First mover International Frontier Resources to capitalise on Mexico energy reforms

TORONTO (miningweekly.com) – Mexico's historic energy reform has established a new legal framework for the country's energy industry and is expected to attract billions of dollars in foreign investment, something that has spurred Canadian oil and gas project developer International Frontier Resources (IFR) into action.

The denationalisation of more than 900 oil and gas blocks kicked off during August 2014, when Mexico's energy ministry Sener issued a five-year, four-round tender plan stretching from 2015 to 2019 for the denationalisation of 914 oil and gas blocks. IFR believed that there were a significant number of underexploited oil and gas fields in Mexico that would be issued in these bidding rounds.

“Having been a quiet few years as we await infrastructure build programmes to reach our major discovery project with Husky Oil, in the Central Mackenzie Valley of the Northwest Territories, we were looking for new opportunities, which Mexico’s energy reform brought,” IFR president Steve Hanson explained in a recent interview with Mining Weekly Online.

The Sener tender process started in the first quarter of 2015 and included 169 blocks, comprising 109 exploration blocks, 60 production blocks, as well as 14 blocks under joint ventures (JVs) with Mexican State petroleum producer Pemex. Licence agreements were awarded throughout 2015 and into 2016, ending Pemex’s near 80-year monopoly on the local oil and gas industry.

IFR, through its Mexican subsidiary, Petro Frontera, and a strategic JV agreement with one of the largest Mexican petrochemical companies Grupo Idesa, participated in the bidding process.

PROJECT PROGRESS
On May 12, IFR announced that Tonalli Energia, a Mexican company jointly owned 50/50 by IFR and Grupo Idesa, was notified by Mexican authorities that it had been awarded the onshore oil and gas development block 24, named the Tecolutla block.

As part of the first round and third call of Mexico’s oil and natural gas ‘mature fields’ bid round (Round 1.3), Tonalli was awarded the Tecolutla block, with an incremental royalty of 31.22%.

Hanson explained that Tonalli's royalty was modelled and bid to allow for a competitive rate of return that compared favourably with royalties bid on other Round 1.3-winning bids. On 10 of the 25 blocks, the incremental royalty would be more than 60%, with three of these blocks having incremental royalties of more than 80%.

The Tecolutla block comprised a 7.2 km² block in the Tampico-Misantla basin, located within the state of Veracruz.

The producing carbonate oil reservoir in the Tecolutla block is the El Abra formation, at a depth of 2 340 m. Three-dimensional (3D) seismic surveys had been acquired over the entire block and seven existing vertical wells had been previously drilled by Pemex to bring the field into production.

Cumulative output to date on a well-by-well basis from four key vertical wells had been 316 000 bbl, 507 000 bbl, 267 000 bbl and 352 000 bbl each.

Hanson advised that, like many oil and gas fields in Mexico, IFR’s technical team believed oil production from Tecolutla had not yet been optimised.

“The team has re-evaluated the field using existing well control and 3D seismic surveys 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,” he explained.

AGGRESSIVE PARTICIPATION
He stressed that Mexico had great infrastructure in place to support oil production and, through the application of modern technologies on existing wells, the company could be in production at Tecolutla by late this year, or early in 2017.

“With the historic data in hand, we treat Tecolutla as a development opportunity, with some exploration on the side. Early success in Mexico will be important for us as we are one of the first foreign companies in this market,” Hanson advised.

He pointed out that the Tecolutla block was merely the first stepping stone. With 900 blocks becoming available over the next four years in a country with excellent access to civil infrastructure, oilfield services and a transparent investment framework within the North American Free Trade Agreement, IFR planned to “aggressively participate” in the emerging market.

Hanson pointed to several other Canadian companies – adept at looking at projects in new frontiers – mobilising to Mexico. Most notable was TransCanada Corporation, which was awarded significant contracts to build new Mexican oil and gas pipelines, the latest being a $2.1-billion contract announced on Monday to build, own and operate the Sur de Texas to Tuxpan natural gas pipeline, in Mexico.

According to IFR, Mexico was the ninth largest producer of oil in the world and the eleventh-largest in terms of net exports. Mexico 's main upstream attraction is a potentially vast resource base. Pemex had estimated that yet-to-be-discovered oil and gas reserves could total as much as 115-billion barrels of oil equivalent, roughly three times as much as current existing proven, probable and possible reserves.

According to some preliminary estimates, investment needs would range between $35-billion and $100-billion over the next decade.

“As a Canadian oil and gas company, we are excited about the opportunity to advance our business strategy in Mexico, working with our partner Grupo Idesa, the government and the people of Mexico,” Hanson said.

IFR’s TSX-V-listed stock had jumped 130% in the last three months to C$0.14 apiece, buoyed by the award of the Tecolutla block.