What I Told the “Heavy Hitters” at the Economic Summit in Mexico City
If it’s Tuesday, it must be Texas.
Today, Marina and I are off to Burleson County to visit the first drilling site for Money Map Project #1.
But that’s just the start of our day-long journey…
Later, we’ll be traveling into East Texas to survey a few of the future locations for the next several wells in this exciting project.
Our first well has a projected total depth of approximately 11,520 feet. It will be drilled as a horizontal well with a true vertical depth of 6,300 feet and a horizontal leg of 5,400 feet, penetrating the lower part of the Austin Chalk Formation.
Sitting at about 8000 feet above the Eagle Ford, the Austin Chalk has delivered an impressive production stratum for decades.
Of course, these formations don’t end at the Rio Grande.
This prolific geology extends deep into Mexico, where I addressed the Mexico Economic Summit on the topic last week.
And if the turnout is any indication, the money being made north of the border is now creating a “shale frenzy” south of the border.
It’s a sign that a major new investment wave has begun…
After 76 Years, Investors Can Finally Strike it Rich
Organized by Bloomberg, the summit attracted several “heavy hitters,” including major figures from the national oil company PEMEX, principal banks, international oil and gas majors, government ministers, and a slew of international equity, currency, and commodity traders.
Of course, investor expectations have been building since the election of President Enrique Peña Nieto, who took office on December 1, 2012 and had campaigned on a platform of reform.
Now after 76 years of nationalization, the gates to foreign investment in oil and gas plays are opening.
For this to occur, a number of major changes have had to take place over the past year. The national constitution had to be amended with the constituent Mexican states approving. The structure of PEMEX along with a number of statutes and legal regulations also had to be revised, extensively rewritten, or scrapped entirely.
Most importantly, the Mexicans needed to take a more realistic view of the sector.
This last element was the real political gamble taken by the new president. PEMEX was enshrined in both the constitution and the popular mind as a national company, controlling major national assets only for Mexico.
In order for this view to change, Mexico had to recognize it needed to open up for outside investment, expertise, and joint ventures.
That proved to be the most difficult hurdle to overcome.
Part of this process involved admitting problems of declining production, infrastructure, management, and technology could not be met with domestic personnel only.
But another dimension painted a more optimistic picture: Get it right at this critical juncture, and there could just be a dramatic improvement in the lives of average Mexicans.
In the meantime, genuine development plans still await specifics. As a result, much of what was discussed at the Summit remains provisional. Nonetheless, there is now a far greater sense of anticipation than at any time in my years of involvement down there.
Live From Mexico City
The response to my presentation was energetic and the questions were far-ranging and intense. In preparation, I had decided to direct my attention on three elements in the immediate future:
(1) Shale gas and tight oil production;
(2) The need to develop multifaceted sources of local support services;
(3) And navigating rapidly changing approaches to project finance.
My comments were predicated on a premise I have often used in international consulting. Almost without exception, projects are more successful and provide greater return if they oblige the creation of genuine domestic expertise, participation, research, and technological development.
In short, I argued that projects in Mexico should train Mexicans, provide tangible ancillary business expansion, inject ongoing capital into local economies and tax bases, network with in-country universities, research centers, financial institutions, along with a myriad of existing industrial, manufacturing, and start-up enterprises.
This should not be another example of outside carpet bagging, where the only local employment realized is minimum wage while the higher levels of pay come in (and leave with) the outside operators. Or, as one of my Mexican colleagues puts it, a case of “gringo economics.”
And as I have noted previously, extending the shale plays in South Texas surrounding the Eagle Ford basin and the producing horizons above and below it, should be regarded as the first major target.
All told, there are five promising areas for uncoventional production carrying more technically recoverable reserves than all of the remaining conventional oil and gas in the country.
The difficulty here will be to coordinate how outside expertise, technique, equipment, and production ability will supplement rather than simply replace what PEMEX can already provide.
Decisive will be the drive to establish joint ventures with smaller foreign companies to provide for locally based service and supply provisions for the huge number of new wells, many of which will require horizontal/multidirectional drilling and fracking.
In this case, allowing a significant component of the oil field services (OFS) segment to be local will maximize the positive impact while lowering the actual cost of projects.
A Major Magnet for International Financing
One of the major keys as I see it will involve how the product will be integrated into major changes taking place in cross-border finance. A major ingredient will be the rapid expansion of liquiefied natural gas (LNG) trade.
The key to how the collateralization of LNG consignments will benefit Mexico lies in the following. According to the latest Energy Information Adminsitration (EIA) figures, the country is sixth in global shale gas reserves (seventh in tight/shale oil).
Yet one does not have to be the actual manufacturer of the LNG moving internationally to benefit from the trade. So long as a country is extracting a substantial and continuous flow of natural gas, contracts can be swapped and paper cut.
In short, providing a significant chunk of the gas coming out of the ground worldwide allows for participation in the finance and shipment of foreign LNG via contract swaps without having to be the producer of the LNG itself.
This means countries like Mexico, where gas production is expected to accelerate, are likely to realize a greater position in the international trade.
We will be talking about this change in the future as it impacts several global regions. But it is already poised to be a magnet drawing additional finance to a reformed Mexican energy sector.
That means we will have additional investment options emerging in short order.