SPE-184938-MS

Preliminary Economic Evaluation for Mexico's Mature Fields

Kelvis Alvarado, Christian Bravo, and Erika Sandoval, Schlumberger

Copyright 2017, Society of Petroleum Engineers

This paper was prepared for presentation at the SPE Latin America and Caribbean Mature Fields Symposium held in Salvador, Bahia, Brazil, 1516 March 2017.

This paper was selected for presentation by an SPE program committee following review of information contained in an abstract submitted by the author(s). Contents
of the paper have not been reviewed by the Society of Petroleum Engineers and are subject to correction by the author(s). The material does not necessarily reflect
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Abstract
Mexican energy reform has opened an ambitious transformation process, authorizing private investment
for exploration and extraction of hydrocarbon under different type of contracts. This transformation has
led IOC's, NOC's and newcomers to enter in Mexico in order to achieve best field development plans for
production increase in onshore, offshore and unconventional fields.
The objective of this study is to analyze winner's economics expectations for 25 matures fields of Round
1-Tender 3. Within the framework of this tender, winners offered royalty values higher than 60% for 14
fields, from 40% to 60% for 6 fields and lower than 40% in 5 fields, while Mexican government requested
minimum royalties from 1% to 10% for all fields. The evaluation took into account the bidding offers
(royalties and minimum work plan), economics and technical variables in order to build a 20 years full cycle
preliminary economic analysis.
A tailored analysis was done for each field, where production profiles took into account: drilling and
workover wells based on minimum work plan and reservoir technical challenges (pressure depletion,
geological complexity, fluid type, well productivity and facility capacity), combining with economics
variables expected, such as: CAPEX (e.g. wells drilling and workovers costs, facilities revamping, etc.),
OPEX (e.g. lifting cost, treatment water/gas, etc.), royalties, oil price for future selling (Mexican basket),
in order to generate more suitable development plan according to bidding process.
For each field an operating margin (from 3.4 to 28.3 USD/STB) and development-operational cost (from
10.5 to 82.1 USD/STB) were estimated considering average Mexican basket in 50 USD/STB, for this
consideration 15 fields would have the chance to have positive gross income, the remaining 10 fields, does
not have any possibility to make any profit.
Although results of this study were not considered for decision making, a visualization of the status of
each field is shown, allowing to know the expectations of each winner. 11 fields have high chance to be
operated by the first or second winner with investment ranging between USD 5 and 43 million, on the
other hand, 14 fields have high potential to be returned immediately or after 2 years evaluation period
with potential investment varying from USD 6 to 73 million. These results indicate that in most of the
cases royalties offered by bidders exceeded the government expectations, leading a tight scenario beyond
economic feasibility of these fields.
2 SPE-184938-MS

Introduction
In December 2013 the Mexican government gave the announcement of a new energy reform. This process,
which it aims to open the oil and gas sector to private capital and strengthen the activity of the oil industry
in Mexico by increasing hydrocarbon production at lower costs, has caught the attention of new national
and international companies.
The National Hydrocarbons Commission (CNH1), and the Energy Minister (SENER2), which are the
main regulatory agencies of the process, have been the responsible for publishing the guidelines and
specifications of the rounds and their tenders. The models offered contemplates four types of contracts -
license, production-sharing, profit-sharing as well as services-, which focus on exploration and production
operations in conventional, unconventional, shallow water, deepwater and mature fields.
On July 15, 2015, 14 exploration blocks (shallow waters) were offered as part of the first bidding process
of the round R1-L1, one consortium was the only winner of two blocks awarded. Two months later, the
second tender R1-L2 took place, where 3 of 5 exploration blocks (shallow waters) were granted to one
company and 2 consortiums. Expectations were moderate and positive in both cases due to the beginning
of the process. Although the results were not the expected, the following tender showed a different interest.
On May 12, 2015, the government announced the requirements for Round 1-Tender 3 (R1-L3). Twenty-
five onshore mature fields were offered in a license contract for hydrocarbons extraction. "This type of
agreement grants an oil company exclusive rights to explore, develop, sell and export oil from a specified
area for a period of 25 years".
The bidding blocks were divided into three categories with the following data:

Figure 1Bidding block's location

Table 1Bidding blocks' characteristics

Bidding Blocks - Characteristics

Location Fields Description OOIP Np GIIP Gp Area

[Million [Million
[Text] [Number] [Text] [Bcf] [Bcf] [Km2]
STB] STB]

