Mexico represents one of the largest privatizations of oil and gas assets that has ever occurred

While oil majors jockey to win bids to explore Mexico’s deepwater Gulf of Mexico offshore blocks, a Canadian energy company has been researching Mexico’s onshore resource plays, bringing on experienced technical talent and senior Mexican energy industry board members, and it has just secured a license that will allow it to help Mexico change its energy future.

As of last Thursday International Frontier Resources’ (ticker: IFR) Mexican partner Tonalli Energia met all the government’s requirements and locked up a 35-year contract with Mexico Comision Nacional de Hidrocarburos (CNH) that will allow it and IFR to develop the Tecolutla block in the Tampico-Misantla basin to produce hydrocarbons from the acreage.

The Tecolutla Block

Tecolutla is a 7.2 km2 block in the Tampico-Misantla basin located within the state of Veracruz.

Tecolutla block ifr

The producing carbonate oil reservoir in the Tecolutla Block is the El Abra formation at a depth of 2,340 meters.  3D seismic has been acquired over the entire Tecolutla Block and seven wells have been drilled into the producing reservoir.   Peak production at Tecolutla of over 900 barrels per day (bbl/d) occurred in 1972 from three wells, with one producing well remaining as of December 2014.  Tonalli’s experienced operating team plans to deploy advanced carbonate drilling, completion and recompletion techniques in the Tecolutla Block.

Development Plans

Oil & Gas 360® spoke to IFR President Steve Hanson today. Hanson said that the legacy wells existing on the block are vertical wells, and IFR plans to start development for the block with workovers, possibly as early as November 2016, depending on receiving approval from the Mexican government for IFR’s final development plan and receiving permits to initiate the work within that time frame. After the workovers, Hanson said IFR plans to drill the first horizontal well on the block.

History of the Win

IFR announced in May that the original first place bidder that was first awarded the Tecolutla Block in December 2015 did not meet the conditions and terms as required by Mexico Comision Nacional de Hidrocarburos (CNH) within the specified time frame.

Consequently, as second place bidder, IFR’s partner Tonalli was then awarded the Tecolutla Block by CNH as part of the first round and third call of Mexico’s oil and natural gas “mature fields” bid round (“Round 1.3”).

The License Agreement

The license agreement applicable to the Tecolutla Block will require Tonalli Energia to execute a minimum work program expressed in work units during a one to two-year appraisal period.  The work units represent the performance of exploration studies, seismic, work-over, recompletion and drilling activities. The term of the license agreement will be 35 years, subject to certain extensions.  The incremental royalty that will be applicable to the license agreement entered into by Tonalli will be 31.22%. This is significantly lower than the original first place bid of 68.40%. The average incremental royalty for the 25 blocks on which license agreements will be signed for in Round 1.3 is 47.22%.

As required by the CNH, Tonalli has secured from a Mexican institution a US$1,764,100 performance bond toward the guarantee of performance of the minimum work programs.

The Secretaria de Energia (SENER) has issued a five-year, four-round tender plan (2015-2019) for the denationalization of 914 oil and gas blocks.  IFR believes that there are a significant number of underexploited oil and gas fields in Mexico that will be issued in these future bidding rounds.

JV Structure

International Frontier Resources through Tonalli Energia Secures 35-Year License to Develop Tecolutla Onshore Block in Mexico

Source: IFR

Tonalli Energia is a Mexican company with the ownership split equally between IFR and Grupo Idesa, one of Mexico’s largest petrochemical companies, founded in 1956, currently with 1,500 employees and holding an ethane supply agreement with PEMEX.  IFR and Idesa have agreed to jointly fund Tonalli’s costs for Tecolutla and the technical evaluation of the next onshore bidding round.

“After months of preparation, this is an important milestone for IFR and Tonalli in formalizing our partnership with the Mexican government,” said Steve Hanson, IFR’s president and director of Tonalli Energia.  “The Tecolutla Block provides a strategic operating presence in the Tampico-Misantla Basin and a solid foothold into Mexico’s Energy Reform.”

“Our view is that this is the largest oil and gas sales in decades,” IFR President Steve Hanson told Oil & Gas 360®. “The fact that it’s in North America, it has large oil reserves, and it has good infrastructure makes it even better. Mexico is not a country that is in exploration; they’re already in development,” Hanson emphasized.

International Frontier Resources through Tonalli Energia Secures 35-Year License to Develop Tecolutla Onshore Block in Mexico

Source: IFR

“What was apparent to us going down there was that these fields have been underdeveloped and under-explored. In many cases, wells that were drilled back in the ‘50s, ‘60s and ‘70s have good 2D and 3D seismic, show good pay zones, and have not been exploited to the degree that they have been in the U.S. and Canada,” Hanson said.

For additional detail, you may download IFR’s corporate presentation from the EnerCom conference here.


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