Politics Cloud Mexico's Promises

Meanwhile, Geology Beckons

One of the most important races in the world is taking place right now in Mexico.

It's a race against time.

In August, a good news/bad news report came from Luis Ramirez Corzo, director-general of exploration and production for Petroleros Mexicanos (Pemex).

The good news:

A nitrogen-injection program has helped delay the decline of Cantarell, Mexico's biggest oil field and source of almost two-thirds of the country's oil production.

The bad news:

Production from Cantarell will begin to decline in 2006, and the drop-off will be brutal — 14 percent a year, according to Ramirez.

Couple that with Mexico's growing need for natural gas imports, primarily for power generation, and the republic faces a rocky energy outlook.

Ramirez later announced that Mexico may have another 54 billion barrels of reserves, mostly in deepwater provinces, in addition to its current 48 billion boe.

So the answer seems simple.

Pemex should call on outside investment and expertise for speedy development of Mexico's impressive hydrocarbon potential.

But Pemex won't be able to move that fast.

Because in Mexico, simple can be complex.

A Fleeced Golden Goose

Matthew Shaw serves as senior Latin America energy analyst for Wood Mackenzie, a major international consulting group with headquarters in Edinburgh.

Shaw said Wood Mackenzie's analysis points to a serious emerging problem in Mexico's oil and gas sector.

"When you put the numbers together, it looks like the production in Mexico is going to decline over the next few years, and the decline is going to be quite steep," he said.

This situation has long set off alarms inside Pemex. But the rest of Mexico doesn't see the scope of the coming challenge, according to Shaw.

"I don't think the public in general understands that they're about to hit a brick wall," he observed.

While many good exploration and development prospects remain, Pemex needs both funding and expertise to exploit them.

Image Caption

A spectacular outcrop from Upper Cretaceous rocks in the La Popa Basin, northeastern Mexico. The La Popa is part of the foreland system of the Sierra Madre Oriental thrust belt, and the exposures provide an excellent analogy toward studying the quality of potential reservoirs, seals and kinematic of the salt movement.
Photo courtesy of Alfredo Guzmán

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One of the most important races in the world is taking place right now in Mexico.

It's a race against time.

In August, a good news/bad news report came from Luis Ramirez Corzo, director-general of exploration and production for Petroleros Mexicanos (Pemex).

The good news:

A nitrogen-injection program has helped delay the decline of Cantarell, Mexico's biggest oil field and source of almost two-thirds of the country's oil production.

The bad news:

Production from Cantarell will begin to decline in 2006, and the drop-off will be brutal — 14 percent a year, according to Ramirez.

Couple that with Mexico's growing need for natural gas imports, primarily for power generation, and the republic faces a rocky energy outlook.

Ramirez later announced that Mexico may have another 54 billion barrels of reserves, mostly in deepwater provinces, in addition to its current 48 billion boe.

So the answer seems simple.

Pemex should call on outside investment and expertise for speedy development of Mexico's impressive hydrocarbon potential.

But Pemex won't be able to move that fast.

Because in Mexico, simple can be complex.

A Fleeced Golden Goose

Matthew Shaw serves as senior Latin America energy analyst for Wood Mackenzie, a major international consulting group with headquarters in Edinburgh.

Shaw said Wood Mackenzie's analysis points to a serious emerging problem in Mexico's oil and gas sector.

"When you put the numbers together, it looks like the production in Mexico is going to decline over the next few years, and the decline is going to be quite steep," he said.

This situation has long set off alarms inside Pemex. But the rest of Mexico doesn't see the scope of the coming challenge, according to Shaw.

"I don't think the public in general understands that they're about to hit a brick wall," he observed.

While many good exploration and development prospects remain, Pemex needs both funding and expertise to exploit them.

In Mexico, Shaw said, "all the easy oil has been found. Pemex has had an easy ride for the past 66 years.

"One of its big problems is that it's technologically poor," he continued. "It hasn't really built up its expertise. Pemex is extraordinarily dependent on outside contractors to run their oil fields."

As the Constitutional steward of Mexico's oil and gas resources, Pemex makes a unique contribution to the country's economy and the government's finances.

It reportedly funds about 35 percent of Mexico's annual budget.

Consider this: In the first six months of 2004, Pemex reported a profit of $16.8 billion (Ps193.8 billion) before taxes and duties.

After taxes and duties, it reported a loss of $1.7 billion (Ps19.9 billion).

Three years ago, hoping to increase production with the assistance of foreign companies, Pemex introduced the concept of Multiple Services Contracts, or MSCs.

Just as the name implies, MSCs allow Pemex to contract out a variety of tasks to other companies, tasks that could include exploration and development work.

The Market Speaks

By law, all production and reserves in Mexico belong to the country. Any work contracted out by Pemex must be paid for in cash, not production shares.

Companies operating under the Pemex MSCs will not benefit from increased production prices and cannot book reserves from exploration success, said George Baker, director of Mexico Energy Intelligence, an industry newsletter published in Houston.

"They'll never get that money that's derived by reference to the market situation," he said. "Therein lies the rub for many people."

Pemex's first MSC offer included seven blocks in the gas-prone Burgos Basin, just south of the Mexico-U.S. border.

In 2003 it awarded contracts on five of the blocks, while two others went without bids, a clear disappointment. Also, no major oil company participated in the bidding.