Burgos 8 Onshore - non-associated gas 798 411 16 135

North 5 Onshore - oil and gas 183 18 64 14 7 23

8 Onshore - oil and gas 1

South 12 Onshore/Offshore - oil and gas 1624 270 2599 1226 10 58
3 Onshore - gas and condensate
SPE-184938-MS 3

Tender 3 took place on December 15, 2015, and it was considered as a competitive procedure. The
participation of 40 bidders (individuals and consortiums), from 51 that showed interest through the pre-
bidding process, demonstrated the importance of the tender for small and midsize companies. All blocks
were granted, where expectations of regulators as well as those involved in the bidding process were
exceeded.
Winner selection was based mainly on an economic proposal that includes the additional royalties offered
by each participant and the additional investment above the minimum work program to develop in each
area. The bidder with the highest weighted average (VPO or V3) was regarded the owner of the block. The
VPO is illustrated in Eq. 1.
(1)
Although the minimum royalties requested by Mexican government considered values between ranges
of 1% to 10%, the offered royalties by bidders were the following: 14 fields with values higher than 60%, 6
fields between 40% and 60% and 5 fields with values below 40%. The minimum royalty value was limited
by the geographical location of the fields, complexity and cost of development for each area, as well as
original volume in place. Fig. 2 shows adittional royalties given by each company.

Figure 2Additional royalties

The minimum work program is expressed in work units and represents the performance of the expected
studies (3D seismic acquisition, processing and interpretation, core and water analysis, as well as 3D
modeling), tests (production and PVT) and drilling activities (drilling, workovers and well services) to be
done per company in a specific period of time. As in the minimum royalties, the complexity of the area and
the cost of development per block controlled the minimum value.
4 SPE-184938-MS

A work unit is valued according to the activity to be developed and has an equivalent cost in 767 USD. The
units requirement is widely connected with the development of the field, where owners got the possibility to
keep the same value established for the minimum work program or increase it gradually. Some participants
doubled the original work units, making the activities to be carried out more complex.
Table 2 shows the possible activities to develop and the value given for each of them:

Table 2Activities and work units value

Work Units - Minimum Work Program

Work Units
Activity Unit
(Number)

Drilling Well 4000

Workover Well 800

Well Service Well 400

Core Analysis Unitary 25

PVT Test Unitary 10

Water Analysis Unitary 10

Static Model Updated Unitary 300

Dynamic Model - Updated Unitary 300

3D Seismic Acquisition, Processing and Interpretation Km2 20

3D Seismic Interpretation Km 2
30

It is well known that each scheme of agreement and type of investment suggests different levels of risk
and compensations for the investors. Considering the current oil industry situation and the fact that this is
a new process for the country and no previous procedures have been reported, the company decided to do
a preliminary economic analysis of the bidding results.

Methodology
The main goal of the energy reform and the bidders (operating companies) seek to achieve best development
plans in order to extend the economic producing life of a field using cost-effective, low-risk technologies.
In some cases the objective seems to include an adequate stage of exploration.
Based on the aforementioned, in order to meet the overall picture of the possible scenarios, a
multidisciplinary team worked on the economic analysis for the 25 mature fields offered in the tender. The
methodology of the study consists of mainly four steps:
1. Premises and considerations were given for each field.
2. Additional royalty and minimum work units were considered.
3. A field forecasting was done considering base case production and additional production given by:
well services, workovers and new drilling wells.
4. The economic evaluation of each area was carried out according to the best development case.
A tailored analysis was performed to know about the level of development of each field. It was crucial
for the understating of the current status of the area and for the generation of summary reports. An overview
of the bidding blocks was given after this step, including mainly the following data:

Available 2D seismic lines, 3D seismic cubes and well logs data

SPE-184938-MS 5

Regional studies, geological and properties distribution maps and structural sections

Reservoir and fluid properties (Highlighting the importance of reservoir pressure, lithology,
reservoir depth and fluid type)
Year of discovery of the field, total number of wells drilled and percentage of wells that were
successful for hydrocarbon's production
Reserves values, well-reservoir production history as well as maximum-current production data

CAPEX investment and OPEX costs based on each block

Once the status of the field was clearly defined, the execution of the minimum work program was
established as the base for the bidding blocks. According to the obtained results, not all fields have had the
same level of development, forcing some companies to deem more complex operations. While some fields
have the appropriate information for a development plan, some others are not even close to have enough
data for a general description. In this case, conceptual FDP's were considered allowing more uncertainty
in the analysis.
Production history per field, total number of wells, potential areas to workover and drill new wells were
considered areally and vertically, in case some potential targets were not produced. The potential production
obtained were forecasted (Fig.3) using decline analysis to contemplate fields and wells behavior for each
of the activity visualized: base case, workovers, well services and new wells. The sum of all these activities
were aligned with the necessity of the block, facility capacity installed combined with remaining reserves.

