Assessing Mexico's offshore potential

Mexico’s oil industry is approaching a critical juncture. The long-cherished ideal of public ownership of the country’s hydrocarbon reserves is being challenged by declining oil production, rising domestic energy consumption, and greater dependence on energy imports.

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Pemex may seek a deepwater solution to the nation’s narrowing gap between oil production and consumption

Peter Kiernan
Roger Knight
Infield Systems Ltd.

Mexico’s oil industry is approaching a critical juncture. The long-cherished ideal of public ownership of the country’s hydrocarbon reserves is being challenged by declining oil production, rising domestic energy consumption, and greater dependence on energy imports. Furthermore, the oil and gas sector has endured under-investment in exploration and development, which is attributable partly to the use of Pemex’s oil and gas operations as a source of revenue generation for the Mexican state.

Such is the gravity of the dilemma that Mexico faces today – the seventh-largest oil producer in the world and a major oil exporter in the Western hemisphere may, according to the US Energy Information Administration (EIA), become a net oil importer before the end of this decade.

If this forecast proves accurate, there will be a number of critical implications for both the Mexican economy and global oil supply fundamentals. Mexico’s income from oil provides about 15% of the country’s total export revenue as well 40% of the Mexican government’s total income. Meanwhile the United States – the world’s largest oil market – relies heavily on neighboring Mexico as a crucial strategic source for its growing oil import needs.

In an effort to turn the corner, the Mexican government is inching toward allowing a certain degree of foreign participation in upstream oil and gas activities, and Pemex plans to drastically boost investment in exploration and production throughout this decade.

Furthermore, Pemex is eyeing deepwater hydrocarbon resources on Mexico’s unexplored side of the Gulf of Mexico (GoM); although any Mexican deepwater development, once discovered, would remain several years away from production and likely will require both foreign participation and technological expertise.

Mexico’s offshore production

The bulk of Mexico’s oil production is offshore in the Bay of Campeche. According to data from Pemex, some 77% of Mexico’s oil production is offshore, most of which is from the Ku-Maloob-Zaap and Cantarell developments. Cantarell – a project which actually consists of four fields with the largest being Akal; as well as Nohoch, Chac, and Kutz – has experienced a steep decline in production since 2004. Output from this major shallow water development has fallen sharply from 2.14 MMb/d in 2004 to just 685,000 b/d in 2009.

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Cantarell’s declining production is the main reason why Mexico’s overall production is decreasing. Output increases from Cantarell’s neighbor, the Ku-Maloob Zaap area, only partially offset the dramatic fall in output from Cantarell. Ku-Maloob-Zaap is now Mexico’s largest producing area, with output estimated by Pemex to be around 808,000 b/d in 2009, well up from 304,400 b/d in 2004.

Despite Ku-Maloob-Zaap’s dramatic output growth, and to a lesser extent growth from the shallow water offshore Littoral Tabasco region, Mexico’s oil production has been in decline since 2004 when production peaked at 3,383,000 b/d. Pemex estimates show that Mexico’s production since then has fallen to an estimated 2.58 MMb/d in 2010, representing a decrease of some 800,000 b/d, or 24%. Outside of Cantarell and the Ku-Maloob Zaap area, the other major offshore producing regions include the Abkatun-Pol-Chuc and Littoral Tabasco areas, which produced 305,400 b/d and 212,300 b/d in 2009, respectively. While output at Abkatun-Pol-Chuc has halved over the last decade, production in the Littoral Tabasco region has tripled over the same period.

Offshore fields also provide a substantial proportion of Mexico’s natural gas supply, with just over half of Mexico’s offshore gas production sourced from associated gas at Cantarell (unlike crude oil, Cantarell’s gas production has nearly tripled since 1999). According to Pemex data, Mexico produced 7,030.7 MMcf/d in 2009, of which 2,894 MMcf/d was offshore gas production (including 1,455.3 MMcf/d from Cantarell).

Pemex also has invested heavily in the onshore Chicontepec project, although production results from the field have not been anywhere near expectations. The field is reported to be producing around 29,000 b/d, and has not been a panacea to offset Mexico’s declining production. Pemex plans to cut drilling activity at Chicontepec as well as in the Burgos onshore gas basin. This will result in a sharp drop in the number of wells drilled in Mexico this year.

Additions and new projects

Pemex has been trying to arrest its declining oil production by developing both onshore and offshore fields. According to Infield data, 22 offshore fields have come onstream since 2000 – all in shallow waters. The most significant developments are the Takin (300 MMbbl), Ixtal (284 MMbbl) and Kutz (150 MMbbl) oil fields, and the Lankahuasa (800 Bcf) gas field. Many of the oil fields that have come onstream since 2000 also have associated gas reserves.

Infield data also shows that a further 33 fields are expected to come onstream offshore Mexico between 2011 and 2015, with the most significant being the Sihil (main phase) development, at a water depth of 70 m (230 ft) lying deeper below the Cantarell complex. Pemex expects Sihil to produce up to 120,000 b/d at maximum, and is forecast to come into production soon. Another significant fairly shallow water field expected to begin production this year is the Ayatsil oil field, with reserves of 200 MMbbl at a water depth of 122 m (400 ft).