However, Pemex said it was pleased with the level of interest in the first round, and that it would hold a second round in 2004.

"Five out of the seven blocks had tenders and they were awarded. Therefore you can say, 'We had a successful round,'" Baker observed.

"Just from the fact that the program has survived and that people are investing, you can say it's successful," he added.

First-round contracts went to:

  • Repsol/YPF.
  • A consortium of Techint, Tecpetrol and Mexican drilling company IPC.
  • Lewis Energy Group of San Antonio.
  • Contracts on two Burgos blocks were awarded to a consortium of Petrobras, Teikoku Oil and Grupo Diavaz of Mexico.

Pemex has acknowledged that much of the first-round bidding may have been strategic, designed to position the bidders for work in more lucrative areas later.

Baker said the contract holders will be compensated out of accounts that grow as the companies generate incremental production from the basin.

One interesting feature of the contracts is that all work will be paid for — even drilling a dry hole — as long as compensation funds are available.

"If the well is a dry or noncommercial well you still get paid, but to be paid you need to produce incremental gas," Baker said.

Going Another Round

Opponents of the MSC approach quickly labeled the contracts illegal and asked Mexico's courts to issue an injunction against them.

"What's not going to Pemex's plan is the tremendous amount of political opposition stirred up by some groups in Congress and the public," Baker noted. "That's a very serious matter, but not serious enough to stop Pemex from proceeding with a second round."

Shaw said any foreign participation in Mexico's oil industry rouses opposition in the country.

"Anything that happens in Pemex affects everyone in Mexico," he said. "Mexicans, as a nation, have a very strong feeling about oil and gas."

Yet Pemex has little choice because of its need for both outside investment and additional expertise, according to Shaw.

"Pemex was in a real straitjacket," he said. "Having said that, the contracts they came up with were horrendously complex, horrendously restrictive."

According to industry observers, Pemex saw the first-round Burgos blocks as somewhat analogous to the Tertiary fields of South Texas District IV.

But "some people thought the geology wasn't too promising, that the gas thinned out to the south," Baker said. "Analogues are only analogues. That there is gas there, there's no doubt.

"Some believe there may be deeper gas, in the 12,000-15,000 foot range," possibly in the Lower Wilcox equivalent, he added.

For MSC Round Two, Pemex has tendered the Ricos and Pandura-Anahuac blocks in the Burgos Basin and the Monclova and Pirineo blocks in the Upper Jurassic-Lower Cretaceous Sabinas Basin.

Pemex said it simplified the basic MSC contracts and modified the bid process to encourage more participation by Mexican firms, an action called for by its critics.

Baker noted that Pemex already has invested a significant amount of money in developing and delineating Burgos Basin fields to enhance production.

"It rose, then declined, and only in recent years have they been able to quadruple production," he said. "They have spent hundreds of millions of dollars in Burgos, and the results show it."

Pemex in Deep Water?

So far, Pemex declines to reveal any details about future MSC rounds.

Industry speculation centers on the opening of oil-producing areas for development, a move likely to attract increased interest from foreign companies, according to Shaw.

"Oil is always more interesting, despite the high U.S. gas prices," he said.

For Mexico, the brightest future hope probably lies in deepwater exploration.

Most estimates of Mexico's deepwater reserves range from 20 billion to 40 billion barrels, though Pemex apparently believes the real number is higher.

"Deepwater holds huge potential, and so far it's untouched. If you talk about areas for frontier exploration around the world, deepwater Mexico is definitely one of them," Shaw said.

"There's another Gulf of Mexico out there, potentially," he observed.

Shaw said Pemex won't be able to use the current, cumbersome MSC structure for deepwater projects.

"There's no way that model can be applied to deepwater. But Pemex is very keen to drill its first deepwater well," Shaw noted.

"If a deepwater discovery is made, the next thought will be, 'We have to develop it,'" he added.

Unlike Petrobras in Brazil, Shaw said, Pemex wasn't forced to develop expertise in deepwater production.

But Pemex has proven itself as an offshore production company, even if it hasn't developed advanced deepwater exploration and production skills, according to Baker.

"If you want to criticize Pemex for not being able to exploit any of its deepwater resources, you can do that. But it's really only an observation," Baker said.

"Look, Pemex is managing one of the largest offshore oil fields in the world. Pemex is managing more offshore oil production that anyone else in the world," he said.

"Are they doing something right, big time?"

Simple? Nah.

With the clock ticking, Pemex has to run the political gauntlet to speed development of its extensive gas reserves and move quickly to begin deepwater exploration.

Mexico faces a growing need to import high-priced natural gas despite its own wealth of reserves. Analysts call that "a huge embarrassment" for both the country and Pemex.

Cantarell's coming decline only sharpens Pemex's problems.

"For the past 20 years, when you talked about Mexican production, you've been talking about Cantarell," Shaw said.

Mexico President Vicente Fox has supported Pemex's efforts to attract outside investment and support. Members of the Mexican Congress have been skeptical of the effort.

"They've got two years before the next presidential election, but (the Fox administration) is pretty much a lame duck in terms of energy policy reform," Shaw said.

He thinks "2007 could be a pivotal year" for Mexico's energy future.

During the coming two years, Pemex will try to establish the groundwork for production growth. That might be an ugly process, and it certainly won't be simple.

In Mexico simple can be complex.

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