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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 ("Grupo IDESA").

This strategic JV enabled IFR to be the first foreign company to:

  • Drill onshore in Mexico within the bid round framework of Mexico’s energy reform;
  • Drill onshore conventional oil in Mexico in over 80 years.

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.

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 Planning Underway;

  • As announced on July 23, 2018, Tonalli has commenced planning for drilling its first horizontal well (“TEC-11”) and a workover of the Tecolutla 7 (“TEC-7”) well. Tonalli expects drilling to take place in late Q4 2018 and Q1 2019, pending regulatory approvals.
  • Perforation and stimulation of the TEC-10 well commenced in late June targeting multiple zones in 138 meters of gross El Abra reef.
  • Production testing is ongoing for the highest porous interval (“Interval C”) of the TEC-10 well between 2,349.5 and 2,353 meters. For the first three days of the test, the well flowed at an average rate of 384 barrels per day (“bpd”) of fluid with an oil cut of <5%. During the 12 hours preceding 5 a.m. MST on July 23, 2018, the flow rate averaged 480 bpd of fluid. The oil cut of the fluid during this later period of testing was 12% with wellhead pressure of 300 psi. (Please review technical support here).
  • As announced on May 16, 2018, TEC-2 was tested for a total of seven days and produced an average of 125 barrels of oil per day ("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 psig. Over the final day of the test, the TEC-2 well averaged an estimated 105 bopd producing 514 bbls/d of fluid, a 20% oil cut.
  • 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.
  • Tonalli has recently entered into a crude oil commercialization agreement with PEMEX. At this time, Tonalli does not intend to produce from any wells in the Tecolutla field until after the next well is drilled successfully, and appropriate production and water disposal facilities are constructed.

Partnering to be the Next Energy Leader in Mexico

IFR, through its Mexican subsidiary Petrofrontera, and Grupo IDESA formed a 50/50 joint venture company in Mexico "Tonalli Energia, S.A.P.I de C.V."

This agreement and formation of Tonalli Energia represented a significant milestone for IFR, allowing the company to enter the Mexican oil and gas industry in partnership with a leading Mexican downstream corporation. IFR believes that the combined strengths of the JV partners are complementary in the pursuit of building a successful exploration and production company.

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’s Ogarrio and Cardenas-Mora farmouts to foreign oil companies. PEMEX hopes to boost production on these fields from 11,750 boe/d to 29,000 boe/d in the short-term. CNH has said that current clusters on auction have extraction costs as low as US$7.

The PEMEX farmout is also scheduled to occur on February 14, 2019. This farmout is 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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