I read a terrific article in Forbes by Helman and Bogan, about a wildcatter named Rod Lewis that, believe it or not, is the only gringo allowed to drill in Mexico. I’ll paraphrase it for you along with my usual commentary and I’ll bet it will open your eyes on what goes on.
Rod Lewis has drilled eight wells in Northern Mexico. Five found natural gas. One unexpectedly hit high-quality crude oil, enough to produce l00 barrels a day. When he relayed the news to state-owned Petroleos Mexicanos, for whom he’s drilling the wells, Pemex bureaucrats told him his contract was to find natural gas, not oil, and ordered him to plug that well.
Had he been exploring just a few miles north, on his acreage in south Texas, he’d be producing it right now.
Lewis is the first U.S. wildcatter to drill in Mexico in three decades and one of only a handful allowed in since President Lazaro Cardenas nationalized its oil industry 70 years ago, booting out Standard Oil and Royal Dutch Shell. Oil is a touchy subject in Mexico, whose constitution bars ownership by anyone but the state of even a molecule of its 30 billion barrels of probable hydrocarbon reserves. That’s stricter by far than Venezuela, Iran or even Cuba.
Four years ago Lewis and his San Antonio firm, Lewis Energy, signed a l5-year contract with Pemex to drill on 80,000 acres near the border. Lewis is merely providing a service. He cannot claim any ownership of or royalty on the oil and gas he finds there.
He also has to front all the capital for drilling wells, laying pipelines and doing seismic imaging. If he completes the entire scope of work in the contract, he could collect $350 million in payments from Pemex.
“I think we could make a lot of money–and I think we could make Mexico a hell of a lot of money, but we have got to loosen up the red tape issues, these handcuffs they put on us,” Lewis is quoted saying. Not to mention strict environmental regulations, cranky landowners, inflation and the threat of kidnapping by narco-gangs.
Lewis, 54, is practically drilling is his own back yard. In South Texas he has l000 wells producing most of his 70 million cubic feet of gas and 350 barrels of oil each day, generating roughly $300 million in annual revenue.
He owns his own drilling rigs, pipelines and gas-processing plants, and he’s convinced that building a solid relationship with Pemex now will pay off if Mexican politicians finally rationalize an irrational system.
That’s a big “if”. In the past year production at Cantarell, Mexico’s big offshore field, has fallen by a third, to l million barrels a day. Total output of liquid hydrocarbons has sunk l0 percent to 3.2 million barrels a day.
To halt the decline Pemex needs to put more capital into its fields. That can’t happen as long as it has to fork over all its profits. First-half 2008 revenues were $67 billion. Pemex netted $44 billion before remittances to the government, leaving income of $l.9 billion.
Reforms proposed by President Felipe Calderon would ease foreign investment in pipelines, refineries and deepwater exploration but would stop short of allowing anyone but the state to own reserves.
“Pemex should be allowed to partner in every project as much as it deems convenient,” says Jesus Reyes Heroles, the company’s director general. But even if Calderon gets all he’s asking for, it won’t be enough. “The proposed reform does not allow a change to the constitution,” Reyes Heroles says. “The president has been very clear to say this reform is not the desirable reform, it is (merely) the politically viable.”
If nothing happens, however, Mexico could well be forced one day into the embarrassment of importing oil.
Lewis grew up around Laredo, where his dad was an Air Force pilot and he thus learned how to fly and took a job with Stampede Energy checking gauges on oil and gas wells after buying a two- sater 65hp Aeronca Chief airplane for $ 4200.
He soon quit and bought his own gauging business and in l983 bought his first well for $l3,000. He had no engineering degree but learned by practical experience in all phases.
Plowing all his cash flow back into the business and with some San Antonio investors, he first bought existing wells, then began drilling his own and building pipelines. His first big financing came in l995 with $5 million from Enron Capital & Trade. He put that toward buying out a partner and drilling (and paid Enron back in eight months).
While drilling in Southern Texas, Lewis always dreamed of drilling in Mexico. He found opportunities in Colombia, where he made deals with oil company Hypecol Caracara. In 2006 he worked unexplored oil basins and paid a modest 20 percent royalty to the Colombian government, those ventures now generating l0 percent of Lewis’ output.
Two years ago he sold much of his pipeline network to billionaire Dan L. Duncan’s Enterprise Products for $325 million in cash and stock. In June he sold his Hupecol stake for more than $l00 million, enough cash to now play a risky game in Mexico.
In 2003 President Vicente Fox designed a new way for Pemex to do business. The so-called multiple service contracts that resulted obeyed the bar to foreign ownership while still attracting capital. Pemex thus signed nine such contracts worth $7.2 billion. Contract stipulations include well drilling, road building and pipeline laying being reimbursed at a fixed cost.
Lewis was the sole bidder on the Olmos Block, having drilled hundreds of wells north of the Rio Grande. For every successful well he drills, Lewis is paid $ l.2 million.
Safety is a real concern for Lewis however. The owner of the land adjacent to Lewis’ biggest well in Mexico was kidnapped from his home. The police chief in nearby Nuevo Laredo was gunned down his first day on the job. Lewis paints “Pemex” on the sides of work vehicles and travels with bodyguards.
“We never spend the night”, he says. He earns goodwill by hiring residents, building community centers, paving potholed roads and digging water wells.
Despite all the complications, Lewis says Mexico has been cash positive. However, he owns his own rigs, employs his own field hands and will move the gas north through his own pipelines and treat it at his own plant.
After four years and $30 million invested, Lewis plans to move his first gas for Pemex. He aims to drill 300 wells in the Olmos block and build a new gas-processing plant. He’d be more gung ho if he had the confidence that every time he found oil, Pemex would pay him to produce it rather than order him to plug the well.
In summary, we have to give this man Lewis a tremendous amount of credit. If any of you Maine readers can visualize the difficulties of doing business in Mexico, taking your equipment across the border, dealing with umpteen kinds of politicians that want a share, gangsters and narcotics gangs running rampant; we have to realize that this is the first man in 30 years with the sheer guts to successfully tackle a problem of this magnitude and still come out ahead.
To my way of thinking, I think he is even impressing the Mexican government with his resolve and abilities. What do you think?
(Dick Halverson lives in Newcastle.)
