Colloquy: Changes loom in Mexico

Nina M Rach
Tuesday, May 14, 2013

COLLOQUY: Editor's Column

The structure of the Mexican oil industry is on the verge of change, driven by a need to increase revenues and build reserves. The consensus is that Mexican fields are aging, production is declining, and although Petróleos Mexicanos (Pemex) has a monopoly in the business, hamstrung by years of under-investment in long-term development projects.

Pemex is designated as the exclusive operator in Mexico, forbidden by the Mexican constitution and constrained by other laws from forming joint ventures or equity contracts with foreign firms, so it is effectively cut off from the expertise of IOCs.

Mexico’s petroleum production is declining. The most prolific field, Cantarell, produces almost 2 million bo/d. The estimated peak output of the five next-largest fields, combined, do not equal Cantarell’s output. They are:

  • Ku-Maloob-Zapp (KMZ) ~794 bo/d.
  • Chicontepec 393 bo/d.
  • Crudo Ligero Marino 230 bo/d.
  • Agua Fria 173 bo/d.
  • Antonio J. Bermudez 161 bo/d.

All of the major Mexican fields are mature or declining, except for KMZ, which, along with Cantarell, produces predominantly heavy oil. Mexico used to export light oil, and its refineries are geared for light oil. The country must now import light oil to blend with the local heavy oil production.

Hopes were pegged on development of the Chicontepec field, but plans have been criticized because the extra-heavy crude will be difficult to produce and market. It does contain some areas of light and superlight crude. Production volumes are still small, reported as 68,000 bo/d in May 2012. The field has probable recoverable reserves of 17.6 billion bbl, but could require 20,000 wells to exploit.

PECOM discussion suggested that the new government might pull the plug and decide against fully funding Chicontepec development.

Historic US partner

Mexico is an important energy partner with the US. According to the US Energy Information Administration (EIA, Feb. 2013), Mexican fields produced 3.2MM bo/d  in 2008, but dropped nearly 10%, to 2.9MMbo/d in 2012, still ranking eighth among the world’s oil-producing countries. The country remains a net exporter of oil, but has become a net importer of natural gas, mostly from the US via pipeline. Mexico has been increasing the use of natural gas is for power generation.

The US supplies the vast majority of gas to Mexico, but the country also imports LNG from Nigeria, Qatar, Indonesia, Peru, and Yemen. US natural gas exports to Mexico reached a record high in 2012, to 1.69 Bcf/d, a 24% increase from the year before, coming from Texas, California, and Arizona.

75 years

Earlier this spring, Mexico marked the 75th anniversary of the nationalization of its petroleum industry. Since they were unceremoniously exiled in the March 18, 1938 nationalization of Mexico’s oil fields, international oil companies have been unwelcome in the country. And companies whose investments have been expropriated have been loath to reinvest, especially without a large, upside potential. IOCs want to be able to share production, share and book reserves.

Several PECOM speakers noted that there is still strong social and political opposition to working with international oil companies. The reasons include the ostensibly popular desire to protect national patrimony, government reliance on PEMEX tax revenues and largesse, unionized oil workers, and gasoline price subsidies benefitting Mexican consumers. Perhaps there is a lingering sensitivity to Spanish imperialism, as well.

These circumstances don’t naturally promise success, but there is already a shift in government rhetoric. Mexico’s new president, Enrique Peña Nieto, of the Institutional Revolutionary Party, may have new proposal by September. He has vowed to modernize Pemex by permitting greater foreign investment.

David Shields, Mexico City-based energy analyst, discussed the “Agreement for Mexico” document from the country’s three main political parties that contains about 90 topics and 7 commitments for the industry. He and others think it likely that foreign investment will only be allowed offshore and in shale development.

PEMEX

Exploration and production are carried out through Pemex Exploracion y Produccion. PEP’s mission is “to maximize the reserves of the country, both in crude and natural gas economic value, on [a] long-term basis.” PEP is divided into four regions: North, South, Northeast Offshore and Southeast Offshore.

Ing. Jose Luis Fong, subdirector of production for the South region, shared strategies at PECOM. “60% of our production is offshore and the South region is important,” producing 508Mbo/d and 1652MMpc/d natural gas in 2012. Crude from the South region varies from 20°API to 60°API, and comprises three main streams: Maya (3%), Istmo (64%), and Olmeca (33%). The region employees 27% of Pemex’s 15,896 workers.

Fong characterized extraction costs as relatively low, and said artificial lift systems were in place. The logistics challenge, is to incorporate more coiled tubing and nitrogen operations, and attempt to double, or even triple the efficiency. He mentioned a continuing problem with downhole centrifugal pump failures, and stressed the need to improve response times.

It’s important for companies to be flexible, he said. Small and medium-sized companies must be more efficient and more competitive: “We must make hydrocarbon extraction more efficient…This is a business, not a sport.”

When bidding for Pemex contracts, companies are expected to generate local employment, and capital projects should have at least 40% national content. Operations must respect local customs and residents: “They are part of us and we are part of them,” Fong said.

He stressed social and environmental responsibility, and mentioned the creation of buffer zones around industrial activities. There was a big effort in the 1990s to clean up past drilling damage, he said. “Activities need to be done better than they were before. No company is going to do work here and leave the land and water in poor condition.”

Ognen Stojanovski, a Research Fellow at Stanford University’sProgram on Energy and Sustainable Development.says that Pemex’s economic efficiency “does not compare favorably” with other large operators. Stojanovski is an engineer and attorney, and recently penned a lengthy chapter about Pemex in: Oil and Governance: State-owned Enterprises and the World Energy Supply (Cambridge University Press, 1036p., published January 2012). The editors contend that NOCs produce most of the world’s oil and bankroll governments across the globe. Stojanovski’s analysis, “Handcuffed: an assessment of Pemex’s performance and strategy,” is among the NOC case studies in the volume.

Is Pemex even an NOC? PECOM speakers challenged this, pointing to Pemex’s lack of financial autonomy. According to the Mexican Constitution Section 90, Pemex is a government office, not a company. It is regulated by the State and is non-competitive.

Pemex does not have an independent board of directors. A truly autonomous company would be able to set its own budget, but Pemex has to negotiate its budget with the Mexican government each year. Capital expenditures are reviewed by the finance ministry. Hydrocarbons are regulated by myriad arms of the government:

  • SENER – Secretaria de Energia.
  • CNH – Comision Nacional de Hidrocarbures.
  • CRE- Comisión Reguladora de Energía.
  • IMP – Instituto Mexicano del Petroleo.

The upshot is that the Mexican government has becomes too dependent on short-term revenues from Pemex and has not diversified its tax base.

Future potential

US drilling has surged in the Eagle Ford shale and in the Gulf of Mexico. But Mexico has not developed the shale south of the US border, and the Mexican Gulf waters are relatively untapped. There is substantial potential in both areas.

The future of oil development in Mexico is about secondary, enhanced oil recovery, shale exploration, offshore development.

A recurring theme of discussion at PECOM was when, where and how foreign involvement will be allowed to speed up Mexican oil and gas development. In the meantime, proven reserves are being consumed. OE

Categories: People Production North America Gulf of Mexico Regulations Reserves

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