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New era for Pemex as government wants foreign investment

The government wants foreigners back in the upstream. What will the reform mean for Pemex?

This year is set to be the most important for Mexico’s state oil company Pemex since it was founded in 1938. More than 70 years ago, the then-government barred foreign oil companies (mostly from the US) from the country’s oil sector, and handed the nationalised fields to Pemex. Now, however, it looks like Mexico will ask those companies to return.

Mexico’s three main political parties will try to frame an energy reform programme this autumn aimed at bringing foreign investment back into the country. “The country is in a position to carry out reforms to the energy sector that will transform and raise the standard of living of all Mexicans. As the President and as a Mexican, I am totally convinced that Mexico is facing one of the most important opportunities of recent times,” president Enrique Peña Nieto said in a speech to congress in August outlining his vision for reform.

The country tried limited reform in 2008, allowing Pemex for the first time to offer per-barrel service fee contracts at producing fields. It was hoped that the reforms would help Pemex attract foreign cash and technology into the country’s oil patch. It didn’t work. The auction rounds have repeatedly disappointed, and they have seen no serious interest at all from major international oil companies.

In July, Pemex held an auction offering six of the so called incentive-based contracts for the huge Chicontepec field. Only three of contracts were awarded. Moreover, they all went to oilfield service companies that appeared more interested in selling tools, equipment and drilling services to Pemex than applying leading-edge technology to maximise output from one of the country’s most important and complex oilfields.

Halliburton won one of the contracts by offering to take a fee of just $0.01 per barrel of oil produced. It is a deal that a major exploration and production company could never accept.

Increased reform

The latest round highlighted the need for more radical reform. At the heart of that reform will have to be a mechanism that allows foreign companies to take an ownership stake in Mexico’s oilfields.

That is a tall order in a country that takes a national holiday on 18 March to celebrate the nationalisation of the oil industry, seen by many as a potent symbol of Mexico’s independence and sovereignty, particularly from its neighbour to the north.

The reforms proposed by Peña Nieto would require Pemex to loosen its grip on the energy sector. The company’s leadership appears to accept this, and recognises that the benefits of doing so would outweigh any disadvantage. That is because the company has pinned its hopes of restoring Mexico’s status as an energy powerhouse on developing the country’s shale and deep-water fields, and has neither the financial muscle nor the technological prowess to do so on its own.

In exchange for giving up its monopoly on the sector, Peña Nieto has promised to realign Pemex into separate upstream and downstream business units and allow Pemex to have more operational autonomy and a more modern corporate structure.

Peña Nieto has also pledged to introduce a new tax scheme for Pemex to reduce the financial burden on the company, which funds about a third of the national budget through taxes, royalties and other contributions. “The budget reform initiative that I will be presenting in the month of September includes a new tax scheme for Pemex that will be fully competitive on an international scale,” he said.

After a decade of steep production decline, Pemex appears to have stabilised Mexican output. In 2004, Mexico was producing more than 3.8m barrels a day (b/d) of crude. But then production from the offshore Cantarell field, once Mexico’s largest, declined sharply – and unexpectedly. The loss of output from Cantarell (and other fields) saw Mexican output plunge to 2.95m b/d in 2010. Pemex stemmed the losses, but production has remained flat for the past few years.

But returning to those previous highs will require opening up new fields, and for that Pemex needs help. At a presentation in Houston earlier this year, the head of Pemex’s exploration and production business, Carlos Morales Gil, outlined the size of the prize and just how important shale and deep-water plays will be for the company over the coming years.

According to Gil, the country’s deep-water fields hold more than 26.6bn barrels of oil equivalent (boe), while its shale basins are estimated to hold more than 60bn boe. Under Gil’s best-case outcome, investment in shale gas and oil will rise from virtually zero today to a quarter of total investment by the end of the decade. And by the middle of the next decade the company would be spending one-third, more than $10bn a year, on shale.

The company also expects shale and deep-water plays to account for the bulk of new reserves. By 2016, again according to the best outcome, the company expects to add 1.96bn boe of new reserves, half of which would come from shale and deep-water fields.

Throughout the 2020s, Pemex says it could be adding well over 1.5bn boe a year in new shale and deep-water reserves, making up about two-thirds of total reserves additions.

For its part, the government reckons reform will help increase Mexico’s oil production to around 3m barrels a day (b/d) in 2018 and 3.5m b/d by 2025.

But there is a flip side. If Pemex does not – or cannot – add the shale and deep-water reserves it expects over the coming years, it will struggle to replace production. If this is the case, Mexico’s oil industry is likely to continue its long downward slide. 

Table : Pemex by the numbers
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