Mexican state oil company Pemex’s chief executive, Carlos Treviño, confirmed the discovery of seven reservoirs in two wells in Mexico’s southeast basin. // File Photo: Pemex.

Mexican state-run oil company Pemex announced on Oct. 9 it had discovered oil in the shallow waters of the Gulf of Mexico that could contain as much as 180 million barrels of crude equivalent. The discovery could add as much as 210,000 barrels of oil per day and 350 million cubic feet of gas per day to Pemex’s output, which has been declining for 14 years. This would represent about one-third of President-elect Andrés Manuel López Obrador’s goal of increasing Pemex’s current production by 700 million barrels by the end of his six-year term. What do the new discoveries mean for Mexico’s oil and gas sector? Will they be sufficient to reverse the country’s production decline? What should Pemex do to ensure it takes full advantage of the discoveries, and how might international players benefit from the new finds?

Doris Rodriguez, partner at Hunton Andrews Kurth LLP, and Carlos A. Chávez, senior associate at JATA-J.A. Treviño Abogados: “While discoveries of this scale are clearly impressive and good news for Pemex and Mexico’s oil and gas sector, the newly discovered Manik and Mulach fields contain 3P reserves and realistically will require several years to produce and to assess whether this production (measured against Mexico’s current production) will meet AMLO’s goals. Significant investment and advanced technology and know-how will be required to achieve production of these fields, and also of additional hydrocarbon resources in order to meet the goal. Pemex is likely to focus a considerable amount of its efforts, funds and expertise in shallow water production, but will need exploration and development partners in the deepwater plays. Thus, not only will AMLO’s projected capital injection into Pemex play a significant role, but additional investment from the international industry sector and varied oilfield services providers’ participation will also be required. The ability to achieve AMLO’s goals will depend on the level of comfort Mexico provides international players, including, most importantly, investor certainty and transparency in the legal and regulatory schemes and bidding and contracting procedures; availability of recognized and impartial dispute resolution; improved commercial terms, such as pricing and reasonable requirements for any required guarantees; and sharing of liability among all participants.”

Steven P. Otillar, partner at White & Case in Houston, and Francisco de Rosenzweig, partner at White & Case in Mexico City and head of the Mexico Office’s Energy, Infrastructure, Project and Asset Finance Group: “While media attention has been focused on private companies’ exploration success in Mexico, Pemex has also been hard at work trying to develop the resources allocated to it in the 2013 energy reforms. Pemex has announced major discoveries in areas including Ixachi, Mulak and Manich. In addition to the formal farmout process, where Pemex has secured more than $1 billion in investment commitments, Pemex has been one the most successful bidders in oil and gas rounds, securing three blocks on its own and 11 more under successful partnerships with foreign oil companies. Adding to new discoveries and international partnerships, the migration process for existing service contracts is finally proceeding. With all of this upstream activity, much work remains to be done to successfully increase Pemex’s production by 700 million barrels in the next six years. Despite changes in tax regulations allowing Pemex to retain more of its revenues to dedicate to exploration and development, Pemex remains obligated to pay a special royalty to the government that significantly limits the impact of such fiscal reforms. Further, finding new partners to help develop upstream assets remains burdensome. Despite complaints of Pemex’s inefficiency, according to Wood Mackenzie, Pemex’s production costs are around $10.90 barrel, just ahead of Shell, but below Petrobras, ConocoPhillips and Chevron. Thus, Pemex has the capability and the asset base to reverse the trend of lower production, but it must focus its capital on development of these assets and receive further relief from some of its fiscal obligations to the state. Pemex will not likely be able to attain the lofty goals of reversing decades of lower production alone. While Pemex will be the engine for upstream growth, direct foreign investment through new upstream operators is required for ultimate success. Simple economics dictate that with more operators and more wells being drilled, production declines will reverse and could far surpass the highest levels of historical production. Whether such progress is allowed to continue will depend on the regulators in the energy sector and the desire of the government to facilitate the growth of production for all players in the market.”

Maria Cortez, senior research manager of the Latin America upstream industry at Wood Mackenzie: “AMLO inherits a maturing asset base and will depend on a backlog of discoveries to achieve his ambitions of raising output. The Manik and Mulach discoveries are positive steps towards reversing Mexico’s declining production. But to take full advantage of new discoveries, a development mindset is needed. For Pemex, the new discoveries must be weighed against existing opportunities. While Pemex could develop these discoveries, it could also seek a joint venture partner to accelerate development. Mexico’s private sector and their early projects—like Talos Energy’s Zama or Eni’s Amoca—have shown that it can move quickly. AMLO and Mexico stand to benefit most by whichever option can appraise and bring production onstream quickly. Longer term, however, these discoveries alone cannot reverse Mexico’s declining production. The country’s oil production has declined year-on-year since its 3.4 million barrels per day (bpd) peak in 2004 to just 1.85 million bpd as of this year’s third quarter. This is despite high levels of spending, particularly between 2009 and 2014. The discovery and development of more technically challenging resources in offshore areas is higher risk, but also higher reward in terms of the potential volumes. The seismic acquired prior to the recent bid rounds should enable Pemex to identify drilling opportunities away from its existing super-giant fields in the Campeche sub-basin. A diverse corporate landscape now exists in Mexico’s upstream sector. International oil companies bring expertise, technology and capital, which will be needed where Pemex has limited experience—such as subsalt clastics, deepwater and HP/HT (high pressure, high temperature wells). A healthy long-term production outlook in Mexico is possible, but it will need the private sector.”

Carlos Ochoa, partner at Holland & Knight in Mexico City: “Even though we only know what has been outlined in news stories and in press conferences, exploratory efforts have allowed for the reduction of a decline in production in the emblematic Cantarell field and progress to be made in perforation. In August, Pemex’s crude production averaged 1,820,000 barrels per day (bpd), far from the 3.4 million bpd average of 2004, a historic maximum. President-elect Andrés Manuel López Obrador, who will take office on Dec. 1, has said his government will raise the country’s crude production and that, by the end of his six-year term, output will be around 2.6 million bpd. He has also said, in various venues, that private investments will be allowed to continue, but he did not say under what schemes. Likewise, both Pemex executives and energy authorities, such as the appointed incoming secretary of energy, have recognized that more investment in exploration is required to reverse Mexico’s declining crude oil and gas production. It is worth noting that neither Pemex nor any other authority have confirmed there will be a tender in the future for private companies and foreign investors to participate in the activities to come in the newly discovered rigs. Similarly, it has been emphasized that Pemex’s operations could start soon to rapidly increase its production, due to the nearby infrastructure that Pemex already has in operation. Provided that the recovery trend on the price per barrels continues, in addition to the current legal framework that allows the participation of private companies in the oil and gas sector, it is estimated that, in two years, the downward trend of national reserves can be reversed. These discoveries confirm the remaining potential of the oil basins in the southeast of Mexico, whose future development, given its proximity to already existing infrastructure, will contribute to Pemex’s production goals in coming years.”

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