Hunting Mexico's Perdido treasures
A successful licensing round makes ready a wave of new deep-water investment
As oil producers spent the past two decades pushing deeper into the US Gulf of Mexico's Lower Tertiary area, home to the prolific Perdido Fold Belt, geologists suspected some of the area's biggest finds might lay across the border in Mexico's waters. Now they can test the theory. In December, Mexico overcame concerns about low oil prices and pulled off a successful deep-water licensing round - a milestone for the country's energy reforms.
The round, held just days after Opec struck a deal that lifted the outlook for crude prices, beat expectations: every one of Mexico's four Perdido Fold Belt blocks was awarded and eight of 10 total deep-water areas were snapped up by international companies. Just as pleasing for the government, all companies significantly exceeded the royalty cap set by the finance ministry.
China's state-owned Cnooc beat Pemex's only bid and took two Perdido blocks. Total-ExxonMobil and Chevron-Pemex-Inpex consortia won the other two. On top of that, the Comisión Nacional de Hidrocarburos (CNH) approved Pemex's farm-out to BHP Billiton for a stake in the Trion field, the state firm's most promising Perdido find, where at least 300m barrels of oil equivalent of light crude 3P reserves are expected. The companies have committed to spend at least $300m on the four Perdido blocks, but the government hopes around $16bn more will follow in drilling and development. It all sets the stage for a Perdido drilling boom in Mexico's waters.
If oil is found, companies will quickly have to figure out how to get it to markets
If oil is found, companies will quickly have to figure out how to get it to markets. Infrastructure in Mexico's deep Gulf of Mexico (GoM) is practically non-existent. In 2014, Pemex proposed piping around 80,000 barrels a day of oil from the Trion field ashore to a port in Matamoros, in Tamaulipas state, near the Texan border. Others have argued that ports further south in Tampico could handle the new production. But both would require major investment and upgrading.
A more compelling option could be to send oil across the maritime border through Shell's Perdido hub onto terminals along the US Gulf coast. The Perdido platform is one of the deepest in the world and already handles output from the Great White, Tobago, and Silvertip fields. The existing spare capacity could be filled with Mexican-produced crude or the system expanded if necessary. US-based Williams, which operates two pipelines linking the Perdido platform with the coast, has shown interest in working with both Pemex and new companies once their fields come online. The pipeline company could easily extend its services to new operators.
While Shell did not snag any Mexican offerings, Chevron did. That matters because the company has a working interest in all three US Perdido fields. So development may come easier for Chevron's consortium as sharing infrastructure would slash significant transportation costs.
Cnooc now also holds stakes on both sides of the border. It acquired a 10% interest in the Tobago field when it bought Canada's Nexen in 2013. That could prove the basis for a cross-border partnership, although under new US president Donald Trump the political ramifications of a major project, involving a Chinese company shipping oil into the US from Mexico, are unpredictable.
The other option would be to contract floating production storage and offloading vessels, but that would drive up operational costs.
Analysts expect breakeven prices in Mexico's newly opened deep waters to ultimately be on par with deep-water US projects - around $70 a barrel.
Mexico hopes all this is just the start. Massive multi-client seismic surveys by CGG, Schlumberger, EMGS and others are covering every corner of the country's Gulf waters hoping to find hints of further untouched riches.
Growing pains will be difficult to avoid. On the regulatory front, many rules are still being written as Mexico builds out its capacity. For instance, even though the Safety, Energy, and Environmental Protection Agency has put forth development guidelines, it has no work experience when compared to its northern counterpart.
There could also be conflicts between Mexico's desire to build out a specialised deep-water services sector and developers' urge to move fast. The government has set a relatively low 8% requirement for local content - things like buying kit made in Mexico and hiring domestic workers - so companies and consortia will most likely prefer their usual go-to partners. If domestic politics take a turn back toward resource nationalism, future governments could increase this requirement.
Still, the future looks promising for Mexico - to the dismay of some of its regional competitors like Brazil, which could see investment move to friendlier shores. If successful, Mexico's Perdido could lead global deep-water developments for at least the next decade.