Mexico Opens its doors to Foreign Investment In Oil & Gas as Supply Challenges Mount

After years of tight national control over its oil industry, Mexico’s newly announced bid round marked the first tangible signs of a more relaxed attitude to foreign participation. Steps towards international involvement have been small and come in response to declining production and new challenges in exploration.

Reform in government policy has allowed state oil company PEMEX to enter into contracts with foreign companies. This led to an announcement of the first Mexican bid round on March 1, 2011. Only three fields were included in the bid round but further bid rounds that include deepwater developments have been promised. This is a small but encouraging step towards international involvement in Mexico. Pemex has marked this as a ‘new age of collaboration with the international oil industry’

The Mexican Petroleum industry has long been defined by an over-reliance on major oil fields – Cantarell and Ku-Maloob-Zaap (KMZ) – with an underinvestment in exploration. Mexico ranks sixth in the world as an oil producer but declines in production are setting the country on the path of becoming a net importer. Tight regulations meant that Pemex could not enter into risky contracts or production-sharing agreements with private or foreign firms.

Pemex’s focus over the years has been to invest in and exploit its major fields. Cantarell commenced production in 1981 and at one point accounted for about 63% of Mexico’s oil production. In 2004 Cantarell peaked and entered into a steady decline which has forced Pemex and the Mexican Petroleum industry to diversify the country’s oil strategy. In 2008 a significant reform, called the PEMEX Act, was granted by the Mexican government to allow Pemex more leeway on contracts. Pemex can enter into agreements with International Oil Companies (IOCs) through incentive-based contracts. Pemex will have full control of all hydrocarbons extracted and companies will be paid in accordance with field productivity.

Source: Evaluate Energy Ltd

Medium Term Plan

In light of the policy reform and declining production, Pemex has established a Medium Term Plan which aims to increase production to 3 million bopd by 2017. An investment of approximately $215 billion will be allocated to exploration and production efforts from 2010 to 2019. Emphasis will shift away from exploiting major fields, to exploration in the Gulf of Mexico, development of the Southern onshore region and increased production at Chicontepec. Pemex has traditionally invested less in exploration due to its higher per-barrel production costs. According to Pemex, exploration efforts replaced up to 77% of exploited reserves in 2010 with new discoveries.

A further feature of the Medium Term Plan is the upcoming licensing rounds, which will see foreign investment for the first time in Mexico. The first round in 2011 focuses on licenses for mature fields in the southern region. The next license round is expected to be launched later in 2011 and will include Chicontepec Basin contracts. The third license round will focus on deepwater licenses and will be launched in 2012. The licensing rounds have already attracted the likes of BP, Chevron, Statoil and Repsol.

Deepwater Opportunities

Largely unexplored is the Mexican portion of the Gulf of Mexico (GoM) which is estimated by Pemex to hold up to 50 billion barrels of P10 oil reserves and is believed to be one of the world’s largest undiscovered deepwater petroleum resources. Pemex’s lack of investment in deepwater has been due to high exploration costs coupled with low investment and a lack of acquisition data, specialized skill and technology. The GoM is an extremely deep area with water depths greater than 500 meters and is notorious for rough weather and hurricanes. Further, the Horizon oil spill in 2011 has put increased pressure on companies to seek out safer techniques that require technical knowledge.

A resource that can no longer be ignored, Pemex will be seeking foreign expertise and will allocate $2-3 billion per annum in the development of the GoM. In 2011, Pemex will drill four exploration wells and gather seismic to establish a drilling plan. Initially, Pemex will develop shallow water fields, including the existing Ayatsil oil field, and then will shift focus to deeper waters. Exploration efforts in the deepwater area have uncovered the Lakach gas field but Pemex is hoping to uncover more oil resources as opposed to gas. Existing infrastructure at the Cantarell and KMZ fields will be used in the exploitation of deepwater discoveries. Contracts for deepwater exploration will be up for tender in the first quarter of 2012.

Other Opportunities

Developing mature fields

A further strategy in the Medium Term Plan is the development of mature fields. A higher per-barrel production cost has made mature field development less attractive but with the production declining, focus has shifted to these fields. Three mature fields are up for offer to International Companies. Carrizo, Santuario and Magallanes are low producing fields (current production: 13,610 bopd) which Pemex believes have the potential to produce up to 54,000 bopd in 2010 and hold combined P10 reserves of 616 mln barrels. Although these fields are somewhat underwhelming, it is an encouraging step for the Mexican Petroleum industry towards allowing foreign involvement. Contracts will be incentive-based with a per-barrel production bonus above crude output targets. Pemex hopes to attract leading international companies with expertise in enhanced oil recovery techniques with these contracts. The fields are expected to be awarded in August 2011.

Chicontepec

In 2011, licensing opportunities in the Chicontepec basin will be available to foreign companies. Chicontepec is a heavy oil complex located northeast of Mexico City. Pemex has faced difficulty with the Chicontepec complex with complications in the field’s geology. The National Hydrocarbons Commission has put pressure on Pemex to reduce overspending and production delays at Chicontepec. Pemex has scaled back drilling activities to experiment with secondary recovery techniques and to develop a strategy to increase production to 70,000 bopd by 2012 (current production: 48,000 bopd). Specialized expertise is needed to develop the complex and increased pressure from the government to increase activities have lead Pemex to put the area up for auction.

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