London /PRNewswire/ - OilPrice.com Market Commentary: In the late 1970s, the de-nationalization of Mexico's mining sector brought in a vast new wave of money and technology that wiped out stagnation and led to a mining boom. This year, the same is happening to the country's mouth-watering oil and gas sector, and the upside is fantastic for a Canadian junior that moved first on Mexico's lucrative onshore offerings. Energy companies in play include: BP p.l.c. (NYSE: BP), BHP Billiton Limited (NYSE: BHP), Chevron Corporation (NYSE: CVX), TOTAL S.A. (NYSE: TOT) and Statoil ASA (NYSE: STO).
The nearly 80-year-old monopoly on Mexico's oil and gas wealth by state-run giant Pemex is over, and the scramble is on to get a foothold in this cheap-to-produce playing field that defies the depressed market.
While Pemex, lacking capital and technology, was only targeting the low-hanging fruit of Mexico's oil potential, leaving most of it in the ground, new-on-the-scene foreign companies have technology that can tap into the country's true oil effectively and efficiently. For smaller energy companies-such as International Frontier Resources Corp. (IFR.V- IFRTF)-this means gaining accessing to big blocks with even bigger expansion potential.
All of this combines to make Mexico the hottest thing on today's global oil and gas scene. Nowhere else can a junior company get in on the ground floor of a major play that already has discoveries and proven reserves and can be developed profitably in a low oil price environment. The competition will be stiff, but for first movers such as IFR, the strategic advance is already secured.
5 Reasons to Keep a Close Eye on IFR in the coming weeks and months:
1 First-Mover in the Hottest Oil Venue This Decade
When IFR scooped up an attractive onshore block in Mexico's first auction round in August last summer, it took a quantum leap in its growth objectives, becoming the first Canadian junior to gain access to Mexico's massive oil wealth.
The removal of a nearly 80-year-old state-run monopoly plus the sudden opening up of an entire industry to foreign companies plus already discovered but underdeveloped plays plus some of the cheapest production costs in the world plus the introduction of advanced technology that could unlock massive amounts of oil and gas left in the ground plus great infrastructure in place plus transparent investment simply put, it's impossible not to see the massive opportunity here.
It all equals the potential for highly profitable new oil for the small-caps and supermajors alike who have secured a strategic foothold with a smart partner and are all set to move on more in the next bidding round.
This is the early stage of an oil and gas opportunity that is possibly even bigger than the U.S. shale boom.
The U.S. Energy Information Agency (EIA) has jumped on board of this super oil express, revising its 2040 forecast for Mexican oil and gas production upwards by a whopping 76 percent.
The playing field here is wide open. And while many were initially skeptical when Mexico held its first auction right after implementing its sweeping reforms, the atmosphere changed quickly. These are now the hottest auctions in the world and bidding is intense.
From the supermajors to the small-caps, the interest is expansive and the competition is only set to intensify further. The December 5th auction saw the who's who of oil and gas giants bid, with Australia's BHP Billiton (NYSE: BHP) outbidding British Petroleum (NYSE: BP) to become Mexican state-owned Pemex's first private partner in deep-water exploration and production in the massive Trion oilfield, discovered in 2012 and believed to contain 485 million barrels of commercial reserves alone. And this Gulf of Mexico offering was only a small part of the deep-water sale-another 10 deep-water blocks estimated to be worth $10 billion were up for auction, and the winning bidders included Chevron Corp. (NYSE: CVX), France's Total SA (NYSE: TOT) and Exxon Mobil Corp., Norway's Statoil (NYSE: STO) and BP Plc, and Murphy Oil Corp., Ophir Energy and Malaysia's Petronas Carigali.
Onshore, the competition is also heating up quickly, and this is where the small-caps can become very big. Mexico just announced its next auction, round 2.3, where it's going to put eight of 14 blocks in Veracruz, near IFR's Tecolutla block, up for grabs. These blocks will be larger than those that were won in the previous round, with the average size being about 71.4 square miles. In total, we're looking at four gas and 10 oil fields in Tamaulipas, Nuevo Leon and Veracruz.
2 Low-Risk Proposition
In November, IFR (IFR.V- IFRTF)-took formal ownership of the Tecolutla block through Tonalli Energia, a 50/50 joint venture with Mexican petrochemical leader Grupo Idesa. Now, it's advancing its strategy to restore production. It's an attractively low-risk proposition for IFR because this block is part of an established basin with past production and an extensive 3-D seismic database. In other words, it's low-risk because IFR is optimizing production capacity from an underutilized producing field. It's not starting from scratch here and exploring an unknown prospect. This is where IFR's access to new technology and enhanced recovery techniques comes into play. They won't need to drill a new well from the surface to restore production here.
Extensive infrastructure is also already in place, including pipeline access and a nearby refinery, all of which reduces production costs and makes it faster and easier to then bring new wells online.
