Larry Comeau peers from his Calgary office across the rolling plains of southern Alberta; a quick glance at his computer screen gives him a detailed picture of what's happening underneath the dry plains of northern Mexico. The view from <$iPrecision Drilling Corp. >'s executive suite reflects increasing ties between Canada and Mexico, part of the ongoing integration of the North American energy industry. Constitutional barriers continue to ban foreign involvement in Mexico's upstream sector, giving a monopoly to state-owned Pemex (Petroleos de Mexicanos). But strong encouragement by the reform-minded government of President Vicente Fox means the maple leaf of the Canadian flag is increasingly perched upon drilling rigs, gas-compression facilities and power plants south of the U.S. border. "Our two projects are probably as close as any projects have come to Mexico's upstream sector," says Michael Stewart, president of the international division of <$iWestcoast Energy Inc., > which owns half of an offshore gas-compression facility in the major oil field Cantarell. "When you go to Mexico and talk to the government and Pemex about how foreign investment should be approached, they point to Cantarell." Ralph Goodale, Canada's natural resources minister, emphasized the bilateral ties in a mid-October trade mission to Mexico. He was returning a visit to Calgary paid by Mexico's energy minister, Ernesto Martens, in July. Goodale was accompanied by officials from 30 companies, many from the energy industry including <$iAlberta Energy Co. Ltd. > and <$iNexen Inc., > scouting for opportunities and using the trip to make personal contacts. The minister says the Canadian government is encouraging market-driven investments rather than waiting on U.S. President Bush's desire for a North American energy policy. "We certainly believe that as the economy evolves and the business-reform process in Mexico continues, there will be more and better opportunities for the future," Goodale says. Precision has landed three contracts in Mexico, the largest a US$270-million deal to punch down at least 240 gas wells in the Burgos Basin of northern Mexico. In addition to five drilling rigs, Precision provides numerous services including bits, wireline-logging, directional drilling and well-testing. Its partner, Houston-based <$iBJ Services Co. >, supplies cementing and stimulation equipment and expertise. The turnkey arrangement means Precision and BJ get paid when each well is completed, right down to hanging a sign on the fence surrounding a wellhead. The crossborder business for Precision, which is Canada's largest drilling contractor, commenced after Pemex officials went to Calgary in June 2000 for the 16th World Petroleum Congress. Demonstrations of Precision's equipment, particularly its automated and highly mobile single rigs capable of drilling 3,000 meters, resulted in Precision obtaining an invitation to bid on the Burgos contract. By using modern equipment suited well to shallow drilling, Precision counted on shaving nonproductive rig time from about 18% under Pemex to something closer to its Canadian standard of 5%. Early results proved the company right, as it drilled 51 wells to the end of September, six ahead of schedule. Comeau says his firm does not expect to test a lot of new technology in the Burgos Basin, although a recent contract to a Precision subsidiary, <$iNorthland Energy Corp., > may involve field tests of innovative offshore production tools in Mexico. "It's a significant technological step because it stresses Precision's ability to put together an integrated package," he says. "We have to look after all the engineering, civil construction, work with a partner and manage it from a cost perspective. It's a big step for us." Westcoast looked south of the Rio Grande as part of a push to grow outside of Canada. It turned its attention to Mexico, which was nearer and had more upside potential, in the late 1990s after spending several years developing a pipeline project in Australia. Somewhat ironically, the Australian development was sold to <$iDuke Energy Corp., > the Charlotte, North Carolina-based company which announced in September the acquisition of Vancouver-based Westcoast for US$3.5 billion plus the assumption of US$5 billion in debt. Stewart says Mexico's demographics, natural resources and economic liberalization policies favor companies with strengths in natural gas, such as pipeline operators and power generators. "I think it's become clear to everyone that Mexico is going to continue its economic growth and improve the basic standard of living for its citizens. This translates into significant growth for electricity and they see that primarily fueled by natural gas. "They face enormous challenges because Mexico forecasts that internal consumption will rise from approximately 5 billion cubic feet of gas per day to 10 Bcf within the next 10 years. It's a marvelous opportunity for Canadian and North American companies involved in the gas business." Westcoast has invested roughly US$425 million in Mexico. A deal scheduled to close in the final quarter will raise its interest to 30% in the US$1-billion Cantarell nitrogen project, which is to produce 1.2 Bcf of nitrogen per day for injection to maintain reservoir pressure at the Cantarell