Seeing ourselves in PEMEX’s mirror

OB-YG355_3pemex_P_20130719165128 Pity Mexico’s oil sector reformers. After a bitter, hard-fought, multi-decade campaign to open the oil sector to foreign investment, they put together a landmark auction…and the thing flops. 

The Mexican government had hoped that its first-ever auction of shallow-water exploration blocks in the Gulf of Mexico would successfully launch the modernisation of its energy industry. In the run-up to the bidding, Mexico had sought to be as accommodating as its historic dislike for foreign oil companies allowed it to be. Juan Carlos Zepeda, head of the National Hydrocarbons Commission, the regulator, had put a premium on transparency, saying there was “zero room” for favouritism.

When prices of Mexican crude were above $100 a barrel last year (now they are around $50), the government had spoken optimistically of a bonanza. It had predicted that four to six blocks would be sold, based on international norms.

It did not turn out that way. The results fell well short of the government’s hopes and underscore how residual resource nationalism continues to plague the Latin American oil industry. Only two of 14 exploration blocks were awarded, both going to the same Mexican-led trio of energy firms. Officials blamed the disappointing outcome on the sagging international oil market, but their own insecurity about appearing to sell the country’s oil too cheap may also have been to blame, according to industry experts. On the day of the auction, the finance ministry set minimum-bid requirements that some considered onerously high; bids for four blocks were disqualified because they failed to reach the official floor.

You can rant about “residual resource nationalism” all day, and I’m sure that didn’t help. But the real story here is simpler: the financial arithmetic facing a potential investor has been totally upended by the collapse of oil prices. Projects that were a slam-dunk a year ago have become distinctly dodgy propositions.

This is a dynamic Venezuelans have barely woken up to. We still tend to think we’re the bee’s wax in terms of oil sector investibility just because there’s so damn much of the stuff under the Orinoco Basin. But things have changed. Low prices leave more and more countries fighting to attract a dwindling pool of investment funds. (And did you notice? Iran just came into the market too…)

This is why the appointment of a relative pragmatist like Eulogio del Pino to the PDVSA presidency means so little. Two years ago, putting a guy like del Pino in charge of PDVSA might’ve been enough to attract big-time investment into the Venezuelan sector. Insane leadership was a serious limiting factor back then.

These days?

International investors have 99 problems and who runs PDVSA is not one of them.

26 thoughts on “Seeing ourselves in PEMEX’s mirror

  1. Oh my, that was an interesting post. When Petrobras did the same thing about 8 years ago, selling offshore drilling rights, they got an enormous financial windfall. Brasil was rolling in Dollars/Euros as a result. They got the World Cup. They got the Olympics. They had a lot of people taking the concept of “BRICS” seriously. Like PDVSA, however, Petrobras was forced to sell their refined oil products, as per a government mandate, BELOW market costs. Not a good idea. Petrobras is now hurting for cash, and little production is taking place off of their Atlantic coast. Between ‘government mandates’ and corruption, Petrobras is a shell of what it used to be…


    • Brazil’s economy had been receiving US$ 60 bn/year in FDI for several years, to think that the selling of a couple offshore drilling rights eight years ago was the catalyst of the whole process is not very accurate. Petrobras was literally just a drop in the ocean.

      Brazil went to hell now because Dilma is very good at scaring away local and foreign investors, and, truth be told told, much better than the previous president at this too, and guess what, investment just vanished away, as no one believes in an economic team that changes the rules of the game depending on the direction of the wind. There’s simply no trust left. Everyone is on standby only waiting for Dilma to either be impeached or to resign to resume their activities. The country is at a stand-still.

      Regarding Petrobras current disaster, a good mental exercise is to compare it with Vale, a company that used to belong to the state just like Pbras, but was privatized in the 90’s, and now you won’t find one single corruption case involving its name, nor leftist politicians trying to imploded it from inside by destroying its meritocracy, or forcing it to sell below market prices, or any sort of populism that would affect its balance sheets,

      Petrobras could be like Vale. Actually, Petrobras was very much like Vale before the Brazilian Chavistas assumed power in 2003.


