Services companies stand to profit if Pemex makes changes

HOUSTON — Proposals to open Mexico’s energy industry to outside investment could make a good thing even better for oil field services companies operating there.

Analysts predict that services companies already in Mexico — including Houston heavyweights Halliburton, Schlumberger, Baker Hughes and Weatherford — will profit from increased drilling activity if Mexican lawmakers agree to a constitutional amendment that would allow international interests to share in the risks and rewards of the nation’s oil business.

“Energy reform is not only going to allow private companies to participate in exploration and production, but also distribution and retailing — the whole value chain is going to be open to private investment,” said Dwight Dyer, an analyst with Control Risks, a global risk consultancy. “This should provide opportunity for companies like Halliburton or Schlumberger to expand their presence greatly.”

They and rival companies already have deep history in Mexico: Many have been providing services for years to Mexico’s national oil company, Petroleos Mexicanos, or Pemex.

While Schlumberger historically dominated the Mexican market, Halliburton has worked hard to catch up in recent years. Each earned about $1 billion from Mexico operations in 2012, according to estimates by James West, an analyst with Barclays.

And the constitutional amendment proposed by President Enrique Peña Nieto to open up Mexico to international energy investment could make life sweeter for services companies, providing incentives for their customers to invest in geologically complex and challenging reservoirs.

The Mexican Congress will debate the proposal later this fall.

Production sharing

If it passes, the next step will be specific regulations to put the amendment into effect.

A key question is whether the rules will restrict outside investors to profit sharing or will permit more lucrative production sharing agreements.

Companies typically prefer production sharing agreements, under which they are entitled to a percentage of the oil and gas produced — allowing them to time sales of the commodities they own and potentially profit from fluctuating prices.

Profit-sharing arrangements establish a fixed price for oil and gas produced, and the partners split that sum. Dyer said profit-sharing deals attract less capital investment.

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The Mexican government nationalized its oil industry in the 1930s, and many Mexicans remain suspicious of any move to allow direct foreign access to the crucial national resource.

The nation began allowing profit sharing in 2008, however, hoping to draw investment after decades in which foreign companies could participate with Pemex only as contractors.

But in the three bidding rounds since then, service companies have shown limited enthusiasm for the profit-sharing terms, preferring to provide direct contract services to Pemex.

Challenging the system

In the most recent bidding round in July, companies only bid on three of six blocks offered in the Chicontepec area — an onshore reservoir east of Mexico City that holds about 40 percent of the country’s reserves.

For one block, winning bidder Halliburton offered terms requiring only 1 cent per barrel profit — suggesting that it was less interested in the fixed-profit aspect of the deal than in the fees from providing services.

“Halliburton stood the whole Pemex model on its head by saying ‘I want one penny a barrel,’” said George Baker, publisher of Mexico Energy Intelligence.

Because the contract provides that Halliburton will recover 100 percent of its costs, it can subcontract with affiliated companies that build profit into their charges.

“No one will know how much profit was in that bill,” Baker said. “The profitability of the contract is completely opaque.”

He said services companies charge about 20 percent more in Mexico than the going rate in the United States, and that the proposed move toward more foreign investment might stimulate competition for work in Mexico.

Growing market

Whatever the outcome of the proposals to revamp Mexico’s oil industry rules, Pemex is moving ahead to seek bids on 10 big service contracts valued at $8 billion to $9 billion for a range of onshore and offshore projects that it will award in early 2014.

And some service companies expect good things in Mexico regardless of whether the investment model there changes.

“If it does, it’s another layer on top of what we already have,” said Key Energy CEO Dick Alario at a recent Barclays conference in Houston. “But it doesn’t have to happen for us to have a nice, successful, growing business in Mexico.”

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His Houston-based company had to relocate its rigs to southern Mexico and the United States when budget cuts prompted Pemex to pull back some projects in Northern Mexico.

Now the company hopes to land work on some of the upcoming Pemex contracts, Alario said.

Technip, a French-based energy construction and services company, also is bullish on its prospects in Mexico. CEO Thierry Pilenko told reporters in Houston earlier this month that Pemex has increased its demand for Technip’s new technology as it pushes to increase production in its more complex fields.

Technip opened an office in Mexico City last year, in anticipation of growing demand, both in the onshore and offshore sector, Pilenko said.

“We are well positioned with Pemex,” Pilenko said. “If they start inviting foreign partners, it will go faster, but even if it is later we will be in Mexico.”