Regional Report: Mexico
An important partner in energy trade, Mexico is one of the world’s leading petroleum producers. The country’s production rate has seen a gradual decline since 2005, however, as output from Cantarell and other large offshore fields has begun to taper off.
Accordingly, the economic significance of the country’s oil and gas sector has begun to wane. The EIA reported that its oil sector now generates only a small percentage of the country’s export earnings, compared to what it did a decade ago. Additionally, a shift in political power is causing a significant rift in the progress of its E&P sector.
OIL POLICY & PRODUCTION
For 75 years, state-owned Petroleos Mexicanos (Pemex) controlled Mexico’s energy sector. Finally, in 2014, Mexico passed legislation, allowing the awarding of blocks to foreign and private oil companies as part of its industry being liberalized. Often referred to as the Great Mexico Oil Reform, the shift in control gave more operators the opportunity to explore and develop assets throughout Mexico’s onshore and offshore regions. Still, it wasn’t an easy reform, requiring a constitutional amendment to achieve.
Now, however, under the rule of President Andres Manuel Lopez Obrador (AMLO), Mexico’s oil and gas sector has taken a significant step backwards. Since taking office in December 2018, AMLO has suspended licensing rounds but left existing agreements with private operators in effect. He said that the foreign firms that won contracts in three rounds and nine bidding processes—including Shell, BP, Exxon Mobil and Chevron—must demonstrate that they can “show results” before new bidding rounds can be held, even though many of the country’s deepwater fields are not set to start production until after his term ends in 2024. The firms were given a three-year period, during which the government will decide whether or not they are profitable enough to continue with the new bidding rounds. Additionally, Pemex has been barred from finding new partners to help support the development of some of its existing projects.
Although he hasn’t formally rescinded the energy reform, the president has been hard at work shelving efforts by his predecessor to open the country’s energy sector to private investment. Instead, AMLO is pushing to transfer power to state-owned energy companies, Pemex and the Federal Electricity Commission (CFE). While the government is aiming to use an ailing Pemex as a tool for economic growth and development, the move appears to be making Mexico less attractive to oil firms—especially as other Latin American countries report success elsewhere. Brazil, for one, is preparing for another huge auction this year, and Guyana has recently announced several new offshore discoveries.
Pemex, laden with a copious amount of debt, has been working to reverse production declines and revamp its refineries to make Mexico more self-sufficient, a primary objective for the administration. The company said in early December that it was aiming to reach 1.778 MMbpd by the end of the month. While this reportedly is an increase from the previous month, it still is only about half of what it was back in 2004. In October, it was reported that the company’s increase in output was the first one in six quarters. The company’s recent increase in output reportedly has been made possible by tapping more accessible resources onshore, as well as in shallow-water fields.
Additionally, an effort to drill new wells at 20 “priority” fields by using smaller, local service contractors has faltered, and Pemex expects to re-bid some of the work later this year. The push to add approximately 100 new wells is coming at a time when oil and gas is generating about 18% of the government’s income. Most of the “priority” fields are said to hold less than 50 MMbbl of recoverable reserves, and it is not clear whether they will be profitable at all.
Meanwhile, AMLO appears bent on restoring Pemex to its pre-reform status. He said that he would lower the company’s tax burden in 2020 and contribute government funds toward paying down near-term bonds.
Nonetheless, a recent discovery of epic proportion reportedly could be the company’s ticket to recovery.
In December, Pemex reported that its Quesqui discovery could hold at least 500 MMbbl of crude, Fig. 1. The discovery, situated in southeastern Mexico’s Tabasco state, is being hailed as the country’s largest find since 1987, when Sen field in Nacajuca, Tabasco, was discovered, holding 526 MMbbl of crude. Company CEO Octavio Romero Oropeza reportedly said that there are plans to recover 69,000 bopd from the site this year, potentially reaching 110,000 bopd by 2021. The find also could help improve Pemex’s credit rating by boosting reserves.
