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Confidence in Mexican oil, gas upstream gets boost from reserves-based lending deal

Highlights

Deal was first real RBL facility for a production sharing contract

Other deals expected to follow with smaller E&P companies

Mexico seeking to boost crude output from 1.7 mil b/d to 2.4 mil b/d by 2024

Mexico City — Confidence that Mexico's upstream sector will be able to meet its production goals over the next few years has been boosted by PetroBAL's recent success in securing a financing deal based on oil and gas reserves, with more such deals expected to follow for private companies that hold licenses in the country.

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PetroBAL, the upstream arm of Mexican conglomerate GrupoBAL, recently secured a $250 million development finance facility, a first for a production sharing contract in the country, and also a first for an offshore field.

Prior to this deal, only two companies had obtained financing using the international reserves-based lending model. The first was the loan obtained by Cheiron's Mexican subsidiary PCS for Cardenas Mora, a mature onshore block that was farmed out by state oil company Pemex. The second was for a service contract, also with Pemex, and also onshore. The borrower was Mexico-based Grupo Diavaz.

PetroBAL's facility is likely to open the door for other similar deals, said Daniel Sanchez, a partner at law firm Baker McKenzie who advised the company. PetroBAL's deal is based on the international reserves-based lending (RBL) model found in the US, although it more closely resembles the African model, where companies do not own rights to the resources under the ground, Sanchez said.

In Mexico, exploration and production companies do not own reserves. They belong to the state, but the 111 exploration and production contracts that companies obtained in the rounds between 2015 and 2017 entitle the 73 companies holding those permits to monetize the proceeds once they have been brought to the surface.

"It is certainly an inflection point. We have tested the waters and shown that it is possible; I am sure others will follow," he said.

Major international exploration and production companies are unlikely to require this type of financing, Sanchez said, but the rest of the companies with a production contract could explore this option.

According to data from the National Hydrocarbons Commission (CNH), there are 73 different companies operating in the country. There are 76 license contracts and 35 production sharing contracts currently active, the data shows.

The deal was the first real RBL in the country; the others are more like project finance, said Cesar Fernandez a partner specialized in Mexico's energy industry at law firm Norton Rose Fulbright who advised the lenders, led by ING bank alongside Citibank, Societe Generale, and Mexico's development bank Bancomext.

"The deal shows that there is still interest in investing in Mexico. It was also the first for the banks involved," said Fernandez, who previously served as legal vice-president of projects at Pemex.

The financing is also good news for the government and for its crude production goals as the country needs the participation of private companies to stop the output decline and increase reserves, said Fernandez.

"This deal confirms that legal and regulatory frameworks provide the conditions for this type of financial structure to continue being implemented in the Mexican oil and gas sector," Fernandez said.

According to data from the National Hydrocarbons Commission (CNH), the country's proven, possible, and probable reserves have fallen consistently for the last 10 years, from almost 45 billion barrels of oil equivalent in 2010 to less than 25 billion boe in 2020.

President Andres Manuel Lopez Obrador has made it a priority of his administration to increase crude production to almost 2 million b/d of crude by the end of the year from less than 1.7 million b/d currently. By the end of his administration in 2024, the president has said he expects production to reach 2.4 million b/d.

According to data from S&P Global Platts Analytics, Mexico's crude output is expected to end this year close to 1.8 million b/d, supported by Pemex production. In 2022, production will be aided by foreign operators, but the decline in Pemex fields will drag it down again in 2023.

The Zama and Trion blocks, operated by Talos Energy and BHP respectively, are expected to account for most of the growth beginning in 2025, said Bill Fuller, senior director at Platts' Global Oil Supply Forecasting Group.