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Pemex bullish as Mexico's upstream opens up

Interest in the Mexican oil monopoly’s upstream operating contracts looks strong as first bid round date is set

Mexico's state-owned oil monopoly is talking up its new operating contracts, which will see the private sector secure a foothold in the country’s onshore upstream play for the first time. Although the first bid round, set for August, will see only three small oilfields awarded to privately owned operators, Pemex officials are talking of putting as many as 20 blocks, including deep-water licences, into operators’ hands by the end of 2012.

Whether that number will end up in private-sector hands is questionable given the multiple delays that have slowed the release of the first contracts. But private-sector participation in the oil sector has received critical backing from important political players both in the ruling party and the opposition, as well as the country’s Supreme Court, guaranteeing some sort of operating role in the Mexican oil industry for the first time in seven decades, and soon.

Underexplored acreage

More than two dozen companies have purchased data packages for the three onshore oilfields, in the southern state of Tabasco. Two of the fields – Magallanes and Santuario – are producing, while the third, Carrizo, is shut in. Pemex has booked 49.8m barrels of proved, possible and probable reserves at Carrizo, 92.7m barrels at Magallanes and 39.6m barrels at Santuario, although executives say the fields, discovered in the 1970s, may well hold more oil as the areas are underexplored.

The two producing fields yield about 7,000 barrels a day (b/d) each, but Pemex planners claim the three combined could have peak output of around 54,000 b/d by 2016, after around $1bn in capital spending over the five-years between 2012 and 2016.

The fields, discovered before the country’s big offshore finds, such as Cantarell, that have been the mainstay of the Mexican oil industry since the late 1970s, have largely lain dormant because of a lack of investment and a shortage of staff to handle smaller projects. Since 1938, Pemex has discovered 445 oilfields, dozens of which offer potential for redevelopment, the company said.

The discovery of Cantarell shifted Pemex’s focus away from small onshore fields to the technical challenge of becoming operator of the world’s largest offshore oilfield. Even today, Pemex focuses the majority of its upstream spending on 52 fields that deliver 90% of the country’s approximately 2.55m b/d oil production; and with human-resource constraints unlikely to improve in the near term, attractive, yet small, deposits must be ignored.

But the modest production prospects offered by the first three areas being offered to investors and that operators are forbidden from booking reserves will dampen interest from the majors, which need big projects to keep growing. Pemex hopes medium-sized firms will be willing to work on a fee-per-barrel basis. By law it cannot offer payments linked to the oil price, but it can pay bonuses for production that exceeds an agreed baseline giving operators an incentive to maximise output.

Yet the operators will not be entirely free of price risk. The contracts stipulate that payments are subject to the fields generating enough cash flow on their own to cover the fee payments.

Investors will also have to contend with a new regulatory structure that is still evolving. The National Hydrocarbons Commission, which has limited enforcement powers under the law, has been trying to assert its prerogatives in the sector, including licensing and drafting recommendations on all aspects of field development. But the government is free to ignore its advice in many areas.

Pemex, in theory, surrendered its regulatory functions to the government under 2008 energy reforms, but it remains the main source for trained personnel for the energy ministry and the commission.

Investors will also be required to include Pemex as a minority partner in field-regeneration contracts to allow the national oil company access to better operating practices and technology, although this will put it in the unusual position of participating as both the client and contractor.

Regulatory difficulties

The regulatory difficulties suggest Pemex may be getting ahead of itself in promising to have up to 20 properties in the hands of privately owned companies by 2013. But with many of Mexico’s oilfields growing long in the tooth and Pemex’s lacklustre track record in developing the challenging onshore Chicontepec project, long touted as a replacement for Cantarell, private-sector participation is certain to increase.

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