The vast majority of fields that have come onstream recently, and that are expected to come onstream in the near term, are shallow water developments. However, Pemex has made some deepwater discoveries in recent years as well. There have been seven such deepwater finds on the Mexican side of the GoM. Four of these are oil discoveries (Leek, Tamil, Noxal, and Nab) and three are gas discoveries (Labay, Lalail, and Lakach). The most recent discovery, the Labay gas field, is close to the Lakach gas discovery, and Pemex claims both fields are in an area that will be a substantial source of offshore gas in the future.

Although none of these finds are anywhere near elephant-sized, Pemex is confident that considerable potential lies ahead for further finds, and the Mexican national oil company estimates that deepwater resources on its side of the GoM could amount to as much as 30 Bboe (as much again is believed to lie in shallow waters as well).

With the gap between oil production and consumption steadily narrowing since the early 2000s, Mexico has been trying to implement several policies to reverse this trend. These include nudging toward liberalization of the upstream oil and gas sector participation rules; higher investment levels from Pemex; and enhancing exploration in deepwater.

Foreign participation

The constitutional limits placed on foreign investment in Mexico’s oil and gas sector prevent direct participation from operators other than Pemex (which is only able to contract out services to oil service companies). In 2008, the Mexican president, Felipe Calderon, attempted to implement reforms to open up the oil and gas industry to foreign and private participation. In that year, legislation was passed which established a National Hydrocarbons Commission (NHC) to approve exploration and development projects and a National Energy Council to prepare annual energy strategies; and which allows Pemex more autonomy in its operations and permits it to raise funds by selling domestic bonds.

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The most significant element of the legislation, however, authorizes Pemex to offer incentive-based contracts to companies for exploration and development of oil and gas, which will then be compensated based on a range of performance criteria. While Pemex will be able to offer service contracts on a fee basis to other companies, successful bidders will not be able to acquire any equity in oil and gas developments.

The final content of the legislation did not go as far as the Calderon government had sought, yet it had to contend with the fact that his center-right National Action Party does not enjoy a majority in the national legislature; and thus compromises had to be made with other parties that were skeptical about allowing privatization of the oil and gas sector. Calderon’s liberalization plans were limited also by the Mexican constitution which guarantees national ownership of the country’s resources.

Progress in negotiating exploration and production contracts with companies under the terms of the latest laws has been slow, and even these incremental changes have faced legal challenges. However, in March 2011 Pemex launched the first of four tendering rounds for the award of incentive-based contracts; this was a tender for six onshore fields. A further three rounds are expected to be launched, two for onshore producing areas with only the final round expected to cover deepwater GoM prospects.

Deepwater plans

Deepwater is, therefore, not an immediate priority under the new tendering process for foreign participation. In the longer term, however, foreign participation in deepwater E&P is envisaged, and Pemex is planning to continue with its own exploration work in deeper waters. By 2012, Pemex reportedly aims to have four drilling rigs operating in deepwater areas, and in April 2011 the national oil company signed a deal with Seadrill to use the ultra-deepwater semisubmersible drilling rigWest Pegasus for five years with a contract value of $850 million. Pemex also is looking for a rig to drill development wells at the Lakach deepwater gas prospect.

Mexico’s plans for deepwater development will also take into account the Mississippi Canyon (MC) block 252 disaster on the US side of the GoM in April 2010. Mexico’s new NHC has required Pemex to report on the safety measures it will take in deepwater operations and also to have its procedures independently certified. Pemex must also certify it has the financial capacity to handle claims and losses arising from any accident.

Pemex still intends to assess the potential of deepwater resources on its side of the GoM. It has an upstream exploration strategy to investigate nine regions that lie between 600 and 2,000 m (1,970 and 6,561 ft) water depth. These include the Perdido folded belt, Oreos, Temoa and Han (light oil), Nox-Hux (heavy oil), and Nancan, Jaca-Patini, Lipax and Holok (gas/light oil) areas. These regions run broadly from north to south along the Mexican coast on the western side of the GoM and into the Bay of Campeche.

According to Pemex, these areas have been defined according to the following criteria: economic value, prospective size, hydrocarbon type, geological risk, proximity to production facilities, and environmental restrictions. Some wells already have been drilled in these areas, and some modest discoveries have been made. Actual production from deepwater reserves is likely to be years away, but this would be a completely new focus for Pemex. Compared to the US GoM, the deepwater Mexican side of the Gulf is virtually untouched.

The path forward

Whether Mexico can meet its production targets over the next decade or so remains to be seen. Pemex’s immediate focus is to boost output from mature onshore areas and existing shallow water fields, but in the longer term the shift to E&P in deeper waters will be required to improve Mexico’s production performance. The question then becomes whether the energy reforms of 2008 go far enough to attract operators with sufficient deepwater E&P experience to help develop those reserves.

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