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Canadian Oil Finds New Energy Opportunities in Mexico

Stockhouse Editorial
0 Comments| March 22, 2018

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Calgary-based junior oil company International Frontier Resources Corp.(TSX: V.IFR, OTCQB: IFRTF, Forum) is pursuing new energy opportunities in mature oilfields with a lot to offer. IFR is on target to become one of the first foreign companies to drill onshore in Mexico in nearly 80 years.

After receiving final authorization to commence drilling the underdeveloped Tecolutla block onshore, International Frontier is mobilizing a rig through its Mexican joint venture Tonalli Energia.

IFR was recently featured in an article by Stockhouse Editorial that detailed this development program to initiate modern drilling techniques to increase recovery from the reservoir. The first well to target new locations within the reservoir will be TEC-10, which is being given a thorough 3D seismic scan.

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Image via InternationalFrontier.com.

The producing carbonate oil reservoir in the Tecolutla block is the El Abra formation found at a depth of 2,300 meters (7,500 feet). To date, 1.9 million barrels of oil have been recovered from four previously producing wells. These wells were drilled by PEMEX, a state-owned petroleum company, between 1956 and 1972 and had initial production rates up to 473 barrels per-day (bbl/d).

Stockhouse Editorial had the opportunity recently to ask IFR’s CEO, Steve Hanson, about these newly available mature oil and gas developments.

1) IFR was one of the first foreign companies to participate in the reform of Mexico’s oil and gas sector. What estimates does the Company have about the size of the reservoir?

Tonalli Energia was one of the first companies to secure rights to develop some of Mexico’s established onshore assets. In the first onshore bid round (Round 1.3), it won the rights to develop the Tecolutla block. This is a 7.2 km2 block in the Tampico-Misantla Basin located within the state of Veracruz which could be considered an onshore ‘Super Basin’ with potentially huge oil and gas potential that may well mirror America’s model super basin – the Permian Basin. Previously, PEMEX’s peak production of over 900 bbl/d occurred from the Tecolutla block in 1972 from 3 wells, with 1 producing well remaining as of Dec 2014.

The producing carbonate oil reservoir in the Tecolutla block is the El Abra formation at a depth of 2,340 meters. 3D seismic has been acquired over the entire block and have been reprocessed by Tonalli.

Like many oil and gas fields in Mexico IFR's technical team believes oil production from Tecolutla has not been optimized. The team has re-evaluated the field using existing well control and 3D seismic and believe that horizontal drilling and workovers will yield daily production results that exceed the historical peak production of 900 bbl/d and significantly increase recoverable reserves.

To execute the plan our team intends to deploy advanced carbonate drilling, completion, stimulation and recompletion techniques in the Tecolutla block. IFR will be able to provide more detailed estimates of the size of the reservoir after drilling TEC-10 and performing workovers of TEC-2.

2) Tonalli has received the final authorization necessary to commence drilling operations at Tecolutla, how close is IFR getting a drill into the TEC-10 well? What are the immediate next steps for the Company?

Having satisfied all regulatory requirements, Tonalli is now preparing for rig mobilization and drilling operations for the TEC-10 directional development well. Tonalli expects the construction of the drill pad to be completed shortly and a spud date is anticipated in mid-April 2018. Based on the interpretation of 3D seismic data, IFR believes that the Tecolutla field has been vastly underdeveloped, and the TEC-10 well is an important step in developing the asset to achieve commercial production.

Tonalli intends to initiate the Tecolutla multi-well development program utilizing modern drilling and completion techniques to increase productivity and recovery from the reservoir, including IFR’s Canadian geoscience and engineering expertise. TEC-10 will be the first Tecolutla well to target new locations within the reservoir leveraging the advantage of recently acquired 3D seismic, which has now been reprocessed by Tonalli. In addition, offsetting field data obtained by Tonalli in Round 2.3 indicated reservoir properties and well productive capabilities of the El Abra formation that increased Tonalli's confidence in the economic viability of the Tecolutla block.

3) Looking to the near future, what is planned with the TEC-11 well?

Tonalli expects to drill the TEC-10 well and perform the workovers of the TEC-2 well in Q2-2018. After completing the minimum work requirements, the next step is to drill TEC-11 horizontal well. IFR will benefit from the results available from initial drilling which should guide the future development of the property.

4) What are the key drivers for success?

IFR and its joint venture partners, such as Grupo IDESA, have a long history of business success and we have put together an experienced team with a proven track record in the oil and gas markets.We established a presence and sound business plan early in the Mexican energy reform process and, as first mover, have the skills and knowledge to execute. This includes field and technical expertise, finance, Mexican regulatory, engineering and logistics, among other areas of depth.We believe as one of the first upstream companies in Mexico we will build on Tecolutla’s success.

5) This sounds like a level playing field for junior companies and major players. What opportunities does this open-up for IFR?

