• Production expected in first quarter 2024
• Migration contract would share risks, claim critics
• Pemex guarantees New Fortress 190 MMcf/d of gas supply

Shaky Espejo, Platts S&P Global

MEXICO CITY
EnergiesNet.com 11 23 2022

Mexico’s Pemex is assuming too much risk in its deal with New Fortress Energy to develop a deepwater natural gas project in the Gulf of Mexico, according to critics of the plan, who argue that the service contract scheme has not typically favored the state-owned company.

Pemex signed a service contract with US-based New Fortress Energy on Nov. 21 to develop Lakach — a site with roughly 900 Bcf of natural gas — and where the state oil company had already spent billions of dollars without seeing any production to date.

Pemex also signed a separate contract to sell 190 MMcf/d to New Fortress, which will then liquefy it using floating LNG infrastructure. Production is expected to begin in the first quarter of 2024.

The deal signed Nov. 21 had sparked controversy when it was announced in July, as public statements made by the companies led many to believe they were planning an upstream venture — which is impossible under the current legal framework.

In particular, the companies were speaking about joint investments and splitting production — characteristics of a shared production contract — rather than a service contract.

Questions from CNH

When the development plan designed by Pemex for Lakach was presented to Mexico’s upstream regulator CNH, or the National Hydrocarbons Commission, in late October, issues and questions were raised as some parts of the plans announced publicly were inconsistent with what Pemex presented to CNH. The plan was approved by the regulator, but some of its members called for supervision and oversight.

CNH commissioner Alma America Porres Luna, one of the members who requested this supervision, said public comments made by the executives were conflicting as they would require a modification to the type of contract Pemex had. She said she had questions about some details of the project but that according to law, CNH could not investigate further.

“Certainly some of the things we were hearing in the press were not possible, but we are unable to conduct ‘pesquizas’ [investigations] of our own,” Porres Luna said.

According to observers, including Porres Luna, to carry out activities the companies had publicly announced, Pemex would need to switch to using new types of contracts created during the 2013 liberalization process, under a process known as “migration.” Migration would allow the companies to share the risk, but could take Pemex at least one year and delay production, the observers added.

Not the best option

Under the terms of the service contract, New Fortress will provide upstream services to Pemex in exchange for a fee. The fee is based on a contractual formula that resembles industry-standard gross profit-sharing agreements between the upstream service provider and the owner of the hydrocarbons, the company said in a statement Nov. 22.

New Fortress will also have the right to buy, at a contracted rate, sufficient volumes for its FLNG unit, while Pemex will sell the remaining natural gas volumes and all of the produced condensate to its customers onshore.

Observers say that Pemex taking all of the risk is not the best option.

Observers point out to several projects in the company’s history where service contracts led to high costs for Pemex but little results, like drilling in the unconventional deposits known as Chicontepec, where the company has spent billions.

“The scheme Pemex is choosing is of high risk,” said David Rosales, partner at consultancy Elevation Ideas in Mexico City on Nov. 21. Rosales said this is evidence of political influence over the upstream sector.

Costly deal

Pemex has invested over $1 billion at the site since the block was awarded to the company in 2015 in what was known as Round Zero, a process where Pemex selected those projects it wished to keep before the sector was liberalized through public auctions. The $1 billion includes the drilling of one well and the construction of some pipelines, according to data from CNH. However, prior to 2015, Pemex had drilled five more wells, which cost over $1 billion then. None of those wells were successful. According to the new plan, approved by CNH on Oct. 31, Pemex will invest a further $1.5 billion.

“A deal like this could be very costly for Pemex,” Alejandra Leon, director of Latin America upstream research at S&P Global Commodity Insights, said Nov. 21.

Mexico has experience on how long-term supply deals could become challenging to fulfill, said Leon, referring to the dispute between Pemex and Braskem-Idesa, which almost ended in an international arbitration.

In 2010, Pemex had signed a 20-year contract to supply 66,000 b/d of ethane to a joint venture between Mexican Idesa and Odebrecht of Brazil, but was unable to meet its obligations due to falling domestic production. Pemex announced in March a deal with Braskem for the delivery of 30,000 b/d of ethane until 2024.

At Lakach, New Fortress and Pemex expect to obtain 10 years of production, with the possibility of significantly extending the reserve life if the nearby Kunah and Piklis fields are developed. Together, the area around Lakach has a total resource potential of 3.3 Tcf of gas, which make it “one of the most significant undeveloped offshore natural gas resources in the Western Hemisphere,” New Fortress said in a statement.

spglobal.com 11 22 2022