What's new in exploration

	Vol. 227 No. 4
PERRY A. FISCHER, EDITOR

Mexican developments. Pemex’s Noxal-1 exploratory well should have achieved its 13,100-ft TD objective by the time you read this. Located in 3,000-ft deep water, about 64 mi northeast of Coatzacoalcos, offshore the state of Veracruz, it is the company’s fourth deepwater exploration well. On reaching a 10,500-ft depth, wireline logs indicated substantial pay had been found. The company is claiming a potential of 10 billion boe has been discovered. In proved reserve terms at this point, all of this is sketchy and speculative.

Pemex Chief Executive Luis Ramírez Corzo, who has run Pemex since November 2004, commented on the significance, “The Noxal-1 well has discovered a new oil province in the Gulf of Mexico in deep water.” Ramírez said it will take another five to seven delineation wells to get good estimates, which will take about two years.

Meanwhile, on the political front, Andres Lopez Obrador, who has been leading in the presidential polls for the past two years, says he does not want to spend the money needed for deepwater exploration. Instead, he wants to exploit the shallow-water and onshore fields, especially in Chicontepec basin. He claims that he can maintain crude production at 3.4 million bpd by spending $1.4 billion a year on exploration. That, he says, should allow 100% of production to be replaced. He made the comments during an event commemorating the 68th anniversary of Mexico’s expropriation of foreign oil assets.

Later, Rogelio Ramírez de la O, the economic adviser to frontrunner Obrador, said, “Deep water is not within our reach, but we have about 20 billion bbl of possible reserves in non-deep areas.’’ In contrast, Mexican President Vicente Fox spoke against energy subsidies and encouraged more public and private investment in state-owned oil monopoly Pemex. Fox cannot run for re-election, and his party’s candidate, Felipe Calderon, trails Obrador by 7% in the polls.

The nation’s constitution forbids foreign equity investments, so, Mexico cannot team up with major oil companies to find and produce more oil and gas. For years, Fox has wanted a compromise, to mix public and private investment, so that the Mexican government can form alliances, as well as compete, with private companies, while maintaining ownership of state energy companies. Fox has pushed the constitutional limits of foreign participation by using so-called Multiple Services Contracts in the gas fields of Burgos basin, just south of Texas.

Pemex head Ramírez echoed Fox’s views, saying that Mexico needs to change its energy laws, so that Pemex can form partnerships with companies experienced in deep water, or it will miss opportunities. Ramírez has described Obrador’s intention to halt deepwater exploration as “short-sighted and irresponsible,” noting that, after discovery, a deepwater field could take as long as a decade to begin production. Ramírez added, “We’d be condemned to failing” to maintain the (present) level of production in the medium and long term.

Despite high oil prices, Pemex lost about $4 billion in 2005, the eighth straight year of net losses. Because the government treats the firm as a cash cow, 60% of Pemex’s revenue accounts for 33% of federal spending. So, the company is forced to take on a mountain of debt – about $50 billion at present. The company received a modest change in the tax structure last year, which is helping the situation. Ramírez knows that money and deepwater expertise are lacking, stating, “We recognize that we should establish new mechanisms of collaboration with other petroleum companies with experience in deep waters.”

Cantarell field, which has been producing since 1979, makes up about 60% of Mexico’s crude production. It is now in irreversible decline, having produced about 11.5 billion bbl of its roughly 18 billion bbl of recoverable reserves. The rate of that decline is not easily predicted, and is a matter of great concern both inside and outside of Mexico. Cantarell is the world’s second largest oil field, and the country is the world’s fifth largest crude producer, at about 3.4 million bopd. Some worst-case scenarios put the decline rate at more than 25% per year, while optimists say 4%. Most estimates range between 6% and 16% per year – starting small and rapidly increasing each year.

Can Cantarell’s decline be made up entirely by developing shallow-water oil fields and the onshore Chicontepec basin? Not likely. Chicontepec, which has 40% of Mexico’s oil reserves, is a mature basin. Discovered in 1926, it is extremely heterogeneous, with numerous small compartments of crude trapped in fractured rock. It would be costly and technically difficult to develop it into a high-flowrate, high-recovery field, especially as a replacement for Cantarell, although some additional production is certainly achievable.

Pemex is optimistic, saying that it will spend $37.5 billion over the next 20 years to develop the 18 billion bbl probably remaining in Chicontepec. The field presently produces only 26,000 bopd, but the company hopes to raise that to 1 million bopd within 10 years.

Over the last five years of the Fox administration, Pemex invested, on average, about $9.5 billion annually. Ramírez said that Pemex needs to double that investment to $20 billion annually for the next 20 years to make any headway against natural oil production decline and rising imported natural gas volumes. Last month, Pemex listed 15 oil and gas projects that it said could, collectively, recover 21 billion bbl of oil and 18 Tcf of gas. Peak production years from those projects range from 1 to 23 years.

The massive nitrogen-injection project in Cantarell did exactly what it was supposed to do: increase production, cash flow and ultimate recovery – but at an added cost of steep decline. This could quickly become a million-barrel-a-day deficit or more, which is what has world markets worried, given that Mexico is now able to export 1.8 million bopd. To keep the status quo, Russia, Africa, the Middle East and the Arctic regions must make up the difference, and soon.

The country’s official proved crude and condensate reserves sank 1.2 billion bbl in 2004, and probably a similar amount last year, leaving roughly 14 billion bbl at year-end 2005. Chicontepec’s estimated reserves, once proved up, could more than double that, and the Noxal discovery (also called Deep Coatzacoalcos field) will add even more. So, Mexico’s exploration and reserve future looks very good, no matter who is the next president. But production is on shaky ground at best, considering what it will take in deepwater know-how, massive investment, and the effect of the likely political outcome.