  2. Mexico is just another victim of the infamous Resource Curse.

    Happens every time, over and over, in modern world history. When countries are not well -educated and advanced before they strike it rich (Norway..) or they are ruled by an authoritarian, yet productive regime (Qatar..) they are ALL royally screwed (Nigeria, Kleptozuela..)

    Besides the Oil curse, and the Under-education curse, Mexico suffers from a third terrible malady: a bunch of horny rabbits, they have 122 Million of poor, ignorant souls to feed. That, of curse, is related to the under-education, and the Curse, in the first place, which inevitably has doomed Dozens of rich nation into Massive Corruption and various levels of disaster in the 3rd World.

    Math is simple:

    Abundant Natural Resource + Under-education/Massive ignorance + Populist Corrupt “democratic” government = Rampant Kleptomania, Galactic Corruption, miserable country.

    Never fails.


    • Brazil, btw, suffers of much of the same curse, 10th largest oil production, plus loads of natural gas and other natural resources. But Petrobras massive corruption is not coincidence, just apply the infallible mathematical formula above.( Ignorant Rabbits too, of course: 300 million of poor souls to feed. (huge difference w/Vzla’s 30 little million)


  3. Time is running out for the Orinoco heavy oil and bitumen deposits. There is a lot of it, yes, but the global energy scene is changing while Venezuela sits on those huge deposits of low quality hydrocarbons. A combination of geopolitical shifts, environmental pressures and technological breakthroughs are making of the Orinoco oil an EDSEL of the energy sector. Resources that would last 300 years at the current rate of exploitation could well remain indefinitely in the ground, as a museum piece in a future energy sector that will based on light oil, natural gas, bio fuels, solar, wind, hydrogen and other sources. This process is ongoing and gaining momentum while Maduro plucks the petals of the daisy: loves me, loves me not


    • Gustavo, very good, the EDSEL of the world energy sector, good only for asphalt to pave the roads for Venezuela’s EDSEL-age vehicle population.


  4. Having a succesful auction takes a lot of heavy and smart technical preparation , you have to figure out what is it that the offshore companies find economically sexy in real detail , run programs to see what has to be offered to get them salivating , Venezuela had some very succesful auctions before Chavez and the preparation was both very thorough and proffessional , get a good outside advisor which specializes in oil , not financial advisors or professional sellers of hot air (they are useless) . People who in Venezuela prepared these auctions have all left the country to highly paid jobs, State oil companies if they are not autonomous often fall into the trap of thinking that they are doing the companies a favour for offering the deposits to exploit or explore and heap the bid conditions with exagerated requirements .

    The situation is even worse where market prices are low and there is no expectation that they will soon rise . If they had their auction 2 years ago it would probably been much more succesful , now they have to offer the world to get anyone interested , this is the sort of thing that people i politics who dont know the industry dont understand !!

    Dr Coronels comments are spot on , it may turn out that getting the oil from the faja will involve a lot of money having to be paid by the State if private business dont get their pound of flesh,!!


    • IIRC, the contracts to explore and produce in the Orinoco heavy oil basin were signed in the 1990s, when oil prices were low. This would suggest that low oil prices per se should not inhibit foreign oil company action in the Orinico. The inhibitor is the trust factor. Given the way that Chavismo kept changing contract terms, in the belief that the golden oil goose could never be killed, only a foreign oil company with no memory – and no awareness of how the Chavista economy has worked for the last 15 years- would venture sign anything with Chavismo.


  5. With oil at $50 a barrel nobody is jumping at any new deals. The price will have to move back upward towards $70-80 dollars a barrel to attract investors and make fracking profitable again. The Peak Oil doomsayers were really full of baloney on this one. There is lots of oil still out there. Just ask Guyana.


