Mexico a bright spot for Keppel FELS

Mexico a bright spot for Keppel FELS

MEXICO, with its low costs of oil extraction coupled with its energy reform, presents a bright spot in the current weak oil price environment for Keppel FELS, the rig design and building arm of Keppel Offshore & Marine (Keppel O&M).

Oil prices have recently tanked on the back of a crude oversupply, forcing oil companies across the world to slash discretionary capital expenditures, especially in oil exploration activity. This in turn has hurt the order-books of rig-builders like Keppel.

In 2014, Keppel O&M secured S$5.5 billion worth of new orders, down from S$7 billion in 2013.

The sharp drop in oil prices has also prompted Mexican national oil company Petróleos Mexicanos, or Pemex - the largest contributor of Mexico's federal budget - to cut its 2015 budget by US$4.16 billion, mostly from deepwater exploration and production activities.

Weaker oil prices has also delayed the execution of Keppel's planned joint venture with Pemex, to set up a yard in Mexico to service the country's offshore oil & gas industry.

Still, Keppel is bullish on Mexico's oil sector. Said Chow Yew Yuen, CEO of Keppel O&M, a unit of Keppel Corporation: "Even with the current low oil price, the fundamentals of Mexico's offshore oil and gas market looks strong."

Speaking at a rig naming ceremony held at the company's Tuas shipyard on Saturday, Mr Chow cited industry estimates which have put the average cost of extracting oil from Mexico's shallow water fields at less than US$20 per barrel. For Pemex, the average cost is US$9 per barrel, he told reporters at the sidelines of Saturday's ceremony.

"That means that oil can go down to US$40 and (there) will still be drilling (in Mexico)."

Keppel is a strong supporter of Mexico's oil and gas programme, and is "on track" to deliver the first three of five jackup rigs to Mexican conglomerate Grupo R, said Mr Chow. Grupo R is presently a drilling contractor to Pemex. When delivered, the three rigs will make it 11 KFELS B Class rigs working in Mexico and 20 projects delivered or on order for the country, including two accommodation platforms and 18 jackup rigs.

Despite Pemex's recent budget cuts, Mexico still hopes to boost oil production, which has been in decline for the past decade, as a result of drying oil wells. In April 2015, production was about 2.33 million barrels per day, down from its peak of about 3.5 million barrels per day in 2004, based on an earlier report by the Financial Times.

With an energy reform launched in 2013 to attract private investment to the sector, Mexico has announced its ambition to boost its oil production up to at least three million barrels per day; a fact which it reiterated in April this year.

"The energy reform allows (Mexico) to bid out some of the oil blocks and a lot of companies are now bidding for it. We are watching them very closely," said Mr Chow, adding that over 30 companies have qualified in the first shallow water blocks on offer in Mexico.

If oil stays at its current levels of US$60-70 per barrel, Mr Chow believes that there are still projects that can take off in Mexico, but it depends on how the country settles the energy reform. Ideally, he hopes oil prices will recover and stabilise at US$70-80 per barrel.

Beyond Mexico, Mr Chow sees "pockets of opportunities" across the world; in India, which is coming out with tenders to take advantage of low drilling rates in the current oil price environment; in Iran, with the possible lifting of economic sanctions; and even in Russia.

But even in a buyer's market, Keppel has to select projects on its own account, and not on a speculative basis. Said Mr Chow: "Customers only pay when we deliver ... non-quality owners run the risk of cancellation."

For customers that have already made the cut to Keppel's portfolio, the company takes efforts to provide quality and build trust. Guest-of-honour at Saturday's ceremony, secretary-general of the National Trades Union Congress Chan Chun Sing, explained that each of the oil rigs is not just a transaction, but a relationship. "Because after building and selling the oil rig, there's still a long-term relationship for the life-cycle maintenance of the oil rig itself," he said.

To continually sharpen Singapore's competitive edge in the rig building industry, Mr Chan added that the government will continue to collaborate actively with the industry in R&D, productivity improvements and skills training.

Keppel's remaining two rigs for Grupo R are set to be completed by year's end, but the delivery period will ultimately depend on the customer.

"Best friends are made in times of trouble, not when everything is hunky-dory. If they need help and you help them, they remember you for life," said Mr Chow.

This article was first published on May 30, 2015.
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