A Different Approach On speaking to management over the past few weeks, ROE has changed its approach in this round of negotiations. It has changed its presentation to a more Mexican format. While ROE has provided solutions for the problem of Pemex being broke and unable to pay its part of the development and drilling costs, the issue that Pemex wants to keep the Chincontepec reserves for its calculations and bondholders and the fracking concerns of AMLO it has changed its approach in another key way.
Acting on the advice of both Political and Pemex consultants and after having seen the approach of the Government with its announcements on the 20 new fields, the recent Dept of Finance budget and Pemex in its 5 year business plan which was released in July, ROE management has decided to be less conservative in its descriptions of the level of production it can achieve from Amititlan shale. While they have not gone the full Blue Sky route, like Pemex or the Government, or the Finance Department they have enhanced the numbers to make the proposal more saleable and in keeping with what the Government and Pemex like to see. This approach has been well received.
As a public oil company the usual approach is to give production guidance and to keep it conservative and confidential. Then when the company over achieves the share price typically jumps. If you overstate what you expect to do and don’t meet your targets, then the market hammers the share price.
In Mexico, in the Government and in Pemex the approach is different. ROE Management has observed and has worked with consultants on how the new Pemex operates and how Pemex Management and Government Officials think and operate in this Government and generally.
For example, Pemex Management and the whole Governments approach can be seen in the 5 year Business Plan of Pemex and the plan to bring 20 new fields into production in one year.
While it seems totally illogical, the CEO of Pemex, the Pemex Board of Directors, AMLO, Sener, Finance Department, etc., have in their approach and culture, no problem with way overstating what they are able to do ( total Blue Sky), and they present it as a realistic goal and they keep restating it even when they know it can’t be done. Why, because it is part of their culture and they also need to sell the idea to everyone and have everyone believe it (Believe in the fantasy).
We see this in the plan of “Bringing 20 new fields into production in one year.” This has been stated and restated even though the reality is known, that it simply cannot be done. But who cares, everybody in the Gov’t, Pemex and AMLO are happy, in fact delighted with the approach. If they don’t meet the projection, the attitudes is that it can be dealt with next year, they can re write the plan, a new 5 year plan, with more unrealistic goals. Pemex has had 3 new 5 year plans in the last 4 years.
Pemex can’t bring the 20 fields into production by January or even April of 2020, depending on AMLO’s year. We know that only 5 of 16 jackup rigs have been contracted, only 3 are in the gulf and only one is in the process of getting ready to drill. (Actually the 2 latest rigs put under contract have been contracted by Pemex, not the winners of the contracts and are likely going to be used by Pemex on other fields.) All of these rigs are to be on 18 to 24 month contracts ( When they are actually located) with some of the contracts starting in December of 2019. A total of about 107 wells have to be drilled to get the fields into production. 13 more oil platforms have to be built and the whole of the pipelines need to be constructed. Yet everyone is still saying the fields will be into production within the year (However long that year is.) and the finance minister has brought in his budget with the oil production numbers added in as if these fields are in full production and as if there will be no further decline in any of the existing fields which currently sees production dropping at the rate of 20,000 barrels per day each month. ( No matter what AMLO says, the CNH numbers show that production is still dropping and dropping at the rate of about 20,000 BOPD.)
Another big piece of Blue Sky in the Pemex 5 year plan is to say that when all fields are producing, Pemex will reach the goal of 2.37 million BOPD. Again, of course, this cannot be done from these 20 fields. The maximum production from all of these fields will be 280,000 BOE’s per day, not 280,000 BOPD’s per day and with oil production dropping at the rate of 20,000 BOPD, the new production will not even replace the drop in production from existing fields.
From my research, Pemex production will be about 1,470,000 BOPD by the end of 2019, and provided there are no further declines in production after the end of 2019, 900,000 BOPD will have to be discovered and brought into production to reach the target of 2,270,000 BOPD that is set out in Pemex new 5 year Business Plan.
Of course that is next years problem that will be dealt with next year. Pemex will likely do a new 5 year plan.
No matter what all of these Plans, policies and officials and AMLO are saying, some of them know the impossibility of what is being put out to the public and the enormity of the challenge of turning the oil industry around is becoming known to them.
The fact that the government has started to realize the enormity of the job of turning around the oil industry in Mexico and is formulating a new energy policy is also helping ROE in the negotiations as the decision makers are now open to listening and changing their approach. (The ice has thawed)
Even AMLO knows a new policy has to be developed and ROE is at the forefront of this push. A big problem has been trying to fit meetings with AMLO into his busy schedule. As we all know, he is the key. I am expecting that everyone in Pemex and the Government is waiting for the signal from AMLO to proceed.
Everything ROE is proposing has been put into terms of how it can boost Pemex production, revenue, reserves and Government revenue.
AMLO keeps saying he wants to see production from the Companies that won bids and rights to drill already and ROE has proven what it can do.
Management and its team ( about 40 ) are working full out to get the contract migrated.There are a lot of money people waiting for this to get done and we saw some of that this past week.