3 Magnificent Upside
Mexico was producing around 2.8 MMOBPD in 2014-87% of it crude oil. By the end of that same year, Mexico had 9.8 billion barrels of proven oil reserves. Of that 2014 production, 25% came from onshore fields.
These onshore Mexican fields were being developed before there was anything like 3D seismic available, but the foreign companies coming in can drill horizontally and employ enhanced recovery methods to tap into the estimated 95% of oil left in the ground here. And with 3D seismic, they can easily pinpoint the sweet spots.
There is so much more oil in the world that is still recoverable, and while none of these places exist any longer in the U.S. or Canada, Mexico is an untapped paradise.
The "Golden Lane Trend", dubbed as such by geologists, and where International Frontier Resources has its Tecolutla block, hasn't seen extensive development in the past 50 years. Now that the doors are open to foreign companies, new technology will pour in and the first-movers will have all the advantage of a known oil bonanza that is virtually untapped, similar to what happened in the U.S. with the shale boom.
The Tecolutla Block, or Block 24, in the Tampico-Misantla Basin, was successfully awarded to International Frontier Resources in an earlier bidding round. In this block, vertical wells drilled by PEMEX left behind the bulk of the oil and then were shut in years ago.
IFR's Tecolutla Block is in the Tampico-Misantla Basin in the state of Veracruz. This is a producing carbonate oil reservoir called El Abra, with a formation depth of 2,340 meters. IFR has already acquired and reprocessed 3D seismic over the entire block, and it already has data on seven vertical wells to bring the field back into production. But this production is yet to be optimized.
Using a combination of advanced carbonate drilling, completion, stimulation and recompletion techniques brought in by IFR, the Tecolutla Block could exponentially exceed historical peak production and significantly increase recoverable reserves.
We're looking at significant upside here once IFR (IFR.V- IFRTF)- starts applying modern technology and takes exploration farther into tighter reservoirs to increase recoverable reserves.
Even more upside comes from the cost of production in Mexico-among the cheapest in the world. That means that Mexico makes sense even at today's low oil prices.
Development costs in Mexico's oil patch, according to Deloitte, come in at an average of $23 per barrel, and roughly 60 percent of the country's production comes from areas that cost around $10-$21/per barrel to develop.
All of this means that IFR's overall netback production will be potentially much higher than in Canada, for instance.
And IFR is already making significant progress. The company has already identified parts of the reservoir that are thicker than previous interpretations had suggested, and the first new well on the block is slated to be drilled in the first half of this year.
If you need even more upside, looking to IFR to participate in the next round of bidding, too, where it plans to acquire additional licenses elsewhere in Mexico.
In short, IFR is a micro-cap with macro-cap ambitions, and so far it's moving at breakneck speed.
4 Attractive Terms
IFR got a great deal on its first Mexico block-a perfect deal for a micro-cap: It got its hands on a proven oilfield without any upfront payment to the authorities. This goes back to the steady pace of progress: IFR promised to spend US$8 million on a work program and the terms call for royalties paid to the state on subsequent production.
Again, this can only happen in Mexico. IFR would have paid upwards of tens of millions of dollars to get their hands on a block of this quality in the U.S. or Canada-and they wouldn't have been able to produce at the low prices Mexico offers.
5 Strategic Foresight
IFR's partner in the 50/50 joint venture, Grupo IDESA, is one of the largest petrochemical companies in Mexico, producing, marketing and distributing petrochemicals. Not only does it have a large market presence, but it also is a large market itself for natural gas, providing additional upside for IFR.
The strategic advantage is that not only is Grupo IDESA big and Mexican-which helps in navigating a foreign country-but the partnership has also allowed IFR to secure a strong foothold in Mexico and set the stage for easier expansion.
As Mexico prepares to dramatically expand the use of partnerships over the next five years, the hundreds of new opportunities for foreign companies are solidified through smart partnerships. This partnership affords the Tonalli Energia JV access to substantial infrastructure, assets, facilities and a huge consumer of natural gas that has just built a $5.2-billion petrochemical plant to handle anticipated increases in energy feed stocks.
In mid-November, Mexico announced it would auction off 14 more contracts for exploration licenses in onshore areas. The blocks up for grabs include 25 fields and areas in the same state of Veracruz, including in the Tampico-Misantla Basin, the Southeast Basin and the gas-rich Burgos Basin.
Contracts will be awarded in July 2017, and we fully expect the first-movers to be among them.
We are right at the turning point of a game-changing event on the Mexican oil scene, and those foreign companies who have already established a foothold have the clear advantage in the next round of auctions. The shift here will be momentous, and oilfield services giants like Schlumberger recognize it as well, gearing up for an anticipated drilling drive in Mexico next year.
With this set-up, in the hottest oil venue in the world right now, IFR could easily turn into a mid-tier producer.
By. James Burgess of Oilprice.com
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