Big resource, and big risk
Huge oil reserves off Mexico are not without danger
Five Canadian companies have pre-qualified to bid on Tuesday for onshore oil and gas fields in eastern Mexico, opening the doors to one of the most promising resources in the world. It would also expose the companies to what analysts say is one of the most dangerous places in the Americas in which to work.
Mexican oilfields are opening up to foreign production for the first time in 77 years, but the industry is plagued with risk, and not just from the pervasive and debilitating dengue fever. Theft, kidnappings and extortion are on the rise, and Canadian companies may find themselves targeted by criminal organizations.
“Mexico remains one of the most dangerous countries to operate in Latin America,” Carlos Cardenas, analyst at IHS risk rating, told a webinar in the spring.
Security is among several factors under evaluation when the bids are made, said Steve Hanson, president of Calgarybased International Frontier Resources Corp., one of the pre-qualified companies. “Our risk analysis isn’t just about security,” Hanson said. “It’s also about access to pipelines and access to services.”
In March, several vehicles owned by companies subcontracted by Petróleos Mexicano, the Mexican state-owned company, were set ablaze by armed men near Villahermosa, Tabasco, after the contractors reportedly failed to pay extortion fees.
Fuel theft is on the rise, with Pemex reporting 4,125 incidents of oil being siphoned off pipelines in 2014 — a 43.7 per cent rise from last year. Theft cost the company 7.5 million barrels, valued at US$1 billion.
But the promise of tapping large hydrocarbon reserves remains tempting. One oil industry observer has likened the Mexican opportunity to going into Alberta or Texas 20 years ago. While Mexico is the world’s 10th- largest producer of oil and gas, its 9.8 billion barrels of proven oil reserves and potentially vast offshore reservoirs remain underdeveloped.
While Pemex has enjoyed a monopoly over the resources since 1938, it also faces fierce competition from drug cartels seeking new revenues. Overcrowding of the drug market forced cartels to diversify into other ventures, such as oil theft, kidnappings for ransom and extortion, according to Lourdes Pintado at Control Risk, a global risk consultancy.
“Because the number of groups increased,” Pintado said, “they had to turn to other sources of revenues, other than drug trafficking.”
The rise in criminal activities has coincided with a decline in oil production as technological shortfalls and a heavy tax burden limited Pemex’s ability to maintain infrastructure and develop new fields. Mexico’s oil production fell to 2.8 million barrels per day in 2014 from 3.8 million barrels per day in 2004.
To attract capital and technology, Mexican President Enrique Peña Nieto’s government approved an energy reform in December 2013, opening the industry to foreign investment. The U. S Energy Information Administration estimates the reform has the potential to raise oil production to 3.7 million bpd by 2040, rather than drop to 2.1 million bpd.
In July and September this year, bidding rounds were held for offshore fields in the Gulf of Mexico. A third tender, to be held Tuesday, will see five Canadian firms — East West Petroleum Corp., Gran Tierra Energy Inc., Renaissance Oil Corp., Torenco Energy Inc. and International Frontier Resources through its joint venture, Tonalli Energia — bidding for some of the 25 onshore oil and gas fields in eastern Mexico.
Fields being considered by Canadian companies are confidential. But it’s the oilfields in Veracruz, Tabasco and northern Chiapas that are the most attractive, said Kevin Smith, vice-president at White Rock, B.C.- based Renaissance Oil. These fields are estimated to contain a total 1.8 billion barrels of oil, according to the Mexican Secretariat of Energy, mostly the prized light or extra-light crude.
“There are very few opportunities globally where you see the denationalization of large hydrocarbon producing areas,” said International Frontier’s Hanson. “This is probably the largest opportunity that’s come in decades.”
Oil- extraction companies will be largely protected from oil theft, which is mainly targeted at pipelines, said Smith. But they are not in the clear — the oil blocks coming on auction are located in areas with the highest levels of crime.
The risk of kidnapping and extortion in Veracruz and Tabasco is considered extreme and high, respectively, by red24, a London- based riskmanagement consultancy. In 2014, Veracruz witnessed 144 incidents of kidnappings and 255 incidents of extortion, while Tabasco saw 100 kidnappings and 139 incidents of extortion according to government numbers — among the highest in Mexico.
Canadian companies seem confident in Mexican government pledges to keep them safe. Since taking office, Peña Nieto has improved security, with the formation of the National Gendarmerie, a federal security force, that will soon assume responsibility f or Veracruz.
“The federal security forces are the most trustworthy and effective in the country, compared to state and municipal police forces,” Pintado said. “However, they do not have the capacity to take over security tasks in all of these places.”
Ultimately, it seems that Mexico is worth the gamble for Canadian oil companies. “The resource potential is massive,” said Renaissance’s Smith, “and the risk is manageable.”
This is probably the largest opportunity that’s come in decades