Panama Canal as Disruptor

Panama Canal as Disruptor

La Jolla – Disruptors are not just for the tech industry anymore. Speaking at the Institute of the Americas on July 22, United States ambassador to Panama, John D. Feeley, called the $5 billion dollar expansion of the Panama Canal a “disruptor of international commerce.”  Ambassador Feeley’s remarks centered on what he called the three reasons to be interested in Panama: history, prosperity and US foreign policy.

Amb. Feeley was quick to note that the US and Panama have a long history and the two nations are inextricably linked; he added that the historical connection goes back to long before the Panama Canal. Indeed, he underscored the role Panama played, and the Trans-isthmian railroad, as a primary route for Americans to get from the East Coast to California for the gold rush in the middle part of the 19th Century. More recently, the epic construction and operation of the Panama Canal was a major piece of interconnection between the US and Panama, eventually culminating in the Carter-Torrijos agreement that saw the US hand over the Panama Canal and its operations to full Panamanian control at the end of 1999.

Opened on June 26, the expansion of the Panama Canal was a 10 year plus infrastructure project that cost over $5 billion and is the aforementioned disruptor. The expanded Canal will shave between 12-14 days off shipping times from the US East Coast. Additionally, it will considerably reduce shipping time for liquefied natural gas (LNG) exporters from the US Gulf Coast to Asian buyers. But it is also the center piece of Panama’s prosperity.

Panama has for several years been a leading economy in the region with GDP growth averaging around 8% per year and GDP per capita steadily climbing each year. Much of the country’s prosperity is linked to the Canal, its expansion, but also a broader services industry. Counting no significant natural resources, Panama has developed an economy focused on services and, as Amb. Feeley put it, “being useful” to global commerce.

When it comes to US foreign policy, Panama has long played an outsized role for the nation of just under 4 million at the intersection of Central America and South America.  Indeed, as Amb Feeley noted in discussing the historical connection, even prior to independence from Colombia, the Isthmus was instrumental for US citizens heading to the West Coast, but with the development of the Canal came a critical juncture.

Panama was home to not only the Canal and the Canal Zone, a 10 mile wide swath of US territory cutting through the middle of the country, but also found in Panama were several vital US military assets including the headquarters of the US military’s Southern Command. The 1989 invasion and removal of Manuel Noriega on drug trafficking charges to stand trial in the US also is a key moment in the country’s connection to US foreign policy.

More recently, the Panama Papers, the leak of thousands of pages of law firm information regarding offshore accounts and tax evasion has brought international attention to Panama. The name, which unfortunately invokes Panama due to the location of the Mossack Fonseca law firm, is really a conversation on global tax policy and international banking underscored Amb. Feeley. He added that it is not an issue directly related to Panama per se.

Amb. Feeley exuded a tremendous amount of optimism for Panama’s outlook and implored everyone in attendance to consider the country and what it has to offer, not just in terms of business and commercial opportunities, but also tourism and historical attractions.

Mexico Celebrates Oil Auction Bidding Bonanza

Mexico Celebrates Oil Auction Bidding Bonanza

Jeremy Martin
Vice President Energy & Sustainability

As the deepwater oil and gas auction came to a close today, momentous, significant, and historical were but a smattering of the adjectives flying around Mexico City and indeed the global energy world.

With the final block adjudicated just before Mexican lunch hour, the success in terms of winning bids, competition and diversity of bidders was clear for all at Mexico City’s Centro Banamex and watching the livestream to see.

Eight of the ten blocks on auction and the farm-out and partnership with Pemex were successfully tendered exceeding the government’s expectations and estimates of many across the industry. The pensive expressions and slightly stooped shoulders of Mexico’s energy authorities that began the day had turned into wide smiles, upright posture and a spring in their step. Winning bidders could also be seen exchanging hugs and handshakes.

The story lines are plentiful as the ink dries on nine long-term multi-billion dollar bids and opportunities to develop projects in Mexico’s deepwater side of the Gulf. But here are seven immediate takeaways that will be worth watching as the new industry dynamics in Mexico unfold, euphoria ebbs, and the daunting work ahead begins on the massive and challenging projects.

  1. The Mexican government is thrilled. Secretary of Energy Pedro Joaquin Coldwell had indicated they would be happy if four of the ten blocks were awarded. Instead, the authorities awarded eight of the ten to a diverse group of bidders from across the globe. Additionally, the first ever Pemex farm-out and source of much innuendo, Trion, was awarded to BHP Billiton based upon their winning payment to Pemex of $624 Million after the Australian firm’s bid and BP’s had tied in terms of additional royalty commitments – each had bid 4%.
  2. Oil price headwinds and capital constraints remain an important part of the context for today’s auction, but given the diversity and size of the bids tendered, it will not be needed as a scapegoat for the Mexican government. Indeed, today offered a strong argument that in a capital constrained global energy market, large projects can still be successfully tendered when the materiality and fiscal terms line up sufficiently to draw investment.
  3. Mark Twain famously remarked his death had been greatly exaggerated. On the heels of a $624 Million commitment from its new partner, BHP Billiton, plus their contribution to cover Pemex’s roughly $570 Million investment in Trion, the imminent demise of Mexico’s national oil company may have been similarly exaggerated. Yes, the company is struggling financially and with oil production but it proved today that it is still relevant as projects with BHP Billiton and Chevron & Inpex underscore, the latter as part of consortium led by Chevron. For years, many have underscored the imperative for Pemex to work side by side and as part of a major international consortium to learn firsthand the best practices and operational excellence of the oil and gas industry. That appears poised to become reality.
  4. In line with the three preceding auctions and bidding, the National Hydrocarbons Commission (CNH) and Mexican government achieved transparency in how the deepwater auction was conducted. A highly rigorous qualification and adjudication process left few doubts as to the validity of bids and their objectivity. The terms and process also produced an important level of competition, particularly for the Salina Basin opportunities.
  5. China is in the house – CNOOC was the early story with two aggressive bids to win two of the four Perdido Fold blocks. And, in what is a bit of break from its posture in Latin America’s upstream of late, the Chinese NOC was a sole bidder as operator and did not participate in consortium. By itself, it will develop two deepwater projects in the Perdido Fold.
  6. Sierra Oil & Gas has carved out an important role in Mexico’s post-reform upstream landscape with participation in two more blocks bringing their total to four in the Round One auction when added to their success in the first ever auction in July 2015. Indeed, they proved the most aggressive and committed bidder with bids that far exceeded the minimum additional royalty terms established by the government.
  7. The deepwater auction was always supposed to attract the globe’s largest upstream oil and gas firms – the so-called majors — and it delivered on that score with the likes of BP, ExxonMobil, Chevron, Total, Statoil, CNOOC, and Petronas all emerging as winners.

Mexic Energy Winners Bid List

Today was a success but the real metrics and analysis to determine success will not be possible for several years. Indeed, the congratulations and victory laps are well-deserved across the Mexican government and industry, but a dose of realism as to the long-term horizon for these projects and when investments will translate into oil and gas production bears noting.

But there will be plenty of time for our customary Mexico and Pemex navel gazing and hand wringing. Today we celebrate Mexico. Let’s all raise a glass and mark December 5 as a historic day for the future of the country’s oil and gas industry.

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