  6. Few multinationals will invest in a country where it’s impossible to get your money out at a credible exchange rate, and where this is no reliable legal means of in-country arbitration when the check bounces. Oil profits are currently going almost exclusively to grease the military and national security forces and the few politicos far enough up the ladder to simply filch from the till. If the former social programs are working at all, they are just barely. The situation in the hospitals is getting very dire. In many cases no one is getting paid anything but peanuts if that, and the resources (medicines, etc.) are criminally thin.

    Like I’ve said, if the energy sector has a hitch and it lasts for a while – if Gurry goes down, for example – the bottom is going to fall out in a matter of days.



  7. “The price will have to move back upward towards $70-80 dollars a barrel to attract investors and make fracking profitable again. ”

    Most specialists have it around $90/barrel by 2020.

    And Fracking already is very profitable and changing the Power balance of the entire planet as we speak. Gringo es Gringo. Y lo demas es guevonaa.


  8. Understand bonds issued by Fracking companies to fund their investments and operations are not doing too well , maybe because low prices hurts their finances, less severely or more severely, depending on whether their fracking activities are located where the production is easier and low cost or more difficult and high cost . They cant stop producing because if they do then they cant pay their debts and they go broke. But if low prices continue for a while there is bound to be a reduction in fracking produced oil in the US . Only the most productive areas will continue to produce oil albeit at a much reduced profit . This was the Saudis game and it appears to be working . Of course it hurts any oil which is more costly and difficult to produce , including the Canadian Bitumen fields , the deep offshore oil fields and very likely some of the extra heavy crude fields of Venezuela which are not alread in production . If prices rise however then fracking producton which requires less heavy long term investments than conventional oils will pick up quickiy and press oil prices not to rise above a certain discreet level .


    • The wildcard is innovation. Fracking is a new high-tech industry that is still on the early, steep part of the R&D curve. Relatively small, innovative, nimble companies are adapting business models and new extraction methods that are increasingly profitable in spite of low prices, and in all likelyhood this will continue. Much as it has in the earlier high-tech industries. As a result fracking is not going away anytime soon.
      Think increasingly more geeks and less roughnecks.


  9. “If prices rise however then fracking producton which requires less heavy long term investments than conventional oils will pick up quickiy and press oil prices not to rise above a certain discreet level .”

    Not sure what this sentence means. The process of “fracking” adds substantially to the cost of producing a well than a well that can produce without being fracked. I assume this is what you mean by conventional.For the most part, because of tight formations, the majority of wells in the US undergo some type of frac job. Of course this is dependent on the type of formation encountered.Typically, long horizontal wells with multiple laterals receive staged fracs that are enormously more expensive than a vertical non-fracked well.There really is no “long term investment” by the oil company paying for the frac job,but wraped up in the overall cost on producing on a well by well basis.

    The fracking companies, employed by the oil companies, are the ones suffering now because many producers will drill the well and temporarily “shut-in” the well, returning when prices are higher and complete the well with fracking, etc.


    • Where I refer to fracking I mean those extraction methods which are associated with the extraction of hydrocarbons from so called shale formations and to conventional methods as those which are used to extract them from other more ordinary geological formations .

      I have read that there are geologic formations where fracking is more profitable because applying the method involves less costs and effort ,and others whose features involve greater costs and effort , The companies exploiting the former are of course more likely to survive or cope with lower market prices than the those exploiting the latter.

      I also understand that in contrast to conventional forms of extraction which involve heavy up front investments and thus a longer recoupement period the fracking form of extraction is one where even if the yield on the deposits are drawn down more quickly the amount of up front investments which are required are lower than is the case for conventional forms of extraction and thus that even if the pay out period is shorter they can more easily and less expensively renew exploitation activities if at any time market conditions cause them to be shut down .

