shutterstock_29118568Pemex is investing in offshore oil exploration and production to reverse a 25% drop in oil production levels over the past 10 years, and to secure its claim to domestic offshore oil leases before foreign oil companies gain access to them. Mexican oil industry reform passed in 2012 and 2013 paved the way for more offshore investment, and in 2013 Pemex announced plans to buy 8-12 new jackup rigs – supporting its goal to be the world’s most prolific jackup operator. Pemex is in a hurry to lock in its investment and drilling plans, as new legislation opens up offshore Mexican oil lease auctions to international oil companies as early as 2015. The national oil company wants to hold on to as much acreage as it can, but it needs to prove that it can drill those acres before the upcoming auctions, hence its ambitious plan to secure more jackups.

Pemex announced a Memorandum of Understanding with Keppel Offshore & Marine in October 2013 that covers the development, construction, and operation of a new yard at the Port of Altamira to build and repair offshore rigs. The yard’s first phase will cost $150m, and give Keppel and Pemex the capability to build six new jackups. In addition to the six rigs that Keppel will eventually build at Altamira, it is already building two jackups for Pemex, and Sembcorp is likely to win orders for at least two more jackups this from Pemex this year.

Why is Pemex is buying rigs instead of renting them? To avoid ever-increasing day rates and ensure availability. True, it is contracting rigs as well, having already closed six-year contracts on four Seadrill jackups (and it will soon close a similar deal on a fifth), but those are only a temporary measure until its own rigs can enter operation. Average jackup day rates rose 11% in 2013, from $120k to more than $130k. A tight market for jackup capacity can push day rates into the $300-400k range for some jackups. Part of Pemex’s goal is to plan its spending as accurately as possible, a goal not satisfied by climbing day rates for rigs. In addition, when fleet utilization rates are high, the wait for available rigs can stretch to years, which could delay Pemex’s long-term drilling goals. Its status as a National Oil Company (NOC), ultimately controlled by the Mexican Government, gives Pemex the flexibility to embark on such an ambitious buying program. In contrast, most Independent Oil Companies (IOCs) prefer not to tie up resources in such capital-intensive assets, contracting rigs wherever possible to insulate themselves from the boom-bust cycle of oil prices.

How does an oil company know whether to buy or lease rigs? A correct decision should compare a forecast of day rates to a properly negotiated purchase contract. The easy way to do this is to forecast straight-line day rates and use 2-3 recently publicized rig contracts as a basis for a comparison. Unfortunately, the actual line is often sloping or curved, and the publicized contracts are not the best price that can be had. Inaccuracies can yield a wrong decision – lease instead of buy, or buy instead of lease. Boston Strategies International recently developed a detailed rig procurement cost analysis for a major NOC that is helping it to assure future drilling capacity while saving approximately 20% on the purchase cost of the rigs – in Pemex’s case this could save approximately $400m on 10 jackups.

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