oil field in the Bay of Campeche. Westcoast also owns half of a US$280-million gas-compression and liquids-extraction facility contracted to a Pemex subsidiary. The platform, the only independently owned unit among more than 200 dotting the jade waters of the Bay of Campeche, is expected to begin compressing 250 million cubic feet (MMcf) of gas per day before year-end. It will go to Mexico's pipeline system for use by power generators and local distribution companies. Some disappointments While the opportunities are large in Mexico, so are the headaches. Westcoast's nitrogen facility, where employment peaked at 4,000 workers on its 50-acre site, only needs about 85 staff to operate. Disappointed more full-time jobs weren't created, local residents protested by blockading the plant several times. The Mexican government responded by building a barracks and permanently stationing soldiers at the plant. Montezuma's best revenge was the creation of Mexican bureaucracy, both in the federal government and <$iPemex >. Efforts by Fox and predecessor Ernesto Zedillo are credited with cleaning up much of the corruption and waste, but the bureaucracy is still described by some Canadian officials as "impenetrable and at times painful." The bureaucracy is one reason Bob Brown, president of <$iSpartek Systems Inc., > says smaller Canadian energy companies should approach Mexico with caution. An Alberta company specializing in monitoring tools, Spartek supplies equipment to <$iHalliburton Co. > and relies on the oilfield-services giant to deal with Pemex and government officials. "You really have to have a large backing behind you before you can venture into markets like Mexico," he says. Comeau says Precision's Mexican staff members have given "coaching tips" on how to work with officials from the national petroleum firm as well as the federal government. While supporting improvements to the bureaucracy, Westcoast's Stewart says some of the cures are almost as bad as the illness. One rule allows federal officials to review contracts signed by Pemex staffers, exposing them to fines or jail term if found guilty of bad deals in hindsight. Stewart says this mostly laudable measure virtually paralyzes the willingness of Pemex managers to make what in Canada or the U.S. would be normal business decisions. "There needs to be more balance in the system. Our experience with Pemex, by and large, has been positive. They've shown flexibility that has been very helpful as we've had a variety of unexpected problems [such as a hurricane]," he says. Mexico remains a tough market for small service firms despite economic reforms, says Michael Doyle, president of Calgary's <$iCan-Petro International Ltd. > His firm, which specializes in geology, geophysics and engineering, went on the Canadian energy mission in October. The carefully organized trip gave participants valuable face time with senior Mexico officials as well as industry players, but Doyle says warm words by government members from both countries will not resolve some of the challenges of operating in Mexico. He points to existing rules surrounding bids on contracts for Pemex as an example of difficulties faced by outsiders. "They're trying to move to more of a cost-benefit-analysis system, but they are not there yet. It's a tricky market because somebody can come in with a product that is not optimal for Pemex but by law Pemex is required to take the lowest bid," he says. "It's very different from the market people are experienced with in Canada or the U.S." Future energy investment Mexican officials have said the country needs US$15 billion of investment during the next six years to develop its energy industry. But government members have issued contradictory statements on the opening of the gas industry, which Canadian executives take as a sign of a major political battle facing Fox as he tries to liberalize the upstream sector. CanPetro has been pursuing Mexican opportunities for nearly a decade, but Doyle expects it will be several more years before there is a significant loosening of rules governing foreign investment in exploration and production assets. CanPetro is an affiliate of <$iPetrel Robertson Ltd. >, a Calgary consulting firm. "I think there will be an evolution but I'm not sure how long it will take," he says. "I have the impression that it is going to be a long process." The upstream sector is fraught with emotion since the nationalization of the petroleum industry in 1938 has turned it into a prominent symbol of Mexican pride. Canadian companies say they have invested time and money on culturally sensitive issues to minimize friction and stress. About two-thirds of Precision's total staff of 450 are Mexican nationals. It pulled Spanish-speaking staff from its South American operations and sent unilingual staff to Spanish classes at night. While drilling crews rotate in and out on varying schedules, the remainder of Precision's staff is stationed full-time in Mexico and its bonuses are tied to the firm's performance in the country. Technology transfer, part of the expectations on Precision, has resulted in the company sending trainers to Mexico as well as bringing Mexican citizens to Calgary for instruction. "Our intention is to continue to indigenize the organization. We'll probably pull