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Obstacles and Opportunity Abound in Mexico

Typically when runners are on their marks, they know the course ahead of them.

However, as industry players anxiously wait for Mexico to open its hydrocarbon-rich fields to foreign investors, the shortest course to the pay zone is not so clear.

Petróleos Mexicanos (Pemex), which has served as Mexico’s national oil company for the past 76 years, has focused on production, rather than exploration, in order to generate roughly 30 percent of the country’s revenue.

After watching the country’s production rate steadily decline over the last decade, Mexican President Enrique Peña Nieto amended the country’s constitution last August to allow third party operators to help achieve Mexico’s short-term goal of raising production by 20 percent – to three million barrels a day – by 2018.

Up for grabs in the imminent Round One of bidding are 169 blocks for exploration and exploitation. They include mature oil and gas fields, the deep waters of the western Gulf of Mexico, heavy oil and the country’s untapped shale formations.

Energy companies just north of the border are eager to dive into the exploration and production of Mexico’s estimated 159 billion barrels of oil equivalent – but where will they go first?

When weighing the options, concerns about security, corruption and lack of infrastructure inevitably crop up.

Factor in the tricky economics caused by the falling price of oil and gas, and the course for the players in this historical new play is anyone’s guess.

The Playing Field

Mexico’s most prolific oil field, the offshore Cantarell, once produced 66 percent of the nation’s oil. It peaked in 2004 at 2.2 million barrels a day before dwindling down to today’s 350,000 barrels.

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Typically when runners are on their marks, they know the course ahead of them.

However, as industry players anxiously wait for Mexico to open its hydrocarbon-rich fields to foreign investors, the shortest course to the pay zone is not so clear.

Petróleos Mexicanos (Pemex), which has served as Mexico’s national oil company for the past 76 years, has focused on production, rather than exploration, in order to generate roughly 30 percent of the country’s revenue.

After watching the country’s production rate steadily decline over the last decade, Mexican President Enrique Peña Nieto amended the country’s constitution last August to allow third party operators to help achieve Mexico’s short-term goal of raising production by 20 percent – to three million barrels a day – by 2018.

Up for grabs in the imminent Round One of bidding are 169 blocks for exploration and exploitation. They include mature oil and gas fields, the deep waters of the western Gulf of Mexico, heavy oil and the country’s untapped shale formations.

Energy companies just north of the border are eager to dive into the exploration and production of Mexico’s estimated 159 billion barrels of oil equivalent – but where will they go first?

When weighing the options, concerns about security, corruption and lack of infrastructure inevitably crop up.

Factor in the tricky economics caused by the falling price of oil and gas, and the course for the players in this historical new play is anyone’s guess.

The Playing Field

Mexico’s most prolific oil field, the offshore Cantarell, once produced 66 percent of the nation’s oil. It peaked in 2004 at 2.2 million barrels a day before dwindling down to today’s 350,000 barrels.

Supplementing Cantarell is the offshore Ku-Maloob-Zaap field with 900,000 barrels a day.

Despite the fact that only six of the country’s 12 basins with petroleum systems currently produce, Mexico is one of the top 10 oil and gas producers in the world, said Alfredo E. Guzmán, director for exploration and new ventures for Casa Exploration, a former executive for Pemex, former president of the AAPG Latin America Region and former AAPG vice president-Regions.

In fact, of the roughly 600 oil and gas fields in onshore and offshore Mexico, just a handful produce more than 80 percent of the country’s oil and gas, Guzmán said.

That leaves the stakes wide open for foreign investors who soon will have access to 109 blocks of prospective resources for exploration and 60 fields with 2P reserves for exploitation.

The blocks fall into five categories:

  • Deepwater Perdido area.
  • Deepwater south.
  • Chicontepec Basin (conventional and unconventional plays).
  • Onshore, shallow waters and extra-heavy oils.
  • Sabinas Basin (unconventional plays).

Mexico has discovered in its subsurface 263 billion barrels of oil and 279 trillion cubic feet of gas, Guzmán said. Those numbers do not include the “yet-to-be-found” conventional and unconventional resources.

