The Last Barrel
On March 18, 1938, Mexican President Lázaro Cárdenas nationalized and/or expropriated all private, foreign and domestic oil companies, creating Petróleos Mexicanos (Pemex). The “acquisition” included the resources and facilities of U.S. and Dutch operating companies. President Cárdenas said the action was necessary to combat the injustice being inflicted on the indigenous population by foreign companies operating on Mexican soil. Expropriation was not outright confiscation, he explained, since the Mexican government promised to compensate companies. Cárdenas said, “I ask the entire nation to furnish the necessary moral and material support to face the consequences of a decision which we, of our own free will, would neither have sought nor desired.” So let me get this right, the Mexican authorities confiscated billions of dollars of assets and equipment, but they really didn’t want to do it?
Reserve base grows. Nationalization gave the Mexican government a running start and helped establish Pemex as a viable NOC. In 1938, the company’s proved reserves stood at about 1.28 Bboe, including oil and gas properties in the Chicontepec/Sabinas basins and in the Gulf of Campeche. During the ensuing years, drilling in these established basins increased the company’s resource base, and in 1960, reserves stood at 5.57 Bboe. The North American drilling boom in the early 1980s pushed the company’s reserve to 60.126 Bboe and, at the end of 1990, it stood at 64.96 Bboe.
Daily production skyrockets. At the time of nationalization, Pemex’s production averaged 104,000 boed, increasing to over 197,000 boed in 1950. Similar to the rise in its recoverable reserve base, the company enjoyed a spectacular rise in crude output in the 1980s, when production leaped forward to 2.54 MMboed. It appeared that Pemex would be a player in the international crude market for decades, but in 1989, production plateaued at 2.5 MMbpd. At that time, about two-thirds of Pemex’s output was heavy Maya crude from the Gulf of Campeche, while lighter blends came from onshore fields.
Technology gap leads to production drop. In 1967, Exxon shot the first 3D seismic survey near Houston. Nearly a decade later, Pemex discovered the super-giant Cantarell complex by mapping surface shows that were spotted by fishermen in the Gulf of Campeche. Subsequent development around the initial Cantarell discovery identified four fields, and production flourished. In 2003, output peaked at 2.1 MMbopd, after nitrogen was injected into the fractured carbonate reservoir. However, engineering studies suggested the field’s subsequent rapid decline was a result of the nitrogen technique, which accelerated short-term oil extraction at the expense of field longevity. After 2003, output dropped steadily, and production is now reported as just 256,000 bopd. The dramatic decline, one of the steepest in industry history, created a budget shortfall, and hurt Mexico’s annual governmental budget and sovereign-credit rating.
Sowing seeds of rejuvenation. In December 2013, the Mexican government amended its constitution to allow private companies to lease drilling rights, in an attempt to revitalize its energy sector. Mexican regulators sieged the opportunity and in July 2015, Mexico’s National Hydrocarbon Commission put 14 shallow-water offshore blocks up for auction, but only two were awarded. The winner of the two blocks was a consortium between Mexica-based independent Sierra O&G, Houston-based Talos Energy and British company Premier Oil. Terms for the blocks were heavily weighted toward the Mexican government, which may have hampered enthusiasm for the initial offering.
In December 2015, the commission offered 25 onshore lease blocks near Burgos field along the Texas border, in the North fields of central Mexico near the Gulf coast and in South field, close to Campeche. The leasing authority awarded all 25 leases in just one day. Many went to Mexican companies founded after the constitutional amendment. Part of the success was attributed to more attractive lease terms that caused stiff competition for the properties offered. This was a victory for authorities, who have lobbied to keep terms attractive to companies struggling to remain profitable in sub-$50 oil.
Since the initial offerings, several other companies have picked-up leaseholds in prospective areas, including Exxon Mobil, Chevron, BP, Eni SpA and Cairn Energy.
First foreign offshore success. In the first quarter of the year, Eni announced that it had made a “meaningful” oil discovery 5 mi from shore, in just 82 ft of water at its Amoca-2 well. Although the discovery is in an area where Pemex had already established production, the find indicates there is more recoverable reserves than the Mexican NOC had estimated.
Consortium finds giant oil field. In July, Houston-based Talos Energy, acting as operator, announced that it had made a major oil discovery at its Zama-1 well 37 mi from Puerto Dos Bocas. The well has a gross oil-bearing interval of about 1,100 ft, with 558 to 656 ft of net oil pay in upper Miocene sandstones with no apparent water contact. Reservoir engineers estimate gross oil-in-place of approximately 1.4 Bbbl to 2.0 Bbbl. Talos President and CEO Tim Duncan said “We believe this discovery represents exactly what the energy reforms intended to deliver—new capital, new production and a spirit of ingenuity that leads to local jobs and government revenues for Mexico.”
Now the bad news. A statement by the Mexican government said the lease agreement executed by Talos Energy gives the Mexican government 68.99% of all profit from every barrel of oil produced in the block, and as much as 83%, when taxes and fees are factored in the equation. A similar deal is in place for the Eni project. At these rates, I wonder who will want to drill an offset? 
