GoM a key long-term market for oilfield services, says new report

The US Gulf of Mexico has proved to be a bright spot for oilfield service companies over the last year or so, according to recent analysis from Trefis, the online securities analyst and research firm.

Beaubouef
BeaubouefBruce Beaubouef • Houston

TheUS Gulf of Mexico has proved to be a bright spot for oilfield service companies over the last year or so, according to recent analysis from Trefis, the online securities analyst and research firm. The analysis attributes this positive predicament to resurgent drilling activity and an increase in capital spending in the region.

Many large oilfield service firms have seen record quarterly revenues as well as improved profitability from the Gulf over the last year, the note observed. The analysis from Trefis examined some of the factors that led to their conclusion that the Gulf could prove to be the most important long-term growth driver in the US oilfield services market.

Geopolitical stability and infrastructure. The US federal offshore region of the GoM accounts for around 23% of total US crude oil production and about 7% of total dry gas production. The region is very attractive to oil companies given its geopolitical stability, proximity to refineries, and strong pipeline and production infrastructure. Of late, investment in the Gulf has been fueled by higher oil prices, and the rig count in the region has grown by roughly 23% over the last year alone to around 59 rigs.

Stability compared to unconventionals.According to the US EIA, total US oil production will rise by around 48% between 2012 and 2019, driven largely by production from shale and tight oil fields. Much of this production growth is currently being driven by strong drilling activity in the most profitable and productive fields. However, shale oil output is likely to decline post 2020 after companies have exhausted production from their most prospective acreage, and could see costs rise as they move to less productive regions. The GoM, in contrast, is likely to provide more stability to US oil production over the longer term considering the vast reserves and strong infrastructure in the region. Between 2014 and 2019, oil production from the Gulf is expected to rise by around 26% from around 1.5 MMbbl/d to over 1.9 MMbbl/d. The economics of producing in the Gulf are also quite attractive, as deepwater operators in the region can produce more oil by drilling fewer wells compared to onshore producers, even after factoring in the additional safety expenses.

Technologies can be scaled globally.Additionally, from a technology perspective, products and services developed and deployed by oilfield service companies in the Gulf can be scaled up to other offshore and deepwater markets across the world. In contrast, unconventionals are currently more specific to North America, and it could take several years before other countries begin commercial scale production from their unconventional resources.

Long-term growth potential. While most of the potential reserves from shale fields have already been identified, a large portion of the GoM still remains untapped. The Gulf could hold a total of around 48 Bbbl of oil compared to the 13 Bbbl of reserves estimated for onshore as well as coastal oilfields, making the region a pivotal part of the US energy landscape. Since much of these untapped resources are located in deep and ultra-deep waters, they will call for a high level of technological expertise as well as a higher service intensity, translating into more activity for oilfield service companies.

The lower tertiary portion of the Gulf could also provide a tremendous growth opportunity going forward, the report notes. The region is seen as the final frontier for the GoM and could unlock as much as 15 Bbbls of new oil reserves. Much of the reserves lie at great depths and this would call for advanced seismic tools for mapping the geologies of the region. In the near term, the report concludes, drilling-focused oilfield service companies could benefit from a shift from exploration to drilling activity, while other service providers could benefit from higher seismic activity over the long run as exploration moves to new frontiers.

Rules implementation next challenge for Mexican reform

In December, the Mexican government approved an amendment to its constitution designed to open the country to wider participation in its petroleum activities. How that amendment actually works will depend upon the content and implementation of secondary laws and regulations. This was one of the main points made at a review of Mexico's energy reform hosted by the law firm Mayer Brown on Jan. 21 in Houston.

Gustavo Madero, president of the Partido Acción Nacional (PAN), said his party decided to accept the political risks of working with the ruling Partido Revolucionario Institucional (PRI) party to bring about this profound change to Mexico's system of petroleum operations. "The political system is the largest economic problem in Mexico," Madero commented. But he added that he was "optimistic about the future" following the passage of the constitutional amendment.

The PAN is concerned that spirit of the amendment might come undone in the transitory and secondary laws that will manage the implementation of the new system.

One key to making the new system work for Pemex will be how the government, particularly the Treasury, reacts. Pemex is the only national oil company to lose money, pointed out Dr. Jesus Reyes Heroles, former Secretary of Energy for Mexico and former CEO of Pemex. This is a particularly important point for Mexico, said Heroles, because the state oil entity provides about 40% of the total government income.

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Dr. Jesus Reyes Heroles, former Secretary of Energy for Mexico and former CEO of Pemex, spoke about the next steps for Mexico's oil and gas reform at a Mayer Brown breakfast seminar held on Jan. 21 in Houston.

Pemex's ultimate reaction will depend on its ability to compete fairly with any incoming NOCs and IOCs; and to do that will require easing the tax burden on the Pemex, Heroles added.

One of the main areas where Pemex needs joint-venture support from outside the country is in access todeepwater exploration and production technology, Heroles said. He also suggested that Pemex needs to eliminate its drilling division to concentrate on exploration and production. "I am thrilled with the scope and depth of the reforms, but we have to see it work under the secondary legislation," he concluded.

The political odds against the reform were huge, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars. Now that it has passed, the work begins on new regulations, terms, and the role of Pemex within the new system, Wood pointed out. This might not be as big a task as it sounds, he noted, because those secondary moves were well discussed during the lead-in to the reform vote. There is a 120-day deadline on passing secondary legislation related to the amendment; that deadline started on Jan. 1, 2014.

Wood questioned whether the government could find people to staff the federal institutions charged with administering the new rules and regulations, and also implementing the results. Getting those rules and regulations done right is one risk within the new reforms.

"They need to establish contract terms, especially the royalty rates," Wood said. "Mexico needs to learn from Brazil's recent bid offering. What if you have a bid round and nobody bids?"

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