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Gulf of Mexico investment opportunities for UK firms

UK oil and gas companies would do well to keep the Gulf of Mexico on their radar as Pemex opens the door to foreign investment

Mexico has been a difficult upstream market for companies to enter – with many still smarting from failed attempts. But there are signs that the world’s sixth-largest oil producer is opening up, as economic circumstances drive political change.

Pemex, the national oil company (NOC), has one of the biggest exploration and production spends compared with other NOCs – $18 billion for 2011 alone. And Mexico is also a great place to do business: ranked 35 in the World Bank’s Doing Business 2011 report, there is less red tape than in countries such as Brazil, ranked 127.

Working in Mexico is not without challenges, however. The constitution reserves the ownership and exploitation of domestic hydrocarbons for the state – a monopoly over exploration, production and refining is entrusted, by law, to Pemex and its subsidiaries. So working in Mexico’s oil and gas sectors means working through Pemex, with all the bureaucracy and politics associated with a state-run body.

But significant opportunities exist. With the country’s huge onshore resources in decline, commentators say the government faces the imminent reality of becoming a net importer of oil and gas by 2014. Mexico’s crude production is forecast by Business Monitor International to fall by nearly 23% between 2010 and 2020, to 2.29 million barrels a day (b/d). But demand is set to increase by 11%, with growth slowing towards the end of the 2020 when the country is forecast to be consuming 2.39 million b/d.

And while gas production is set to rise over the next decade, from an estimated 55.3 billion cm in 2010, a predicted 55% increase in demand will also require a significant leap in Mexico’s gas imports, from the 2010 level reported by BP of 15.15 billion cm. 

The country needs the help of international oil companies both to develop offshore reserves in the Gulf of Mexico, and prolong the productive life of large onshore resources. Energy reforms in 2008 were intended to foster private-sector industry participation, providing business opportunities for domestic and international companies, but Pemex can neither engage in risk-share contracts, common in deep-water projects, nor pay contractors with oil.

However, for companies with Mexico on their radar, now is a good time to consider establishing or strengthening ties and relationships in the country, especially in the wake of Pemex’s ground-breaking award to the UK’s Petrofac in October. Under the deal, Petrofac will operate the 14,000 b/d Santuario oilfields, in Tabasco, for the next 25 years, with the aim of boosting production.

While Pemex is cash-rich, revenue in 2009 was $80 billion, it has debts of $42.5 billion – 60% of revenue is paid to the government in the form of royalties and taxes, accounting for 40% of Mexico’s annual budget. Consequently, the level of upstream investment is significantly lower than Brazil’s.

While the 2008 reforms are welcome, further improvements are needed. Progress, however, is unlikely until after elections next year. Whatever the results, Pemex will need technical expertise to revitalise its oil industry

The challenges of operating in the Gulf of Mexico are similar to those faced in the North Sea, so UK companies with experience in deep water, or of enhanced-oil recovery can export their knowledge and technology to the Gulf.

Louisiana vs Houston

Companies keen to work in the Gulf of Mexico (GOM) should give serious consideration to setting up in Louisiana. For many UK oil and gas companies looking to work in the GOM, Houston is the first place on the list. But Louisiana is where the work happens. It is the number one oil and gas state, and most companies involved in servicing the offshore market have a base there – areas such as Lafayette and Morgan City house many of the main players.

Not only is the location valuable for its proximity to the Gulf, but UK companies can take advantage of a number of incentives that are highly attractive to smaller services companies. The Louisiana Economic Development Corporation provides incoming companies with incubation units in Lafayette –rent-free for the first year, with heating and lighting costs included – and access to the FastStart training programme. The top workforce programme in the US, FastStart offers a turnkey labour force for an incoming company with all training paid for by the state.

Technology companies can take advantage of Louisiana’s digital-media incentive, under which the state pays 30% of a software writer’s salary while the employee is working on software development. This reflects a policy to attract quality jobs, with high-end value, employing people with disposable income.

Aberdeen-based Return to Scene (R2S), which is opening an office in Lafayette, is exactly the type of company Louisiana wants to attract. R2S is small, with only 25 employees, so opening an office in the US is a big undertaking and investment. But the software company, which specialises in the way data is captured, collated and communicated, will benefit from many of the incentives on offer.

R2S’s business development director, Bob Donnelly, says it chose Lafayette rather than Houston for many reasons, not just the initial tax support and help with training and recruitment. “The crux of why we chose Lafayette has more to do with the talent pool, logistics and IT infrastructure. The Louisiana Intensive Technology Centre is a fantastic facility with excellent infrastructure and IT services. As a high-tech company, this is a great place to start and grow.”

For companies thinking of establishing a presence in the Gulf of Mexico, whether in Houston or Louisiana, do your homework first – speak to people that know the market and, where possible, join a trade mission run by the UK Trade and Industry Office or Scottish Development International to Louisiana.

Campbell Dallas also works with Pathfinder Team Consulting, the European representatives for the Louisiana Economic Development Corporation, to help UK companies with their overseas strategies. There are great opportunities to be close to your customers in Louisiana and the incentives suggest this may be a good time to make the move.

Tom Faichnie is the corporate finance partner at chartered accountants, Campbell Dallas, in Aberdeen.

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