      The above is meant to convey the idea ( which perhaps you can correct or revise) that in the case of fracking operation of ‘shale’ formations even if they are shut down because of low market prices they are more easily restored than conventional forms of operations once the prices economically allow for such restoration

      The implication being that if prices rise they may be enough to allow certain shale fracking operations to be restored even if they dont encourage the initiation of new conventional oil exploitation ventures.


      • In the jargon of the oil industry, a conventional well is simply a vertical well that may or may not be fracked, dependent on the need to prop open the formation.Many wells can have porosity such that the formation will flow naturally with little stimulation such as with an acid frac.The trend in recent years has been for horizontal drilling in many formation types, including tight shale formations. As fracking technology has improved, the tighter shale formations, such as the Bakken Shale in North Dakota, have become popular targets for horizontal drilling and high rate fracking jobs to “prop open” the tight shale permitting flow to the wellbore. This method of drilling and completing is always MORE expensive than conventional drilling but can result in much greater production because more of the wellbore passes through the completed producing interval versus a vertical wellbore. It is not uncommon to achieve 3 to 4 times the rate of production or more with this method of drilling as compared to a vertical wellbore.

        Either a vertical or horizontal well can be reentered if temporarily shut-in at similar costs. Much of the continued drilling today is because of contractual obligations with the drilling contractor or because of lease expirations. Unlike in many countries such as Venezuela, in the US, the minerals may be privately owned by individuals and the land must be leased by the oil company. Until prices stabilize, we will continue to see reduced drilling activity, especially in the tight shale formations where well costs can exceed 4 to 6 million USD per well. Many of these welsl have what we call “flush” production (e.g. 600 to 700 bopd) but many decline rapidly and might stabilize at 100 to 200 bopd. Relatively quick payout at these rates when oil is over $100 per barrel but not so at $50.


  10. Reading some the above comments, one could think Fracking is hurting the USA, a waste of money, favoring Kleptozuela and the Arabs.. As opposed to changing the entire World balance of Economic power in Uncle Sam’s favor.

    Thanks for the laughs.


    • Waste of money? Hardly. Fracking is nothing new, it has been employed in the oil industry for fifty years or more. Most neophytes who read about fracking think it’s something that was just developed.


      • True, it is more the highly controllable directional drilling, coupled with new methods of reservoir modelling, that allow for profitable exploitation of tight formations. Having said that, fracking shale is a whole new ball game as compared to traditional reservoirs. Traditional production is (was) from sandstone and limestone formations.


    • Palante he is saying nothing of the kind , please read again what he wrote , still the implication is there that the current low prices do not offer the same incentives for shale formation production as did the higher prices and thus that we can expect US shale formation production to drop as leases and existing drilling contracts expire if prices dont rise to higher levels . There is of course a cut off point at which the incentives for shale oil production for certain formations are so low that they will tend to fall as market prices remain at a low level.


      • You are absolutely correct with your conclusion above. My point is that fracking, if needed in a well, is always cost effective since in many instances the well will not even produce if not stimulated correctly. I would agree with Palante that excessive drilling in new basins within the US, with current fracking technology, has led to an oversupply of oil which is currently hurting the industry. At the same time, it is moving the US towards energy independence. This industry is no different than any commodity market….it has its ups and downs. We may be oversupplied now but we are dealing with a finite resource and until the infrastructure exists worldwide for alternate energy sources, I’ll place my bet on prices rebounding albeit not very quickly.


        • Shale oil production is not insensitive to world prices , the lower the prices the lower the production , the higher the prices the greater the production , To the extent non shale oil production is less costly (and more profitable) than shale oil production it will have the advantage in displacing the latter , Thus if prices rise causing shale oil production to rise the market supply balance will reach a point where prices must stabilize.

          My understanding was that once prices rise it will be easier for shale oil production to beging rising than for non shale oil production to increase production thru the development of new projects because re starting shale production was generally easier and cheaper than increasing no shale oil production which involved generally more long term activity and heavier investment . i now stand corrected on that !!


Comments are closed.