Mexico moves toward deepwater GoM, seeks ways to accelerate drilling program
Pemex makes first discovery
For the first time, the Mexican offshore oil and gas industry is looking at deepwater E&P as a top priority. Recently, Petróleos Mexicanos (Pemex) confirmed its first deepwater discovery with the Nab-1 well in Campeche bay. Moreover, the company is actively looking for ways to get started in drilling through joint ventures or technology agreements in the Perdido fold belt, where deposits will most likely straddle the maritime boundary with the US.
Recent political changes, both at the Energy Ministry and in naming E&P man Luis Ramirez-Corzo to the director general’s position at Pemex, have brought deepwater issues to the forefront.
On Sep. 1, 2004, President Vicente Fox said in his fourth state of the nation address that Mexico had identified major potential in what he called “preliminary discoveries” in the deepwater Gulf of Mexico. Ramirez-Corzo said seismic studies have identified potential resources, and he believes the Mexican GoM could hold as much as 54 Bboe in deepwater.
This provides Mexico with the opportunity to double its oil reserves and its crude oil output to 7 MMb/d, he said in statements that met with skepticism in the oil industry, but which seemed aimed at calling attention to Mexican deepwater both domestically and internationally.
Vinicio Suro, head of E&P planning and evaluation at Pemex, explains that the 54 Bboe figure “is a prospective resource. We have identified plays, but they have not been drilled. We infer that this potential exists by analogy and through geological and geophysical studies.” The figure is, however, of an entirely different magnitude from the reserves operators have discovered so far in the Great White, Trident, and Baha prospects on the US side of the maritime boundary.
Mexico sees deepwater as its only real option to offset a major decline in production at its shallow-water super giant Cantarell field over the next few years. Mexican crude oil output has been relatively flat for almost two years now, with Cantarell alone providing close to 2.2 MMb/d of total output of 3.37 MMb/d in 2003 and 3.4 MMb/d in the first 10 months of 2004. Nevertheless, Pemex officials say Mexican output will rise to 3.44 MMb/d in 2005 and then jump to 3.78 MMb/d in 2006.
Pemex takes action
In November, two major events occurred. First, Pemex began a domestic permitting process - obviously just a formality - for seismic studies and exploration between the 200-m and 3,000-m isobars in an area of 16,673 sq km west of the Tamaulipas coast, which runs along the maritime boundary with the US and includes the Perdido fold belt. According to the permitting process, seismic and exploration will confirm the continuity of plays in the southwestern part of the Alaminos Canyon in US waters penetrating into Mexican territorial waters.
Second, Pemex confirmed the Nab-1 discovery, which flowed 1,200 b/d of 9° API oil. Diamond Offshore’sOcean Worker semisubmersible drilled the well in 2,230 ft of water 90 mi north of Ciudad del Carmen in Campeche Bay. Pemex tested production at 9,170 ft. The discovery is part of a trend running northwest from Pemex’s Cantarell (22° API) and Ku-Maloob-Zaap (12° API) producing complexes. A preliminary estimate of potential reserves at the field is 200 MMbbl, Pemex says.
Legal obstacles
Pemex seems set to do more, both in Campeche and Perdido, but just how it will proceed and how the company will fund the work is not entirely clear, given that Mexican E&P operations are still constitutionally off limits to direct private investment. For now, private operators can only work through service contracts.
Pemex is a Mexican symbol, and nationalistic discourse still predominates. “Nab-1 was drilled by a vessel belonging to another company, but Pemex designed and funded the well and operates and owns it,” Carlos Morales, provisional head of Pemex’s E&P division, says. However, he acknowledges that some kind of joint ventures with oil majors will be required for Mexico to fully develop its deepwater oil potential and would help push Pemex 10 years forward on the deepwater learning curve.
Pemex is seeking ways for such alliances to be formed “within the existing legal framework through service contracts and the exchange of technical information,” says Morales, who rules out any kind of risk contracts or production sharing for now. Ramirez-Corzo has said publicly that he will promote major changes in oil industry legislation, including joint ventures and risk contracts, but he and other observers seem aware that there is no political will in Mexico’s congress to move in that direction at this time.
Adan Oviedo, head of Pemex exploration, says Pemex “could try to develop this on its own, learning on its own, and it would take us 20-25 years. A better option is to capitalize on other companies’ experience and thus reduce the time cycle between evaluation, discovery, and production. This is the big question for us.”
Pemex has only a small deepwater working group and no technology. However, the company says it now has a portfolio of 20 deepwater prospects awaiting drilling and hopes to add another 33 such prospects next year.
The buzz is that six international majors - Shell, ExxonMobil, Petrobras, Unocal, BP, and Total - have been talking to Pemex and that they all have reportedly assisted Pemex with seismic studies. However, Pemex has not given the majors any assurances that they will get a more substantial involvement in Mexican deepwater development other than what might be possible through technology-exchange agreements.
Financing offered
The sudden burst of discourse and activity in Mexican deepwater has brought a first financing proposal. A non-governmental organization known as the North American Forum on Integration (NAFI), which US Democrat Robert A. Pastor heads, has announced plans to create a fund to finance development of the Mexican GoM in line with the long-term goal of doubling crude oil output, President Fox announced.
Christine Fréchètte, the Canadian general director of NAFI, says financing could come from the US government and from institutional investors and multilateral agencies, such as the World Bank and the InterAmerican Development Bank. It would amount to $3-5 billion annually. US and Canadian Eximbanks would release the money to Pemex, and the company would use it to contract companies that would support Pemex in the development of the fields, says Fréchètte, who did not suggest there might be any demands upon Pemex in terms of production sharing or direct participation of companies that could book reserves.
On the contrary, funding would not be contingent upon any modification to the Mexican constitution, which prohibits concessions, direct private investment, and any kind of payments based on performance. Contractors would provide equipment and technology, and international oil companies would acquire output from the fields, Fréchètte says.
Although she makes no direct comparison, the financing mechanism suggested is apparently similar to the multiple services contracts, which Pemex has been awarding to contractors to produce non-associated natural gas in its onshore Burgos basin fields in northern Mexico. These contracts do not allow contactors to book reserves or share production, and they are on a much smaller scale than what deepwater would require. Even so, the multiple services contracts have been the subject of legal controversy, as opposition politicians say they violate Pemex’s legal monopoly.
Fréchètte says funding the new deepwater contracts would not suffer from the same problems because Mexico would first have to provide a “clear orientation” in terms of energy reforms before the suggested Eximbanks would make funding available. This apparently means that Mexico would have to modify its law to give a sound legal basis to the new contracts, even though they may still be no more than sophisticated service contracts.
In any case, Pemex and companies operating in the US part of Alaminos Canyon will have to push for the signing of unitization agreements, if it is confirmed that there are cross-border deposits they want to develop. Nevertheless, Mexican law still denies Pemex any orthodox options of getting international majors involved in offshore field development in the Mexican GoM.