Figure 3Example _ Production history and forecasting

Using a specialized software (Fig.4) and considering the best scenario per field, a preliminary economic
analysis of 20 years was created. This study considers a variable oil and gas price (forecast published by third
party) and the difference and price volatility between Brent oil and Mexican basket. The use of economics
helped to reduce uncertainties and optimize Net Present Value (NPV).
6 SPE-184938-MS

Figure 4Example _ Company's software

Key factors were taken into consideration during the economic evaluation of the fields: hydrocarbon
in place, reservoir flow performance, well productivity, water cut development, CAPEX, OPEX, facility
constraints and environmental regulations.
Besides the additional royalty, each company should consider other payments applicable to all contracts
(not all of these were considered in this analysis):

Exploratory and production phase fees.

Basic royalty for oil (7.5%), associated and non-associated natural gas (0%), and condensates (5%).
Variable values in accordance with prices.
Abandonment fund (agreed between the government and contractor group)

Landowner fee

Income tax

Value-added tax (VAT)

Results
A general description of the bidding areas is given in the following lines. In addition, the results of the
preliminary technical economic analysis is explained in tables and charts.
Bubble charts were used to visualize the results in four dimensions. As coordinates (x, y) additional
royalties offered and Net Present Value are displayed, colors (green and red) show the expectations of the
profitable of the development plan and bubble's size represents the expected ultimate recovery (EUR) of
the field.
Operating margin values and development-operational costs are two headers of the tables: the first one
is a measure of gross profitability (gross income after royalties), the second represents sum of development
costs (e.g. new drill, facilities revamping, seismic acquisition, characterization studies, etc.) together with
OPEX cost.

Fields Burgos
8 onshore mature fields were awarded to 5 participants in this area. These are sandstone reservoirs producing
wet/dry gas, average depths between 1300 m and 3000 m with original gas in place values between 48 Bcf
and 190 Bcf. The current production varies from 3 MMcf/d to 20 MMcf/d.
SPE-184938-MS 7

Due to the high level of development of the blocks, companies have the option of implementing more
flexible plans, fulfilling the minimum program with studies, tests and activities such as workovers and well
services. A low value of drilling activities is expected.
Economic analysis results (Table 3) show operating margin costs between 1.2 and 2.4 USD/Mcf and
development-operational costs from 1.6 to 4.1 USD/Mcf. NPV in Fig. 5 suggests the option of 3 fields
to be operated for the first winner without any constraint and 2 fields probably for the second winner.
Unfortunately, 3 fields are at risk of being returned to the government.

Table 3Burgos: preliminary economic evaluation results

CNH Guidelines & Regional Technology Center - Proposed Program

Minimum CNH Base +

Wells Current Additional
Work Workovers Drilling NPV (USD Minimum Additional
Field Services Production EUR (Bcf) Royalties
Units (Number) (Number) Million) Royalties Royalties
(Number) (MMcf/D) (%)
(Number) (%) (%)

Benavides 8050 3 14 0 19 89.5 10.94 2.50 40.07 40.07

Calibrador 9200 3 7 1 10 41.6 -4.96 3.00 41.77 41.77

Carretas 9200 4 15 0 4 20.8 -4.66 1.00 50.86 50.86

Duna 8648 3 6 1 3 4.9 -7.96 3.00 20.08 20.08

Mareografo 9200 2 9 1 11 48.6 2.50 4.00 34.25 34.25

Pea Blanca 9200 6 11 0 10 57.4 -5.16 5.00 50.86 50.86

Ricos 9200 3 7 1 4 19.4 -8.23 3.00 41.5 41.50

San
5060 3 7 0 4 13.2 4.98 1.00 10.56 10.56
Bernardo

Base
0.00%
Royalty

Figure 5Burgos results: NPV vs additional royalties bubble chart

Benavides field is likelihood to present a reasonable EUR (89.5 Bcf) value due to high activity
implemented in this field (88 active wells). Additionally, Pea Blanca field, which has the second highest
expected EUR (57.4 Bcf), could have a negative impact in its economy due to its additional royalty
(50.86%). On the other hand, San Bernardo Field has the second lowest expected EUR (13.2 Bcf), however,
8 SPE-184938-MS

its NPV is in the positive side due to the royalty offered (10.56%). With this in mind, negative results in
NPV is driven by the additional royalty offered in most of the cases.