If Pemex’s estimate of 435 billion barrels of oil equivalent for the country’s total endowment is correct, there are at least 159 billion barrels of oil equivalent to be produced, Guzmán said.

Low-Hanging Fruit

Guzmán predicts that operators will find it most worthwhile to explore and exploit Mexico’s deep waters in the Gulf of Mexico and its shale, as both remain untouched and ripe for production.

Twenty-five exploratory wells have been drilled by Pemex with economic successes in the Mexican Perdido Fold Belt and the Catemaco Fold Belt provinces, he said.

“It has been confirmed that the Perdido Fold Belt enters Mexico with better conditions than across the border,” Guzmán said.

Four discoveries in the Perdido Fold Belt have been made in the Supremus, Trion, Maximo and Vespa fields, with Trion being the best with 3P reserves estimated at 480 million barrels of oil equivalent – some of the largest in the Gulf.

“To develop and produce these fields, it will no doubt require the major players – the ones with the deepwater experience,” Guzmán said. “It is extremely low-hanging fruit.”

In terms of unconventional oil and gas, ideal plays lie in the Paleozoic shale in the north, the Eagle Ford shale in the northeast, and the Jurassic shale in east central Mexico, Guzmán said. All three areas have the potential to produce liquids-rich gas, light oil and light-to-heavy oil.

To date, nine exploratory wells have been drilled in unconventional plays and 112 million barrels of oil equivalent of 3P reserves have been found. In the next four years, Pemex plans to invest $3 billion to drill 175 wells and acquire roughly 4,000 square miles of 3-D seismic data, Guzmán said.

While many may be eying the Eagle Ford shale – its proof in the pudding already found in Texas – unconventional plays that could top it are the Upper Jurassic (Tithonian) shales just south of the Burgos field, said AAPG member J. Antonio Cuevas-Leree, president of the Mexican Petroleum Geologist Association and former exploration manager in the Northern and Southern Regions of Mexico at Pemex.

When factoring in today’s economics, however, Cuevas-Leree insists the most lucrative opportunities lie in unexplored conventional plays – particularly the Austin Chalk and Edwards Limestone in northeastern Mexico, the Lower Jurassic Huayacocotla play in the Tampico Misantla Basin and the dolomitic facies of the Upper Tithonian in the southern region.

Looking from Texas across the border, others agree.

“I would think some of the best opportunities might be in the development of existing fields by using the application of new reservoir technologies to improve production rates and add reserves,” said AAPG member Brian Horn, chief geologist at ION Geophysical. “While the deep water is very prospective, the well cost, development cost and time to first oil will require a more long-term approach.”

Most companies are looking to monetize their assets, he added. Given the recent dip in oil and gas prices, operators and service companies that bring new technology and fresh ideas – which increase production or decrease cost in Mexico’s mature basins – could reap rewards the fastest, he speculated.

Obstacle Course?

While opportunities in Mexico abound, so do obstacles. Guzmán is the first to admit that issues with security, corruption and lack of infrastructure could detract foreign investors.

He is quick to point out, however, the Mexican government already is on the case.

“The government is really working to allocate resources and create new positions in the armed forces and the police” to ensure exploration and production crews remain safe, he said.

In addition, the Mexican government is looking at ways to comply with the United States’ Foreign Corrupt Practices Act, and has recently passed laws that require more oversight and regulations to prevent corruption, he added. Bids will be open, clear and transparent and available to the public via the Internet.

Furthermore, the government is implementing a large program to build and improve infrastructure – spending $20 billion to upgrade and expand the Mexico City airport, as well as build railroads, highways and pipelines that will run through Mexico into Central America, Guzmán said.

“Mexico is one of the most open economies in the world,” he said, pointing to its auto and telecommunications industries. “Mexico is a stable country. We haven’t had a coup in the last 70 years.”

From a geological perspective, Horn puts it best: “I think one of the best things about the opportunities in Mexico is that they are in the southern half of the most mature oil and gas province in the world – the Gulf of Mexico,” he said.

“The Gulf of Mexico is the laboratory for all new technologies in oil and gas exploration and development,” he added. “Most exploration technologies have been developed in the Gulf Coast region.

“If you look at the history of our industry, you could say all roads lead to and from the Gulf of Mexico.”

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