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Global Energy Advisory October 6, 2017


With new discoveries on the map and a series of auctions, Mexico’s newly liberalized energy sector looks great—on the surface. But there are plenty of things to trip up investors, and next year will be particularly decisive.

While all the news right now is of the latest round of auctions in which an Egyptian and German company signed deals to partner with Mexico’s state-run Pemex for two onshore oilfields, what’s buried in this story is significant.

Yes, Wednesday tender announcements are important: It’s only the second time Mexico has offered outsiders partnerships with Pemex. A third block up for auction in shallow waters garnered no interest at all, but what investors should really be paying attention to is the bigger picture.

Three years ago, Mexico opened its energy sector to private investments in a landmark energy reform that ended more than seven decades of monopoly by state-run Pemex. Supermajors Exxon, Chevron, and BP are opening or planning to open their first service stations to tap into the Mexican refined products market. Shell is the latest Big Oil player to have entered Mexico’s retail market, pledging US$1 billion in investment over the next 10 years.

But the real game here is shale, or unconventional oil and gas. And this is where things get tricky. Mexico has postponed this much more crucial auction twice now. Most recently, it was supposed to get started in December this year. It’s been postponed again, and the reason is significant: Mexico will hold elections in July 2018, and these key shale gems will wait for the auction block now until after that. There are 70 blocks slated for auction—and these are the blocks that are the backbone of Mexico’s post-reform energy story.

For investors, this is what it’s all about—and this is exactly where the uncertainty lies. President Enrique Pena Neto, the man behind Mexico’s sweeping energy reforms, is not constitutionally allowed to run for office again. So whoever ends up taking over, and is inaugurated by December 2018, will determine what happens with these key auctions. Essentially, this likely means we’ll wait for another year to see these prime shale blocks go up for tender. And even then, this story is loaded with uncertainty.

Right now, then, Mexico has opened its doors to foreign investors for conventional oil and gas only, and it’s the unconventional that counts. Mexico can only increase its production through the non-conventional plays, but the political heat is rising, helped along by the devastation of massive earthquakes.

Deals, Mergers & Acquisitions

• Shell has canceled the sale of its interests in Thai gas fields to Kuwait Foreign Petroleum Exploration Company, the Anglo-Dutch major said. A spokeswoman for the company cited the inability of the seller and buyer to agree on the terms of the deal, which was estimated to be worth $900 million. The divestment was part of Shell’s asset sale program following its $70-billion acquisition of BG Group.

• Noble Group plans to divest from its oil liquids business by the end of the year and is currently studying second-round bids. The divestment is part of Noble’s plans to slim down its operations focusing on what’s core and selling the non-core operations. The company used to be Asia’s biggest commodity trader but it has been saddled with substantial debts that it is now trying to cut through asset sales.

• Saudi Aramco will buy a 50% interest in Petronas Chemicals’ unit PRPC Polymer for $900 million, the Malaysian company said. After the divestment, Petronas Chemicals will retain the other 50% in the polymer business. Aramco will also supply 70% of the crude feedstock for PRPC Polymer. The deal, for the Saudi state giant, is part of its diversification efforts into refining and petrochemicals. Meanwhile, Petronas is seeking buyers for more of its Canadian assets, after it scrapped what was to be one of the biggest LNG projects globally, worth $29 billion.

• Statoil, Total, and Shell have sealed a three-way deal to advance carbon storage in the Norwegian continental shelf. The project envisages developing a carbon capture and storage capacity of 1.5 million tons of CO2 annually, with the option for additional volumes at a later stage. The project has the backing of the Norwegian government as part of efforts to develop full-scale carbon capture and storage capacity in Europe’s biggest oil producer.

Tenders, Auctions & Contracts

• Tehran plans to sign the first Iran Petroleum Contract by the end of the current fiscal year, March 31, 2018. It will be for the development of the South Azagedan field, which Iran shares with Iraq. The tender for the field is yet to be announced but Tehran has invited 29 international companies to take part, including Total, Shell, Eni, Lukoil, Gazprom, OMV, Schlumberger, and CNPC and Sinopec. South Azadegan currently pumps 83,000 bpd but plans are to boost this to 320,000 bpd in the first phase and to 600,000 bpd in the second phase.

• Shell has emerged as the top suitor for Iran’s second-biggest gas field, Kish, not least because it has so far been the only company that has expressed interest in studying its development. The Anglo-Dutch major conducted a study of the field’s potential under a deal with Tehran and has now presented its findings to the government. The Kish field is believed to hold 1.3 trillion cubic meters of natural gas and over 500 million barrels of condensate.

Discovery & Development

• BHP Billiton is preparing to start drilling off the Mexican coast, in the Trion field, which it will be operating alongside Pemex. By the end of 2017, BHP plans to sign the contract for the field with Mexico’s government, commission drilling rigs, and in the second half of 2018 spud two wells. Trion holds an estimated 485 million barrels of oil equivalent and could become of the biggest Gulf of Mexico oil developments.

• Gazprom plans to snap a tenth of China’s natural gas market after 2025, after it completes the Power of Siberia pipeline, which will carry 38 billion cubic meters of gas annually by 2025. Shipments will begin in 2020, at a rate of 4.6 billion cubic meters.

Regulatory Updates

• Canada’s federal government is firmly behind the capacity-expansion of Kinder Morgan’s Trans Mountain pipeline that ships crude from Alberta’s oil sands to the coast of British Columbia. The federal Minister of Natural Resources told media that with or without new pipelines Canada will continue to produce oil but with pipelines its transport will be safer. The government of BC is just as firmly opposed to the Trans Mountain project, with the province Energy Minister claiming BC doesn’t need any more oil to go through its territory and be shipped from its ports.

Politics, Geopolitics & Conflict

• ISIS militants set three oil wells around Kirkuk, Iraq, on fire in an attempt to slow down the advance of the Iraqi army and Shia militias to the town of Hawija, which is under the control of the terrorists. On Thursday, Iraqi forces announced that they had retaken one of the Islamic State's remaining strongholds after about 1,000 militants surrendered amid fresh signs the terror group is collapsing and unable to defend its territory.

• Colombia’s government struck a ceasefire with the radical left militant group ELN. The ceasefire started on October 1 and will last until January 9, 2018. The militants have pledge to stop attacking energy infrastructure during that period, along with other allowances.

• Iraq has begun freezing all relations with the Kurdistan autonomous region after a referendum showed the Kurds want independence from Baghdad. The Iraqi state has banned foreign currency transfers to the region as well as sales of U.S. dollars. Earlier this week, Baghdad banned international flights to and from Kurdistan.

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