The announcement of BP's Tiber discovery echoes across the border

Thursday, September 17, 2009

In early September, British oil giant BP announced it had made a giant oil discovery in the deepwater US side of the Gulf of Mexico (GoM). The news of the Tiber well echoed around the world and served as proof that large reserve deposits are still waiting to be uncovered in the GoM.

On the Mexican side of the GoM, where oil production is limited to state oil giant Pemex, Tiber may well signal opportunity. Given Pemex's sluggish entry into deepwater, however, it remains to be seen when the company will be making such discoveries of its own.

BNamericas spoke to Gianna Bern, president of US consultancy Brookshire Advisory and Research, to hear her perspective on how Mexico likely received news of the BP well and what the country could do to grow its nascent deepwater operations.

BNamericas: What does a large discovery like Tiber mean for Mexico? Is the industry now accustomed to hearing about discoveries like this one, or is it something of a wake-up call, or a reminder, that this could be happening on the Mexican side of the maritime border as well?

Bern: BP's Tiber discovery is a wake-up call, not only for Mexico, but also for the US. I would think it would make companies like Pemex take note of what's going on because this is a perfect illustration of what can happen if you keep investing and stick to your game plan.

All the low-hanging fruit in the industry is gone, so you're now pursuing opportunities that are on the frontier of the industry and deepwater is on the frontier. A company like Pemex should absolutely see opportunity ahead. Deepwater is a very high-cost, high-risk endeavor that takes years to unfold, but I think it's great news for BP and it's a case in point that every super major is taking note of right now.

BNamericas: Could this sort of announcement push Mexico towards embracing private investment in deepwater?

Bern: Hopefully congress will say this is something they should be acting on and prompt them to accelerate efforts to bring in outside investment. I hope it will prompt them to move in that direction.

BNamericas: [Mexican President Felipe] Calderón made vague calls for a second energy reform last week. Do you think deepwater-related measures could be incorporated into a future energy reform proposal?

Bern: It would be very promising if Calderón not only teed up initiatives like deepwater, but pension reform, tax reform, etc. There is a plethora of structural issues that need to be addressed systemically. Deepwater should absolutely be on the short list because you see what BP has done. But other issues - tax and pension reform - still need to be addressed, and I just don't think the Mexican congress has the stomach for it right now.

BNamericas: He has a pretty heavy reform agenda. He seems confident, which I think is surprising considering his party [PAN] just lost the mid-term elections.

Bern: Exactly. It is an unbelievably challenging time. The devaluation of the peso has not helped. Inflation creep, so to speak, has not helped. Various Pemex project delays have certainly added to the challenging environment ahead. Having said that, I've always felt that the Pemex management team clearly understands the challenges. I don't know that congress is nimble enough to react to opportunities.

BNamericas: Obviously it is more important to carry out an energy reform given all the factors you've mentioned that are hurting Mexico's economy. But do those factors increase congress' willingness to do so, or does it put energy reform on the back boiler behind the reform of other issues that are also being negatively affected by a difficult economic climate?

Bern: I think that the faster-than-expected decreases in Cantarell are pushing additional energy reform to the forefront. This just ratchets up the debate another notch.

BNamericas: What sort of exploration contracts are to be expected for Mexican deepwater – big, half-billion dollar contracts like Pemex's E&P subsidiary PEP recently awarded to France's CGG Veritas or possibly smaller tenders for specific areas?

Bern: That may be difficult to tell at this point, but I can see them rolling it out on a case-by-case basis with smaller, very specific tenders. I don't know that the large tender offers are something they'd want to pursue right now. A series of smaller ones might be very beneficial.

I suspect Pemex is probably in the midst of their budgeting process for the coming year. There are perennial changes to the budget as it unfolds. I suspect that given financing challenges in general, I could see them taking a more cautious approach.

BNamericas: Regarding the forthcoming incentive-based contracts, what do you think those will look like for deepwater?

Bern: Oil field service companies have the best opportunities in Mexico right now. So hopefully they'll structure contracts that generate global interest to attract a wide number of firms competing for the business and open it up as much as possible. Everyone will be watching and hoping that there will be opportunities to participate.

About Gianna Bern

Gianna Bern is an energy analyst and president of Brookshire Advisory and Research, an independent consulting firm focused on corporate management consulting and energy economics research. Bern has 20 years experience in corporate finance and treasury, portfolio management and energy analysis.

Prior to Brookshire, Bern was a senior director at Fitch's Latin America corporate finance group, where she was responsible for rating both oil and gas, and utility companies in the region. Prior to that, she was a credit portfolio manager, handling US$2.5bn in funds.

Bern has also held managerial positions in energy risk management at both British Petroleum and Amoco Oil Company, prior to their merger. She has also been an energy analyst at both major oil companies.

Bern has a BBA in finance and accounting from Illinois Institute of Technology and an MBA from The University of Chicago Graduate School of Business.

About the company

Brookshire Advisory and Research is a consultancy focused on corporate finance, credit risk management, and energy economics research with clients based in Europe, Latin America and the US.