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Southern Exposure: Mexico’s shale plays

Horizontal drilling and multi-stage fracking opened up dead fields in Alberta. Now, Alberta companies are turning their attentions and equipment south – way south – of the border

May 20, 2014

by Eric Blair

Most of the energy service sector’s attention may be directed northwest towards the Montney, but there’s an emerging opportunity in exactly the opposite direction: Mexico. That country’s government has decided, in the face of falling oil production and growing losses at its national oil company, Pemex, that it will open up its oil sector to international investment. And while it’s unlikely that many Canadian producers will be able to compete with the ExxonMobils and Shells of the world, it’s a different story when it comes to the service sector.

CanElson Drilling, for example, has been operating drilling rigs in Mexico since 2009, and it’s not alone. Trinidad Drilling also has rigs in Mexico, while pressure pumpers like Calfrac Energy Services and Trican Well Service also have equipment in the country. They’re poised to benefit from the country’s turn towards the kind of horizontal multi-stage fracking that’s unlocked plays all across Western Canada. “What I see down there is a number of older fields much like we have. If you look at the Cardium, it was discovered in the 1950s, and just recently horizontal drilling and a number of other technologies have allowed it to be reopened,” says CanElson CEO Randy Hawkings. “In Mexico, I see opportunities for doing what we’re doing here, which is looking at every single formation with a view to seeing whether it can be optimized.”

Dana Benner, an analyst with AltaCorp Capital, thinks those opportunities could turn into a long-term revenue stream. “They need better rigs, and they’re going to need much more technical fracking,” he says. “It’s been a lot of plain-vanilla operations down there – Pemex hasn’t wanted a whole bunch of technology invested, nor have the companies been incentivized to use it.” For Hawkings, that would offer a welcome buffer against the weather-driven volatility ­Albertan service companies have to deal with back home. “It takes out the bumps in the year that are a direct consequence of ­weather,” he says. “Now, depending on where you are in Mexico, you can be affected by weather, but not anywhere near the ­extent that you would be up here. So it can help level out some of the revenue streams.”

For those who are looking to make the move into the market, Hawkings says having good relationships with local operators is critical. “We took a partner – there was a connection between one of the fellows on our board of directors and the chairman of a large Mexican service company – and they’re very well connected to Pemex. My partner down there has 40 years of working with Pemex. I couldn’t hope to replicate those relationships or the knowledge of how to do business there.” That emphasis on building local capacity extends to proving up the requisite supply of skilled labour. “We’ve been focused on getting young Mexican engineers,” Hawkings says, “and building up a base of guys. There are some very qualified people down there. We just have to get them in and trained in the way we like to do things.”

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He’s not expecting the benefits from those investments to start flowing overnight, though. The Mexican government still has to pass the legislation that would actually open up its energy sector to foreign investment, and define exactly what shape they want that to take. And even then, the ramp will probably be a slow one. “The fear is that North America will get swamped with Mexican production,” AltaCorp’s Benner says, “but that will take a long time. You have infrastructure issues and you have safety issues – northern Mexico is still one of the riskiest places to operate globally. With all that, I think it’s going to take a long time for Mexican production to have a material impact on the North American balance.” MNP’s David Yager agrees. “It’s one thing for Mexico to say it wants to fix the joint, and quite another to undo 66 years of state ownership,” he says. “I don’t think that’s going to happen quickly.”

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