These mature oil and gas assets such as the Tecolutla block are “building blocks” for junior oil and gas firms. The same model was adopted in Texas and Canada during early stages of the development of its oil and gas sector which proved great for junior oil and gas companies that grew into large corporations over time.

The smaller oil assets such as the Tecolutla block are “jewels” for junior companies such as IFR as these mature fields are company builders due to their proven production record. The oil and gas sector of a country is always built on creating opportunities for companies of all sizes and that the Mexican energy reform remains inclusive of junior oil companies through the auction of these mature onshore fields. The successful development of a competitive oil and gas sector in Texas is attributed to the same framework that has been adopted under the Mexican energy reform, ensuring the participation of companies of varying scale to build the oil and gas sector of the country. Tecolutla block can be a building block of success for IFR due to its significant productive potential.

6) Onshore versus offshore drilling, which provides the ideal benefit for a junior company?

The Mexican energy reform continues to be attractive for juniors, mid-cap, majors and super-majors of the oil and gas sector. The recent shallow water discovery has proved that Mexico has significant potential for expanding its overall oil reserves. Moreover, auctions are planned for deep water exploration over the next few years which will be most attractive for super majors.

Onshore drilling provides an ideal opportunity for a junior company like IFR to establish itself in the context of Mexico’s energy reform. As offshore drilling can take longer in terms of the development of oil fields and tends to require additional commitment in terms of financing, a junior oil company is better positioned to establish a strong presence through the exploration and development of onshore assets. Mexico’s assets are unique in the sense that these auctions include mature fields with proven oil reserves and a history of drilling.

As noted earlier, IFR (through Tonalli) acquired the Tecolutla oil fields in the Veracruz state and the last well on property was in production until December 2014. The ability to quickly develop these assets enables junior companies like IFR to generate revenues and demonstrate profitability within the first few years. With low royalties and favourable pricing of Tecolutla, alongside competitive operating costs, IFR is well-positioned in Mexico to deliver results.

7) As a partner with Export Development Canada (EDC) IFR was fully funded for its 2017 operations, how about 2018’s operations?

Having EDC as a financial partner was an important step in the ongoing growth of IFR and the management looks forward to building on this strategic relationship. IFR is honored to be the first Canadian oil and gas exploration and production company to be backed by EDC in Mexico. This partnership involves an Account Performance Security Guarantee (APSG) facility of USD$882,050 with EDC. The APSG facility (known as the "Guarantee Facility") is provided as 50% of a performance bond issued by Tonalli Energia.

It is noteworthy that IFR was fully funded for its 2017 operations and the company held CAD$6.1 million in cash on December 31, 2017. In 2017, IFR raised more than CAD$5 million from an oversubscribed private placement which was partially brokered by PI Financial. Similarly, IFR received CAD$2.56 million from the exercise of warrants in December 2017. Moreover, IFR reported a gain on disposal of its south east Alberta property of CAD$677,055.

IFR remains fully-funded for its 2018 operations and is confident in its ability to raise additional finances for new assets that might become available from future bid rounds.

In short, IFR’s 50 per cent share of completing minimum workover requirements for Tecolutla has been budgeted as CAD$2.6 million and the company has sufficient cash to fulfill these requirements and drill additional wells.

8) Will IFR continue to bid on new blocks when they become available?

IFR has aggressively pursued onshore bid rounds in the past and intends to continue with the trajectory. The management is reviewing the prospects for the upcoming bid round 3.2 which is an onshore conventional auction scheduled for July 2018. Likewise, bid round 3.3 is scheduled for this September and that offers onshore unconventional reserves.

IFR is reviewing the prospects individually and conducting its due diligence. IFR’s leadership will aggressively pursue oil and gas fields that are economically lucrative and in the best interests of its shareholders. IFR will continue to participate in onshore auctions to gain access to “potential assets” which can favorably enable growth.

9) Can you provide investors with an updated look with respect to IFR’s development over the next five years?

IFR’s goal is to become the leading onshore oil and gas exploration and development company in Mexico over the next five years. With this long-term focus, IFR intends to establish itself as a leading oil and gas company in the Mexican upstream oil sector. This is an unprecedented opportunity and IFR intends to continue to build on its assets and first-mover advantage in Mexico.

The first step will be to achieve first oil from Tecolutla in 2018 with the spudding of the TEC-10 well, which will provide IFR with reliable estimates of the reservoir. This should enable IFR to maximize reserves and production on Tecolutla and then generate its first revenues in 2018. Achieving those near-term milestones will position IFR as the first foreign company to drill onshore conventional in Mexico and one of the first company to drill onshore in almost 80 years. As IFR generates revenues and delivers performance, we will be able to leverage this initial success and first mover advantage to help establish new industry partnerships in Mexico, further optimizing our case for winning competitive bids in the upcoming onshore auctions and expand our land base.

FULL DISCLOSURE: International Frontier Resources Corporation is a paid client of Stockhouse Publishing.




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