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Mexico could be biggest winner from OPEC production cut

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Hydrocarbon Engineering,

Commentary begins: "On today's global oil and gas scene, nothing is more exciting than Mexico right now. Only here can you get in on the ground floor of major plays that already have discoveries and proven reserves and can be developed profitably in a low oil price environment. After the doors suddenly flew wide open to foreign companies for the first time in nearly eight decades, the competition is starting to heat up for energy companies such as BP p.l.c. (BP), BHP Billiton Limited (BHP), Exxon Mobil Corporation (ExxonMobil), Chevron Corporation (Chevron) and Statoil ASA (Statoil).


The nearly 80 year old monopoly on Mexico's oil and gas wealth by its state run giant is over, and the scramble is on to get a foothold in this cheap to produce playing field that defies the depressed market.

"Right now we're in the early stages of an oil and gas opportunity that will be bigger than anything in history," says International Frontier Resources Corp. (IFRTF) President and CEO Steve Hanson.

That is what happens when a huge country de-nationalises its entire energy sector, removes a state run monopoly on oil and gas overnight and ushers in top foreign companies with advanced technology to unlock all the oil that has been left in the ground. The US Energy Information Agency (EIA) has jumped on board this super oil express, revising its 2040 forecast for Mexican oil and gas production upwards by a whopping 76%.

While the supermajors have their radar locked on massive deepwater discoveries offshore auctioned off successfully on 5th December, juniors such as International Frontier Resources Corp. are focused on Mexico's onshore bonanza. As first movers, IFR is setting itself up for success with aggressive oilfield development. It is also setting the stage for an advantage in the next auction round.

IFR scooped up the Tecolutla Block through Tonalli Energia, a 50/50 joint venture with Mexican petrochemical leader Grupo Idesa, in Mexico's first onshore licensing round and signed a historic contract with the Mexican government on 25 August. This propelled Canadian IFR to its coveted 'first-on-the-scene' position, giving this small cap a very large cap strategic operating presence.

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 5 December auction saw the who's who of oil and gas giants bid, with Australia's BHP outbidding BP to become Mexican state-owned Pemex's first private partner in deepwater exploration and production in the massive Trion oilfield, discovered in 2012 and believed to contain 485 million bbls of commercial reserves alone. And this Gulf of Mexico offering was only a small part of the deepwater sale, another 10 deepwater blocks estimated to be worth US$10 billion were up for auction, and the winning bidders included Chevron, France's Total SA and ExxonMobil, Statoil and BP 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 – round 2.3 –where it is going to put eight of 14 blocks in Veracruz, near Tecolutla, 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 miles2. In total, looking at four gas and 10 oilfields in Tamaulipas, Nuevo Leon and Veracruz. The data room will open its doors on 15 December, and IFR is set to aggressively take its Mexico operation further.

Mexico has multiple large conventional onshore oilfields. And we're looking at significant upside once we start applying modern technology brought in by foreign partners, and the ability to take exploration farther into tighter reservoirs to increase recoverable reserves. Mexico was producing around 2.8 million BPD in 2014 – 87% of it crude oil. By the end of that same year, Mexico had 9.8 billion bbls 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 US or Canada, Mexico is an untapped paradise.

The 'Golden Lane Trend', dubbed as such by geologists, and where IFR has its Tecolutla block, has not 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 US with the shale boom. The Tecolutla Block, or Block 24, in the Tampico-Misantla Basin, was successfully awarded to IFR 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 2340 m. 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 optimised.

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. Production in Mexico is 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 US$23/bbl, and roughly 60% of the country's production comes from areas that cost around US$10 - $21/bbl to develop.

Getting a foothold in Mexico's newly wide open oil wealth is not just about getting there first and bringing the right technology – it is about creating strategic partnerships. 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.

While the supermajors are operating in consortia and partnering with PEMEX, IFR, for one small-cap, has partnered with Mexico's Grupo Idesa, a billion dollar leader in the Mexican petrochemical industry and a net importer of natural gas. 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 US$5.2 billion petrochemical plant to handle anticipated increases in energy feedstocks.

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 recognise it as well, gearing up for an anticipated drilling drive in Mexico next year. Hands down, there is nothing bigger on the oil and gas scene right now than Mexico. The factors that have combined to make this an obvious truth are fantastic.

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 is 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, but even more so for first mover small caps like IFR, who have secured a strategic foothold with a smart partner and are all set to move on more in the next bidding round.

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