Fields North
5 onshore mature fields were awarded to 2 participants in this area. These are limestone reservoirs producing
mainly heavy oil, average depths between 1200 m and 3300 m with original oil in place between 0.5 million
barrels of oil and 165 million barrels of oil. The current production varies from 10 BOPD to 300 BOPD
(only three fields are producing).
The level of development of these section tends to be lower than Burgos; therefore, drilling activities,
workovers, well services, studies and tests are expected for all fields. Since one company was declared as the
winner of four blocks, a leverage in facilities cost was considered in order to reduce the expected investment.
Economic analysis results (Table 4) show operating margin costs between 12.0 and 15.5 USD/STB and
development-operational costs from 13.5 to 38.0 USD/STB were obtained. NPV suggest the option of 2
fields to be operated for the first or second winner performing some optimizations in CAPEX and OPEX,
however, 3 fields could be highly affected for royalty values and minimum work program offered.

Table 4North: preliminary economic evaluation results

CNH Guidelines & Regional Technology Center - Proposed Program

Minimum CNH Base +

Wells Current EUR NPV Additional
Work Workovers Drilling Minimum Additional
Field Services Production (Million (Million Royalties
Units (Number) (Number) Royalties Royalties
(Number) (BOPD) STB) USD) (%)
(Number) (%) (%)

Barcodon 9400 4 6 1 305 3.0 -6.46 1.00 64.50 72.00

La Laja 9200 1 2 2 8 0.5 -6.19 1.00 66.30 73.80

Paso de Oro 5980 1 0 1 0 0.2 -4.60 1.00 67.61 75.11

Ponton 9200 3 7 1 0 0.8 -4.37 1.00 61.50 69.00

Tecolutla 9200 1 1 2 9 0.5 -6.42 1.00 68.40 75.90

Base
7.50%
Royalty

Fig. 6 shows that Ponton is the field with higher NPV in this area, this is mainly affected by additional
royalty offered (61.5%) rather than expected EUR (0.8 million barrels of oil). On the other hand, Barcodon
shows higher EUR (3.0 million barrels of oil), with higher additional royalty (64.5%), impacting its
economic evaluation.
SPE-184938-MS 9

Figure 6North results: NPV vs additional royalties bubble chart

Fields South
11 onshore mature fields and 1 onshore/offshore mature field were awarded to 8 participants in this area.
These are sandstone/limestone reservoirs producing from heavy/light oil and gas and condensate fluids,
average depths between 700 m to 6000 m, with original oil in place between 0.6 million barrels of oil
and 650 million barrels of oil and original gas in place values between 0.3 Bcf and 720 Bcf. The current
production goes from 20 BOPD to 800 BOPD (two fields are not producing).
Unlike the previous cases, fields have levels of development from high to almost zero activities, leading
almost all the companies to choose more complex procedures. What is more, 3 companies must consider
drilling activities, studies to achieve the minimum work program.
Economic analysis results (Table 6) show operating margin costs between 3.4 to 28.0 USD/STB and
development-operational costs from 10.0 to 80.0 USD/STB. NPV in Fig. 7 suggest the option of 4 fields
to be operated for the first or second winner without any constraint. On the other hand, 8 fields have high
potential to be returned for the government (since they lead the list of fields with major losses).

Figure 7South results: NPV vs additional royalties bubble chart

10 SPE-184938-MS

Table 5South: preliminary economic evaluation results

CNH Guidelines & Regional Technology Center - Proposed Program

Minimum CNH Base +

Wells Current EUR NPV Additional
Work Workovers Drilling Minimum Additional
Field Services Production (Million (Million Royalties
Units (Number) (Number) Royalties Royalties
(Number) (BOPD) STB) USD) (%)
(Number) (%) (%)

