it crude oil. By the end of that same year, Mexico had 9.8 billion barrels of proven oil reserves. Of that 2014 production, 25% came from onshore fields.

These onshore Mexican fields were being developed before there was anything like 3D seismic available, but the foreign companies coming in can drill horizontally and employ enhanced recovery methods to tap into the estimated 95% of oil left in the ground here. And with 3D seismic, they can easily pinpoint the sweet spots.

There is so much more oil in the world that is still recoverable, and while none of these places exist any longer in the U.S. or Canada, Mexico is an untapped paradise.

The “Golden Lane Trend”, dubbed as such by geologists, and where International Frontier Resources has its Tecolutla block, hasn’t seen extensive development in the past 50 years. Now that the doors are open to foreign companies, new technology will pour in and the first-movers will have all the advantage of a known oil bonanza that is virtually untapped, similar to what happened in the U.S. with the shale boom.

The Tecolutla Block, or Block 24, in the Tampico-Misantla Basin, was successfully awarded to International Frontier Resources in an earlier bidding round. In this block, vertical wells drilled by PEMEX left behind the bulk of the oil and then were shut in years ago.

IFR’s Tecolutla Block is in the Tampico-Misantla Basin in the state of Veracruz. This is a producing carbonate oil reservoir called El Abra, with a formation depth of 2,340 meters. IFR has already acquired and reprocessed 3D seismic over the entire block, and it already has data on seven vertical wells to bring the field back into production. But this production is yet to be optimized.

(Click to enlarge)

Using a combination of advanced carbonate drilling, completion, stimulation and recompletion techniques brought in by IFR, the Tecolutla Block could exponentially exceed historical peak production and significantly increase recoverable reserves.

Production in Mexico is among the cheapest in the world. That means that Mexico makes sense even at today’s low oil prices.

Development costs in Mexico’s oil patch, according to Deloitte, come in at an average of $23 per barrel, and roughly 60 percent of the country’s production comes from areas that cost around $10-$21/per barrel to develop.

Smart Partnerships that Guarantee Market Access

Getting a foothold in Mexico’s newly wide open oil wealth is not just about getting there first and bringing the right technology—it’s about creating strategic partnerships. As Mexico prepares to dramatically expand the use of partnerships over the next five years, the hundreds of new opportunities for foreign companies are solidified through smart partnerships.

While the supermajors are operating in consortia and partnering with PEMEX, International Frontier Resources, for one small-cap, has partnered with Mexico’s Grupo Idesa, a billion-dollar leader in the Mexican petrochemical industry and a net importer of natural gas. This partnership affords the Tonalli Energia JV access to substantial infrastructure, assets, facilities and a huge consumer of natural gas that has just built a $5.2-billion petrochemical plant to handle anticipated increases in energy feed stocks.

Just the Beginning of Mexico’s Major Global Debut

In mid-November, Mexico announced it would auction off 14 more contracts for exploration licenses in onshore areas. The blocks up for grabs include 25 fields and areas in the same state of Veracruz, including in the Tampico-Misantla Basin, the Southeast Basin and the gas-rich Burgos Basin.

Contracts will be awarded in July 2017, and we fully expect the first-movers to be among them.

We are right at the turning point of a game-changing event on the Mexican oil scene, and those foreign companies who have already established a foothold have the clear advantage in the next round of auctions. The shift here will be momentous, and oilfield services giants like Schlumberger recognize it as well, gearing up for an anticipated drilling drive in Mexico next year.

Hands down, there is nothing bigger on the oil and gas scene right now than Mexico. The factors that have combined to make this an obvious truth are fantastic.

The removal of a nearly 80-year-old state-run monopoly plus the sudden opening up of an entire industry to foreign companies plus already discovered but underdeveloped plays plus some of the cheapest production costs in the world plus the introduction of advanced technology that could unlock massive amounts of oil and gas left in the ground plus great infrastructure in place plus transparent investment … simply put, it's impossible not to see the massive opportunity here.

It all equals the potential for highly profitable new oil for the small-caps and supermajors alike, but even more so for first-mover small-caps like IFR, who have secured a strategic foothold with a smart partner and are all set to move on more in the next bidding round.

By James Burgess for Oilprice.com

Legal Disclaimer/Disclosure: This piece is an advertorial and has been paid for. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. No information in this Report should be construed as individualized investment advice. A licensed financial advisor should be consulted prior to making any investment decision. We make no guarantee, representation or warranty and accept no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Oilprice.com only and are subject to change without notice. Oilprice.com assumes no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this Report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, we assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this Report.




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