Pemex also laid claim to the giant Zama field in January. The field, discovered by U.S. firm Talos Energy Inc. in 2015, is believed to be Mexico’s biggest private discovery since the oil industry was nationalized, Fig. 2. The shallow-water field is estimated to hold nearly 1 Bbbl off Mexico’s southern Gulf coast, and its reserves have been estimated at 670 MMbbl of recoverable oil-equivalent. “In Pemex’s analysis, we consider that we have the largest portion of the field,” Romero reportedly said. “Independently of who has what, Pemex will drill exploratory wells to confirm this information.”
According to Talos, 60% of Zama’s total resources are in Block 7, which is the area that it won in Mexico’s first competitive oil auction—alongside partners Premier Oil Plc and Sierra Oil & Gas, a Wintershall DEA subsidiary. Talos also reportedly holds a 60% stake in the discovery. Bloomberg reported that Pemex is in talks with the Energy Ministry over a unitization agreement that would see it receive a share of Zama’s production. It also was reported that Pemex’s Asab well, situated adjacent to Zama, is expected to start production in 2021.
Pemex and the Talos-led consortium reportedly are expected to negotiate terms of the Asab well, including who will operate and how revenues will be divided. Bloomberg reported, however, that the decision could end up in the hands of the energy ministry, if an agreement can’t be reached. Investors have warned that if the Zama unitization agreement isn’t reached either, resounding effects on the oil sector could be seen. Despite this, the consortium reportedly is moving forward with FEED work at Zama in anticipation of a 2020 FID.
As operator of Block 7, Talos Energy was granted a two-year term extension for additional exploration activities in September, Fig. 3. Situated in the Sureste basin, the block is home to several other promising prospects near Zama. Two targets reportedly with the most potential are the Xlapak and Pok-A-Tok prospects, which have typical gross unrisked resource ranges of 75–150 MMboe, each. The prospects are said to be targeting resources similar to those in the drilling campaign related to Zama. This was the first time that an extension such as this had been granted to a private company offshore Mexico’s coast.
Talos President and CEO Timothy Duncan said, “The recent CNH approvals have provided Talos and its partners with the flexibility to continue optimizing the potential of Block 7. The consortium has significantly over-delivered on its commitments under the production sharing contract, and these approvals will give us the opportunity to continue to successfully develop the country’s resources. We are excited about the additional potential of these prospects, all of which could be incremental to our world-class Zama discovery, the first by the private sector in Mexico’s history. Finally, we believe these approvals, in combination with the significant increase in industry activity, are yet another indicator of the tremendous potential of the basin in the future.”
Also, in the Bay of Campeche, Schlumberger is starting a new 5,080-km2 wide-azimuth (WAZ) multi-client survey. The survey, which will take place in the Salina del Istmo basin, reportedly will provide the first 3D coverage over the shallow-water area that includes Zama. It is a project that the company is calling WAZ-6.
According to WesternGeco, the geophysical services and subsurface data solutions division of Schlumberger, a series of advanced imaging technologies will be applied to improve reservoir continuity and ensure reliable amplitude and quantitative interpretation analysis. This will reduce pre-drilling risk and increase the exploration success rate.
“The WAZ-6 project builds on our vast subsurface understanding of Campeche and will help clients solve their illumination and imaging challenges in this geologically complex area,” said Maurice Nessim, president at WesternGeco, in a release. “We have acquired and processed more than 72,000 km2 of new commitment to help our clients accelerate their exploration plans.” The company said it will use cloud computing power to accelerate processing, with delivery expected late this year.
Shell, one of the few majors outside of Pemex that still has regional access, is moving forward with a deepwater drilling plan, despite the complications that it expects from the present administration. The drilling campaign includes four new wells this year. The company has nearly 20,000 km2 of acreage across its nine deepwater blocks offshore Mexico, making its position there one of its largest globally. “First oil, if we are successful, is unlikely to occur before the end of AMLO’s term, due to the complexity of deepwater fields, which can take anywhere from five years to a decade to start producing,” Alberto de La Fuente, Shell’s Mexico country chief, told Bloomberg.
In February, the company was granted approval by the National Hydrocarbons Commission (CNH) to drill its second ultra-deepwater exploratory well, Max-1. The La Muralla IV semisubmersible has been leased from Mexican company Grupo R SA to drill the well. “The contract will allow us to drill three deepwater wells with Grupo R, and it could be as many as eight, depending on how it evolves and what we find,” De La Fuente told Bloomberg. “Imagine having 2,000 km2 for the block we’re currently drilling, and you have to drill one well, which is a few inches in diameter and make sure it’s successful.”
