ROE does not need an out.
During my discussions with management it became obvious that
ROE and Partners hold key cards in the migration process. This is not all Pemex and the Government.
Know How
ROE knows how to drill wells economically and Pemex does not know how and are proving it on every well they drill.
Financial
Lukoil is a big company with deep pockets and ROE knows it can finance its part of the development and the ROE team knows they can develop at costs way below the drilling costs PEMEX incurs. Pemex test wells they are drilling are costing over US$ 25 million per well and Pemex is basically broke. Pemex budgeted US$206 million to drill 8 wells into Upper Jurassic formation and they don’t know how to even properly locate or complete such a well.
ROE and partners had budgeted $18.00 million for the first test well, then drilled it for $14.0 million,and expect they will have costs down to around US $8.0 million per well by the time they have drilled a couple of wells.
Pemex has been drilling Upper Jurrasic wells on some of the neighbouring blocks, with limited success. Pemex doesn’t know how to identify the best locations for drilling and Pemex does not have the know-how when it comes to fracking and completion.
Pemex has drilled a half a dozen shale wells and Nick Steinbrenner of ROE has drilled and successfully completed over 1200 wells in various parts of the world, especially in similar formations in the U.S.
The Service Contract
The Big Key - ROE and Partners have a valid, in force, fully and over performed, fully enforceable contract under which it can drill on the Amititlan property. What this means is that nobody else can drill or develop this property, not even Pemex without breaching the contract. On speaking to Management, management confirmed that both their legal team and Pemex lawyers know that the service contact is binding on Pemex.
The news article a few months ago which said Pemex was going to drill and frack two wells on four properties, including on Amititlan was not something Pemex could legally do and they have not drilled on Amititlan. Pemex could not do what was announced and can’t drill without the permission of the Luckoil and ROE partnership. My understanding of what this means legally is that if the contract does not migrate, ROE and Partners can sit on this property that likely has reserves of 2.0 billion barrels of oil until the Government and Pemex have a change of mind or until there is a change of Government. If AMLO and Pemex want this property developed then it will be ROE and partners or nobody. If Pemex tries to cancel the contract then Pemex will likely face a multi billion dollar claim from ROE and Partners in a lawsuit.
Money Invested
Pemex owes $46.0 million USD to the other partners for work done to date on Amititlan. While this is not a lot of money in the big picture and should not be a lot for a company like PEMEX the reality is Pemex is broke and can’t just write a cheque and if they do, it still gets them nothing as ROE and partners have the land under a service contract and they have already fulfilled the terms of the contract.
ROE and Partners are sitting on the biggest and best property
Pemex could develop the blocks around Amititlan if they chose to do so but Amititlan is the big block sitting right on the sweet spot for development.
As you move onto the Soledad block to the East the oil gets heavier and thicker and will not flow out of the well as easily and not anywhere near what will be achieved on Amititlan. To the West on the neighbouring block the formation becomes mainly gas and while valuable, it is not worth a quarter of what oil on Amititlan is worth and the development costs are basically the same. There is no gas infrastructure in place either.
So ROE and Partners, sitting on Amitilan are sitting on the big piece of Cheese. The next best block is the Latina block to the North and while ROE no longer has the option or first right of refusal on this block, they feel that can be obtained again once the contract migrates. The problem on Latina that has stalled the migration process is the fact it has had substantial Chincontepec development and the reserves booked for that block are way larger than the reserves booked for Amititlan and Pemex can’t afford to give those reserves up.
So whose cards are better?
The only Card that Pemex and AMLO can play in this negotiating game, is to say “No”. It is a big lose/lose card.
ROE and partners, bring the know-how, the financing, and the right to the property under the service contract, and the fact that Pemex owes ROE and partners US$46.00 Million.
Both parties and the government gain big time if and when the contract migrates. Pemex and Mexico need the oil and the oil reserves that will be proven.
I still think this deal gets done and done fairly soon.