Calicanto 5428 0 0 2 305 0.8 -10.60 5.00 81.36 88.86

Catedral 4600 5 2 0 26 2.6 -1.88 1.00 63.90 68.90

Cuichapa 9552 2 20 0 475 2.7 -4.73 2.50 60.82 68.32

Fortuna
9200 1 1 2 94 1.1 5.49 1.00 36.88 41.88
Nacional

Malva 9400 1 1 2 84 1.4 -7.40 4.00 57.39 64.89

Mayacaste 8700 0 0 2 0 2.0 -18.59 10.00 60.36 67.86

Moloacn 5000 3 7 0 840 4.3 -18.13 5.00 85.69 93.19

Mundo
5750 2 1 1 121 3.4 -22.84 10.00 80.69 85.69
Nuevo

Paraso 17400 0 0 4 0 1.0 -47.99 10.00 35.99 43.49

Secadero 9200 1 1 2 32 1.6 -2.67 1.00 60.74 68.24

Tajon 9200 1 1 2 20 3.1 -30.26 5.00 60.88 68.38

Topn 5750 1 2 1 223 2.1 -19.35 10.00 78.79 86.29

Base
5.00%
Royalty

Base
7.50%
Royalty

Based on this analysis Fortuna Nacional has high potential to get positive NPV, this is due to the royalty
offered (36.88%, second lowest in this area), rather than expected EUR (1.1 million barrels of oil). Special
attention for Moloacan field who shows the highest EUR (4.3 million barrels of oil) with expected low
CAPEX, however, its additional royalty offered (85.69%) is the highest among 25 fields offered, affecting
its economic result.
Fig. 8 is a comparison and summary of NPV, operating margin and development-operation costs charts.
Colors suggest that 11 fields have high chance to be operated by the first or second winner with low risks,
investment values are between USD 5 and 43 million. On the other hand, 14 fields have high potential to
be returned before 2 years production period (even if the second winner takes possession of the field, the
level of risk can be high for some cases), investment values vary from USD 6 to 73 million.
Special attention for Paraiso, Tajon, Mundo Nuevo, Topen, Moloacan and Calicanto which development
and operational cost is estimated to be 3 times higher than their operating margin, leaving a tight scenario
for optimization in order to convert them profitable.
SPE-184938-MS 11

Figure 8NPV, operating margin and development-operating cost comparison

Conclusion
The obtained values were used only for the analysis of the economic expectations of each fields. However,
operating companies and regulatory agencies should consider asset and economic evaluations as part of
their pre-bidding process for proper field's ranking based on additional royalties and minimum work plan
to accomplish development plans that leads in profitable economics results.
Studies, tests and activities (drilling, workovers and well services) are suggested as part of current
development plans, where static and dynamic modeling must be deemed in order to reduce uncertainties
through the validation of the original oil in place. Although enhanced oil recovery (EOR) methods were not
taken as options at this moment, they should be recommended partially for future activities.
The profitability of the fields is not directly related with their reservoir quality or characteristics. All of
them are highly affected by the offered values in the economic proposal (royalty values and minimum work
program). More than 80% of the fields will required optimization in CAPEX and OPEX in order to make
them profitable. 16% of the fields have high potential to be in the positive side of NPV.
14 fields have high potential to be returned immediately or after 2 years evaluation period. Reinforcing the
fact some companies offered higher royalty values than threshold of economic performance. These results
compromise government's expectations, where drilling operations (29 new wells, about USD 90 million)
and development plans could not be covered as planned.

Annexes
Exploratory phase fee
Monthly payment per square kilometer applied from the signing of the contract and until production begins.
This is intended to provide a cash flow to the government during this period, and to prevent idling and
incentivize the development of a field. The fee is set at MXN 1150 during the first 60 months, going up to
MXN 2750 afterwards. The fees will be adjusted annually

Exploration and production activity tax

Monthly payment per square kilometer. The fee is set at MXN 1500 for the exploration period and MXN
6000 for the production phase. The fees will be adjusted annually.
12 SPE-184938-MS

Basic royalty
A percentage of the gross revenue derived from hydrocarbon production, the rate of which is raised if the
market price of the hydrocarbon in question increases. There are different rates for oil, associated natural
gas, non-associated gas and condensates.
1. Oil

If the U.S. price per oil barrel is less than USD 48, a rate of 7.5% applies.

If the U.S. price per oil barrel is equal or greater than USD 48, the rate shall be Eq. 2.
(2)
2. Associated Natural Gas

(3)
3. Non-associated Natural Gas

If the contractual price of natural has is equal to or lower than USD 5 per million BTU, the
rate shall be 0%.
If the contractual price of natural gas is greater than USD 5 but lower than USD 5.50 per million
BTU, the rate shall be Eq. 4:

(4)

If the contractual price of natural gas is equal or greater than USD 5.50 per million BTU, the
rate shall be Eq. 5:

(5)
4. Condensates

If the contractual price of the condensates is lower than USD 60 per barrel, the rate shall be 5%

If the contractual price of condensates is equal to or greater than USD 60 per barrel, the rate
shall be Eq. 6:
(6)

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December 2015)
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GAAP_Measures.pdf (accesed March 2016)