more and more expatriates out of Mexico as we go forward," Comeau says. There are many things besides language, food and weather that drive home the differences between the plains of Alberta and northern Mexico. Drug trafficking is a problem in Mexico, so driving at night is not recommended for Precision's staff. Its drilling crews had to climb a steep learning curve to deal with the higher formation pressures in the Burgos Basin, often around 4,700 psi, compared with less than 1,000 psi in many parts of Canada. "We've had some tremendous kicks because these are very, very touchy wells," Comeau comments. "We use a pressure prediction program but there is just a lot of engineering work that we have to do to make sure we get it right. For the boys from Alberta going down there, it can be a little scary. These are wells where you have to pay attention." Positive differences The differences can also be fascinating and fun, says JoAnne Butler, regional general manager of Mexico for <$iTransAlta Corp. >, a Calgary-headquartered power company. "I don't think Mexico is a country one can be indifferent about. I find Mexico fascinating for its culture, music, history and the people, who can be incredibly passionate about their politics and their country," says Butler, who moved to Mexico City last March with her husband and three small children. "Mexico City itself is unique because there are so many incredible things to do and see." TransAlta is building two power plants, a 252-megawatt unit in the state of Campeche and a 259-megawatt facility in the northern state of Chihuahua. Gas at the second site will be supplied by a unit of <$iEnron Corp. > Construction of both projects is well under way, with total spending estimated at US$400 million. The plants are expected to come online in 2003. The power will be sold under long-term contracts to the <$iComision Federal de Electricidad > (CFE), the state electrical company, which reduces the market risk for TransAlta. Electricity is one of the most attractive opportunities in the country. According to statistics given to the recent Canadian trade mission, Mexico has a population of roughly 100 million with 40,000 megawatts of capacity. Ontario, Canada's most populous province with 11 million people, has 30,000 megawatts of generation. The obvious disparity-with Mexico's capacity and consumption more on the level of Uzbekistan than the rest of North America-has caused an influx of foreign power players such as TransAlta. While the fallout from the terrorist attacks of September 11 may reduce the rate of growth, TransAlta still expects healthy annual demand increases of 3.5% to 4% per year. Butler says power players wanting to operate in Mexico have to satisfy the CFE's rigorous and detailed bid process. Experience and relationships that TransAlta gained during its first bid, for the Campeche project, definitely helped six months later when it went after the Chihuahua facility, she says. "When you make a bid, there are certain things you have to do technically and commercially or you get kicked out. Once you have worked through the process a couple of times, it becomes slicker. The CFE is also working at streamlining the bid process." Mexico has a reputation as a bastion of machismo, but Butler says she has had no problems with the professionalism of Mexican business executives and government officials, many of whom have been educated and worked in the U.S. or Canada. This means speaking Spanish is not a necessity, but Mexicans are patient and encouraging when outsiders like Butler practice their new language skills for something other than ordering cerveza. TransAlta operates with a minimum of expatriates and Butler does not expect much of a problem with fulfilling a long-term goal of finding a Mexican national to replace her in a couple of years. However, she says complicated tax laws in Mexico make an expatriate a good short-term choice when a company moves into the country. "You need senior technical presence and a good comptroller with very strong accounting skills who can set up office policies and procedures and make sure the proper cost-control systems are in place between Mexico and the parent company." Mexico's domestic growth, proximity to the U.S. and potentially rich geological resources make the country very attractive, CanPetro's Doyle says. "If you look at all of the projections, Mexico is going to need a lot of exploration and development activity. It's going be one of the more active areas for gas in all of North America. I see more growth in Mexico than in Canada or the U.S. during the next 10 years. I think it will be a very good market for Canadian service firms." Officials with other Canadian companies say good airline connections, ease of supplying heavy equipment from Texas and similar time zones enhance the appeal of going international while staying within North America. Westcoast's Stewart neatly sums up the situation for maple leaf-waving firms looking at Mexico. "I think the bottom line is that Canadian energy industry companies are pretty well positioned if they want to pursue the opportunities because I would say there are more opportunities than there is capital available. It's a marvelous opportunity for Canadian and North American companies involved in the gas business."