Pemex awards first ever incentive-based contracts to Petrofac, APC

- Thursday, August 18, 2011

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Mexican state oil company Pemex's E&P subsidiary PEP awarded its first three service contracts under the new incentive-based modality to London-based service company Petrofac and Monterrey-based service company Administradora en Proyectos de Campos (APC), Joel Bermúdez Castro, administration and finances chief of PEP's southern region, announced at an event in Tabasco state.

The contracts target the mature Santuario, Magallanes and Carrizo fields in the southern region. Petrofac won the contracts for the first two fields, while APC won the contract for the latter field.

Both companies bid just above the minimum US$5/boe tariff associated with each extracted barrel of oil. Pemex will also partially reimburse costs and provide bonuses associated with productivity and cost reduction. The contract modality was made legal by the 2008 energy reform.

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"In the three cases, the winning tariffs were very close to the minimum tariffs which in many senses speaks not only to the opportunity, but also the certainty of the legal framework that surrounds these processes," Vinicio Suro, deputy director of PEP's southern region, said.

CONTRACT AWARD DETAILS

Having overcome constitutional challenges to the incentive-based contract modality, Pemex launched the tender for the three contracts in March. Pemex received the companies' offers on Thursday and awarded the contracts to the firms that presented the lowest bids, provided they fell below the established tariff ceilings that were revealed at the event.

The ceiling for Santuario field was US$7.97/boe, and nine bids ranged from Petrofac's US$5.01/boe to the US$25/boe bid submitted by the consortium of Argentine firm YPF and the oil major Repsol's (NYSE: REP) Repsol Exploración México subsidiary.

The Dowell Schlumberger subsidiary of Houston-based oil field services company Schlumberger (NYSE: SLB) submitted a bid of US$5.08/boe, which was close enough to Petrofac's bid to force a run-off.

Each company was asked to submit a percentage increase to the minimum US$58.3mn initial evaluation of the Santuario field. Dowell Schlumberger proposed a 65% increase, while Petrofac proposed a 100.5% increase, thus securing the contract.

The ceiling for the Magallanes field was US$9.78/boe, and Pemex received four bids ranging from Petrofac's US$5.01/boe offer to Bridas' US$21/boe. The second lowest bid was US$8.65/boe from Burgos Oil Services, so Petrofac won its second contract of the day.

Mexican energy expert David Shields said the logical interpretation is that Petrofac bid low as a means to secure a foothold in Mexico with the new contracts, but that the strategy "may not be the whole story."

"I suppose there must be a premium for the company to be willing to make a very low bid in order to get a foothold. But one assumes they have done their arithmetic," Shields said. He added, however, that in past Pemex bid processes some companies have bid low initially and later renegotiated terms.

George Baker, director of Houston-based consultancy Baker & Associates, told BNamericas that Petrofac fits the profile of the company Pemex was seeking with these tenders because it specializes in farm-in arrangements rather than undertaking exploration risk.

"Pemex calls this whole exercise a mature field project. Another way to describe it is a farm-in project. Pemex has taken the exploration risk, found these reservoirs, and is now trying to get companies to farm-in, except with a farm-in traditionally you get an equity position. So you might say this is a farm-in project because you do not get a share of the physical oil or revenue at market prices of that oil," Baker said.

For the Carrizo contract, PEP established a US$12.31/boe ceiling and received two bids. Dowell Schlumberger offered US$9.40/boe, while APC submitted a US$5.03/boe bid and won the contract.

APC is currently working for Pemex in conjunction with GPA Energy, a subsidiary of Grupo Industrial Monclova, on the Monclova block in Coahuila state.

Neither Petrofac nor APC responded to a BNamericas request for comment as of press time.

The Santuario, Magallanes and Carrizo fields hold 207Mboe 3P oil reserves and more than 2.2Bboe in situ that is mostly light crude. The former two fields currently produce a combined 14,000b/d, while the latter field's operations were shut down in 1992.

"We are very certain that in the subsoil of the region of these areas there is a very significant quantity of hydrocarbons that today are only partially benefiting the owners of the resource: the Mexicans. But with these contracts that we are starting today, we are sure we are going to be able to substantially increase recovery of reserves," PEP's CEO Carlos Morales said.

Petrofac and APC in September will start a 1-1.5-year study period during which they will propose activities to increase production of the three fields. Pemex has previously said production could increase the fields' combined output to 55,000-60,000b/d within three years.

"Without a doubt this is a very important step that helps us be able to establish different oil operation mechanisms in Mexico. The work is really just beginning. From here onward, we have a lot of work," Morales said.

Pemex's CEO Juan José Suárez Coppel affirmed that the company is working on publishing a second tender later this year for incentive-based contracts in the northern region's mature fields, and more tenders subsequently.

"This is the start of a new stage in which we seek companies that help us exploit this resource working together shoulder to shoulder in a more contractually flexible way. We have great potential to exploit and we invite you to continue working with us going forward," Suárez said.

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