By Phoebe McMellon, Elsevier Geofacets
In part one of this article, we looked at the opportunities that are being presented to foreign companies as a result of Mexico’s landmark energy reforms. In this second part, we outline the challenges that these companies face with bidding for explorations blocks in an unknown terrain.
Challenges that companies are facing when participating in Round One can be classified under three categories—challenge of variables, challenge of unknowns and challenge of time for data collection. The overall effect of these is that the lack of definitive information means bidding decisions are being guided by guesswork.
The challenge of variables
What will the Mexican government and the oil industry do?
Both the government and bidders are operating in a tough environment as a result of oil price uncertainty. Each party wants the oil to be extracted and sold on world markets, but how long can the government endure low oil prices?
The first half of Round One is expected to be set aside for bid registrations, followed by the awarding of projects in July and toward year-end. The bidding timetable, however, has since been revised and may well be again. Whatever the case, the pressure is on to rapidly acquire actionable information on which to base bids. Compounding this matter is the uncertainty around the number of bidding rounds; while five have been announced, there is speculation about whether they will all take place.
Furthermore, while preliminary bidding rules are available, the actual terms and conditions of the licenses are not. It has been said that a local content requirement fixing the provision of goods, services and labor at an initial 25%, increasing to 35% in later years, will be maintained. The requirement of this is that bidders must have a minimum of $1 billion in assets. The government royalties and tax fees will be announced closer to the bidding round, according to the minister of finance.
Contract terms for mature fields, unconventional oil and gas, deepwater blocks of the Gulf of Mexico (GoM) are also promised soon. But the contract length for the first blocks will be 25 years with two extensions of five years each. This could significantly impact licenses by determining how many drilled wells will be required; given that a deepwater platform can cost up to $2 billion, that wells cost $300 million to drill and that a system of seabed pumps and processing equipment can add another $100 million over a 5- to 10-year investment.
There also is uncertainty about the duration that a company can keep its allotment without having to develop or drill, and whether large companies will be required to collaborate with smaller ones.
Finally, the industry is experiencing depressed oil prices, leading to cutbacks in exploration budgets, especially for marginal projects. However, some reassurance is provided in the BP Energy Outlook 2035, which envisions that the current supply glut in oil will fade as U.S. production slows and the worlds’ demand for oil recovers.
The challenge of unknowns
The little seismic information that exists is in the hands of Pemex. Seismic information is crucial to oil and gas exploration and drilling. Unless companies can obtain it, they will be riskily placing bids with a highly obstructed view. Mexico recognizes the importance of seismic surveys and will be issuing separate bids for companies to do them, perhaps alongside Round One. However, given the little time available, it will be virtually impossible for bidders to conduct 3-D and 4-D seismic surveys.
The challenge of time for data collection
For this bidding round, there are huge gaps in information and little time to gather new data to make bid predictions. Even if new data can be collected, it must be consolidated and integrated to enable proper analysis. This is a very time consuming process when done by an individual geophysicist, as files must be individually converted into a standardized format before being integrated. If the data is collected secondhand, the geophysicist still needs to validate it to make sure that it is reliable enough to provide actionable insights.
Possible solution
Compressing time and restructuring data is the formula for success in the GoM.
While this solution seems obvious, it is difficult to implement. Not only must the data be collected and synthesized, it must also seamlessly integrate with tools that geophysicists use. Companies use a variety of information sources and tools to gain a competitive advantage in the bidding process; most of the data access, restructuring and integration issues discussed above are eliminated through automated integration features. Importantly, maps and other facets can also be quickly obtained using keyword and location-based searches, while strategic search filters enable specific areas of interest to be pinpointed. Ultimately, these tools can save companies valuable time, and, when based on trustworthy, credible sources, increase the confidence in bidding decisions.
Finding success in Round One
To succeed, companies must take control of available geological data and analyze it in order to produce actionable results. This would increase the probability of an accurate prediction, helping to locate the most fertile blocks.
Another option is to bid on blocks just to get into the game. Once a company has licensed the blocks, it can choose to develop the blocks or to hold them, while waiting to see how companies with nearby blocks develop their parcels. By doing this, a company can watch and learn and then make an educated guess on the value of its holding and whether to develop or drill. However, if both companies employ this strategy, then discovering the true value of your costly bid becomes a high-stakes game of chicken.
The year 2015 is already shaping up to be an exciting year for companies interested in developing the GoM. While finding oil and gas resources is never a sure thing, how time and data challenges are dealt with will help to determine who obtains the best parcels and declares victory for 2015 and beyond.
Phoebe McMellon is director of product management for Elsevier Geofacets.
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