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International Frontier Resources Corporation

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Mexico

Mexico is the ninth largest producer of oil in the world and the eleventh largest in terms of net exports. Mexico 's main upstream attraction is a potentially vast resource base. Pemex estimates that yet to be discovered oil & gas reserves could total as much as 115 billion barrels of oil equivalent, roughly three times as much as current proven, probable and possible reserves (3P). According to some preliminary estimates, investment needs will range between US$35 billion and US$100 billion over the next decade.

Mexico's historic energy reform announced in 2014 has established a new legal framework for Mexico's energy industry and is expected to attract the billions of dollars in foreign investment needed to revitalize Mexico's oil and gas industry. 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 under exploited oil & gas fields in Mexico that will be issued in these bidding rounds.

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In August 2014, SENER began the bidding process for assets by announcing that Round One would include: (i) 169 blocks, comprised of 109 exploration blocks and 60 production blocks and (ii) 14 blocks under joint ventures with PEMEX. The tender process commenced in the first quarter of 2015, and license agreements were awarded throughout 2015 and into 2016.

International Frontier Upholds its First-mover Advantage in Mexico's Energy Reform

International Frontier Resources ("IFR") was early to identify the oil and gas opportunities offered by Mexico's historic energy reform. IFR, through its joint venture (JV) Tonalli Energia ("Tonalli"), has now achieved its initial goals, in partnership with Mexican petrochemical leader Grupo IDESA S.A. de CV ("IDESA").

Through its JV with Grupo IDESA, IFR became one of the first foreign companies to participate in Mexico's energy reform in the first bid round of the onshore blocks ("Round 1.3"). Moreover, it was one of the first foreign companies to be awarded an onshore oil and gas development block through a license contract.

 

The Tecolutla Block

On May 12, 2016, Tonalli Energia was notified by the National Hydrocarbons Commission (CNH) that it had been awarded Block 24 ("Tecolutla block") in Round 1.3, with an incremental royalty of 31.22%. Tonalli's royalty was modeled to allow for a competitive rate of return and compares favourably to royalties for other winning bids. On 10 of the 25 blocks, the incremental royalty was more than 60% with three of these blocks having incremental royalties in excess of 80%.

The Tecolutla block is a 7.2 km2 block in the Tampico-Misantla Basin located within the state of Veracruz. In 2017, IHS Markit identified Tampico-Misantla as a potential "Super Basin." The producing carbonate oil reservoir in the Tecolutla block is the El Abra formation.

3D seismic has been acquired over the entire block and seven existing vertical wells have been drilled by PEMEX to bring the field into production. Since reaching total depth, Tonalli has utilized modern well logs from TEC-10 to perform a pre-stack depth migration of the 3D seismic volume ("PSDM Seismic") to give a more precise image of the top of the El Abra. The PSDM Seismic has resulted in a clearer image of the reef edge, which matches Tonalli's original interpretation of the reef edge and confirms the areal extent of the reef. For additional information, please review our technical support graphics.

Like many oil and gas fields in Mexico, International Frontier's technical team believes oil production from Tecolutla has yet to be optimized. To execute the plan, the team intends to deploy advanced carbonate drilling, completion, stimulation and recompletion techniques at the Tecolutla block.

 

Tecolutla Development Underway and First Cash Flow;

  • As announced on September 13, 2018, Tonalli has commenced selling oil produced during the well testing phase to PEMEX. It is being trucked to PEMEX's Ezequiel Ordonez facility, approximately 35 km from the Tecolutla block. Achieving crude oil sales and first cash flow is a major milestone in the ongoing development at Tecolutla.
  • On August 6, 2018, Tonalli completed an 18-day flow test of the primary zone interval producing 178 barrels of crude oil during the last 24 hours. Equipment has been mobilized to recommence production at TEC-10, scheduled for late September. Additional information is available in the TEC-10 production testing results.
  • The TEC-2 legacy well was tested for a total of seven consecutive days and produced an average of 125 bopd from existing perforations. Throughout the test, TEC-2 flowed naturally on a restricted 20/64" inch wellhead choke with a final wellhead flowing pressure of 660 pound per square inch gauge (psig). Please see the May 16, 2018 press release.
  • Construction of the expanded TEC-2 pad, the drilling site for the upcoming first horizontal well ("TEC-11"), is nearing completion. Tonalli is in the final stages of procurement planning and expects to spud TEC-11 in Q4 2018, pending final logistics and regulatory approvals.
  • TEC-11 will be drilled utilizing knowledge obtained during drilling and completion of the TEC-10 directional well. The well is designed to maximize contact of the horizontal leg of the wellbore with the upper portion of the prolific El Abra reservoir. Tonalli expects that the reprocessed 3D seismic data and application of horizontal drilling will mitigate the risk of encountering localized geological features that limit well performance.
  • FMI log data indicates abundant natural fractures at lower depths within Interval A and Interval B, which may connect this tighter Lower El Abra to the higher reservoir quality Upper El Abra. Tonalli encountered oil at these lower depths, which indicates a potentially lower oil water contact and a larger gross rock volume within Tecolutla that is charged with hydrocarbons.

 

Future Bid Rounds

IFR has the opportunity to acquire new assets in the upcoming bid rounds and PEMEX farmouts.

Through its JV, IFR has now entered the largest onshore bid round of the energy reform. Tonalli has been granted access to the data room for the second tender of Round 3 ("Round 3.2") of Mexico's energy reform by CNH. Please see the news release of May 9, 2018.

Round 3.2 encompasses 37 onshore conventional blocks including 21 blocks in the Burgos region in Tamaulipas, nine in the Tampico-Misantla Veracruz region and seven in the southeastern Mexico, Tabasco and Campeche areas. As of mid-May, eight companies had initiated the prequalification process and 12 companies had expressed interest in participating in Round 3.2.

The minimum balance sheet requirement for participating in Round 3.2 is US$100 million. These blocks collectively cover 9,513 km2 with prospective resources of approximately 260 million barrels of oil equivalent (boe) including wet and dry gas, and light oil.

The third tender of Round Three ("Round 3.3") will be the first bid round to award licenses for onshore unconventional fields since the energy reform. Round 3.3 is comprised of nine unconventional blocks for exploration and production, which are located in the Burgos Region in Tamaulipas, covering 2,704 km2 collectively, with prospective resources of approximately 1,214 million boe. Rounds 3.2 and 3.3 are both scheduled to occur on February 14, 2019.

PEMEX farmouts are also scheduled to occur on February 14, 2019. These farmouts are expected to increase oil and gas output aggressively across seven mature fields by 2020. The seven onshore clusters are in southern Mexico and are composed of exploration areas and mature fields with as many as 45 years of operating history. These clusters include Artesa, Juspi-Teotleco, Giraldas-Sunuapa, Bedel-Gasifero, Bacal-Nelash, Cinco Presidentes and Lacamango.



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IDESA to Become a Strategic Investor in IFR

IFR has entered into a share option agreement (the "Option") with its JV partner, IDESA. The Option gives IFR the right to acquire a 100% stake in Tonalli by acquiring, through its wholly owned subsidiary, the outstanding shares of Tonalli held by IDESA prior to the expiry date of September 25, 2020.

The Option aligns IFR and IDESA's long-term strategy to build IFR into an energy leader in Mexico. Upon exercise of the Option:

  • The agreement will consolidate all cashflow and reserves into IFR
  • IDESA will have the right to nominate two directors to IFR's board of directors with an ongoing right to nominate 25% of the board seats as a major shareholder of IFR; and,
  • IDESA will subscribe for a minimum CDN$1 million of IFR shares pursuant to the future private placement.