Premier Oil holds a significant amount of interest in Mexico’s offshore, as well. In addition to its stake in Zama, the company holds an interest in Block 30 of the Sureste basin, and Blocks 11 and 13 in the Burgos basin, Fig. 4. According to the company, significant progress has been made at these sites in the last few years. A 3D seismic survey acquisition across Block 30 was completed in July 2019, and data are being processed to delineate the full extent of the Wahoo prospect. Drilling of Wahoo, which reportedly exhibits direct hydrocarbon indicators similar to Zama, is scheduled for the end of this year.
On Blocks 11 and 13, Premier has reported that reprocessing of existing 3D seismic data has commenced and is expected to be complete sometime this year. The company says there are numerous structures that have been identified in plays similar to those proven in the onshore Burgos basin and offshore the U.S. Gulf of Mexico.
Although Mexico is home to numerous aging fields, it still has significant proven reserves. The supergiant Cantarell field, specifically, maintains its status as one of the country’s most productive oil fields, but it has seen a sharp output decline in recent years, as it matures.
As recently as 2004, Cantarell, situated about 50 mi offshore in the Bay of Campeche, was considered the second-highest producing field in the world, after Saudi Arabia’s giant Ghawar field. During that time, the field reportedly was producing approximately 2.14 MMbopd. By 2014, however, the EIA reported that the field’s output had been falling for nearly a decade. The field, which has been producing since 1979, is languishing as a result of declining reservoir pressure.
Just over a decade ago, Ku-Maloob-Zaap overtook Cantarell as Mexico’s most productive oil field, with a production rate of approximately 853,000 bpd (2015’s average). The complex, situated northwest of Cantarell, is now the second-largest in Mexico, after the onshore giant, Chicontepec. The Chicontepec formation is situated northeast of Mexico City, where there are a number of other producing assets operated by Pemex.
Despite recent efforts, Pemex isn’t the only company with producing assets in Mexico. Other majors are operating in significant areas onshore and offshore Mexico, as well. German independent Wintershall Dea, in particular, holds a chief position in the region. In addition to its considerable share in the Zama discovery in Block 7, it holds ten offshore exploration licenses in the Tampico-Misantla basin. It operates Blocks 16 and 17, and has a stake in the neighboring Block 2. It also operates Block 30 in the Sureste basin.
Among its producing assets, Wintershall operates Ogarrio field, in southeastern Mexico. The onshore field, although mature, has “a fine future,” according to Wintershall. The company says it plans to maintain, or possibly increase, its output, long-term. With more than 100 wells already active at Ogarrio field, new wells and technical optimization measures reportedly are planned to enable future production.
WORLD’S LARGEST OIL HEDGE
Talks of the world’s largest oil hedge had begun to circulate last year. Finance Minister Carlos Urzua told Bloomberg in January 2019 that the country was already planning a hedge for 2020. It was confirmed this past January that that the Mexican government would hedge 2020 oil exports at an average $49/bbl, in an effort to protect the nation against low crude prices.
In February, Finance Minister Arturo Herrero said that Mexico intends to hedge through 2021, as well. The Finance Ministry (Hacienda) hedge is believed to be one of Wall Street’s most secretive. Herrero told Bloomberg that the nation needs to keep details of the trade private, in order to prevent the market from front-running the transaction.
“We need to be very careful about operating throughout time in a very discreet and disciplined manner so that no one knows the Mexico government is operating, and they can’t identify the periods we are covering,” Herrero said. “Because, if not, we’ll have problems the following year.”
Herrera reportedly also said that Mexico is willing to adjust tax levels to make new E&P integrated service contracts, called CSIEEs, more appealing for companies. Ideally, this would allow Pemex to include private companies in fields where it has marginal operations. CSIEEs could contribute as much as $5.8 billion over four years, according to the company’s business plan. However, analysts have expressed that this almost certainly won’t be enough to ease the pain of its excessive debt or the last 15 years of oil production decline
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