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Major oil find to boost Pemex growth

The gap between what the Mexican state-owned oil firm aims to produce and its president’s ambitious output targets could be partially plugged by material from new Tabasco discovery

Mexican president Andres Lopez Obrador marked his first anniversary in office with the revelation of a fresh oil discovery in his home state of Tabasco last month, purportedly the largest in the country in over three decades.

Pemex, the state-owned oil and gas firm, says that seismic and well data collected in June from the Quesqui oil field indicated 3P deposits of around 500mn bl oe in place, with crude quality of 43.8° API. If confirmed, the discovery would be the most significant in Mexico since the Sen field, also in Tabasco, in 1987, which added 536mn bl oe to national oil reserves.

“Quesqui is positive news,” says Edgar Cruz Borges, head of credit research at Spanish bank BBVA. “It could be comparable to Akal field, one of the largest fields after Ku-Maloob-Zaap (KMZ), which holds 669mn bl oe.”

Pemex plans to drill 11 wells at the field this year to target 69,000bl/d of oil production and 300mn ft³/d of natural gas, rising to 110,000bl/d and 410mn ft³/d in 2021.  “With expected new discoveries and accelerated development of new fields, we estimate increasing oil production in the area from 215,000bl/d to 500,000bl/d by the end of the administration [in September 2024],” says Octavio Romero Oropeza, president of Pemex.

Plugging the gap

Pemex says its production has halved to just 1.7mn bl/d in 2018 from a peak of 3.4mn bl/d in 2004. The firm has already scheduled 20 new oil fields to begin production across the next four years—including Cibix, Valeriana and Chocol in Tabasco state—aimed at helping the Obrador administration achieve its output goal of 2.6mn bl/d by 2024.

“If you add 320,000bl/d from new Pemex fields to current production, it would mean a little more than 2mn bl/d, assuming that current production does not fall and the new fields are going to be able to reach maximum production in the coming year,” says Borges.

Quesqui is not included in these figures and therefore could help fill this 600,000bl/d gap. But Borges is unconvinced that it, or Pemex more generally, can make up all of this volume. New non-Pemex-operated fields such as US independent Talos Energy’s Zama discovery need to step up—making the Obrador regime’s opposition to private investment into the Mexican upstream, including its extended moratorium on bidding rounds, a significant roadblock to meeting its output ambitions. “In our opinion, the way forward for Mexico to reach that aggressive production target is with the help of private companies,” he says.

2.6mn bl/d – Mexican production target for 2024

Francisco Garcia, associate analyst at risk consultancy Control Risks, agrees—pointing out that “if anything, Pemex remains unlikely to have reached its 2019 production goal, and its main risks continue to be its unsustainable debt and the government’s continued push for state control of the sector”.

Production from assets operated by private firms that participated in previous bidding rounds are projected to start up only over the next three to five years, with many currently still in the exploratory or development phase. Obrador has suspended all planned further auctions—in part until the government sees tangible returns from planned developments actually moving into production—and further ratcheted up investment uncertainty by promising to re-examine existing contracts.

Pemex has committed to a significant capex programme to fulfil its share of production increases. In a July investor presentation, the company set a preliminary budget of MXN$320bn ($16.64bn) for 2020 and MXN$420bn for 2021—with 80pc directed to the upstream. In 2019, Pemex’s capex increased by 37.7pc year-on-year.

But the company must also balance its huge consolidated debt. The government has pledged to limit debt growth to zero and in November re-financed Pemex’s short-term debt—issuing a series of new bonds. Total debt, though, still stands at around $99.6bn and, as Pemex shoulders the bulk of future production growth, its debt profile will continue to raise doubts over its ability to sustain increased E&P spending.   

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