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Page added on March 29, 2014

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Mexico’s state oil company is calling dibs on the best fields before the foreigners arrive

Mexico’s state oil company is calling dibs on the best fields before the foreigners arrive thumbnail

Mexico wants to break out of a nine-year petroleum production slump and join the lucrative oil party under way in the US and Canada. To do so, the country’s laggard, state-owned oil company has finally announced the fields that it’s prepared to relinquish to more proficient foreign oil companies, which for the first time in three-quarters of a century will be permitted to drill in Mexican waters.

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Pemex’s wish list is unsurprising in its brazen self-interest: It has asked the Ministry of Energy for rights to retain control of more than 83% of the country’s proven and probable oil reserves. Still, under the 68-page document (paywall) that Pemex submitted March 21, foreign oil companies would still have some 4.2 billion barrels of proven and probable reserves to pick over.

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That’s undeniably a large volume of oil, but there are still a lot of unanswered questions. How much of Pemex’s wish list will be approved? How many of those 4.2 billion barrels are concentrated in one place, making them more lucrative to extract? What kind of profit-sharing deals will the ministry offer? And, finally, to what degree will Pemex invite foreign players as drilling partners for the other 20 billion barrels of proven and probable reserves—the fields that it has attempted to claim for itself?

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The Mexican Energy Ministry has until September to review Pemex’s wish list and announce the fields that will be up for grabs in five annual bidding rounds from 2015 through 2019, with each round covering 20,000 square kilometers.

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The stakes are high for everyone. Pemex revenues finance a third of Mexico’s budget, but those proceeds have been falling. Pemex oil production has dropped for nine straight years, from a peak of 3.4 million barrels a day in 2004 to an average of 2.5 million barrels a day last year. And the company has lost money for five straight quarters, including $5.8 billion in the fourth quarter last year.

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Meanwhile, Pemex is seeking to ramp up to 4 million barrels a day of production by 2025, but the company has barely managed to start drilling the offshore and shale fields with the most new potential. On the US side of the Gulf of Mexico, for instance, hundreds of wells produce some 1.3 million barrels of oil a day. In Mexican Gulf waters, Pemex is producing exactly none. On the Texas side of the Eagle Ford shale field, permits have been issued for some 13,000 wells. In Mexico, Pemex has drilled about 175 shale wells.

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As for the foreign companies, many are eager to drill in Mexico given the relative political instability in the rest of the world. There are the economics of critical mass—majors such as BP, Chevron and ExxonMobil that are already active in the Gulf of Mexico can use the same expertise and knowledge in Mexican waters. Along with smaller players, they have mastered the drilling techniques of hydraulic fracturing in the Eagle Ford shale, and hope to move across the border and ply the same skills in Mexican shale.

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There are already some indications of how the ministry will decide. Lourdes Melgar, deputy minister for hydrocarbons, told reporters this week that, in addition to boosting oil production and profits, the government’s aim is to retain “a strong Pemex. A vision that aims to shrink Pemex would be very negative and is not an option.”

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In that vein, Pemex looks likely to be given approximately 15% of the shale fields, as it requested. It will also probably keep all the country’s shallow-water oilfields, which have been under development for decades.

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The most sought-after deep-water play—the Perdido Fold Belt, which straddles US-Mexico waters in the Gulf—looks likely to be split between Pemex and foreign companies. Pemex believes that some 30 billion barrels of oil reserves underlie Mexico’s section.

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In addition, according to Pemex CEO Emilio Lozoya, the state-owned company will not go it alone in the parts of Perdido that it is allocated, but will instead seek foreign partners with deep-water experience. To the degree the pie is shared, the party could indeed spread south.

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15 Comments on "Mexico’s state oil company is calling dibs on the best fields before the foreigners arrive"

  1. rockman on Sun, 30th Mar 2014 12:10 am 

    “Pemex’s wish list is unsurprising in its brazen self-interest:… for rights to retain control of more than 83% of the country’s proven and probable oil reserves.”

    I wouldn’t call it “brazen” at all. I’ve done countless trades in the last 40 years and rarely did I give up proved reserves other than to sell them outright. The trades almost always dealt with the exploration rights. IOW I’ll let you drill on the mineral rights I own allowing you to earn a piece but you are going to put your capex for that right.

    We call them “promoted” deals. A common structure: you pay me $X up front and pay for 100% of the cost for the exploration portion of the well. If it works I pay 25% of the completion cost of that well and 25% of the total cost of the future low risk development wells. You pay the 75% of the completion cost and of all the development wells. And then we split the revenue 25/75. And if it’s a dry hole? You lose all your capex and I make a little from the up front monies.

    We call it a “third for a quarter” deal: pay 1/3 and earn 1/4. And that’s how it’s suppose to work: the Golden Rule…he that owns the gold (the mineral rights in this case) makes the rules. Don’t like my rules? Then go drill your well somewhere else.

  2. Northwest Resident on Sun, 30th Mar 2014 12:41 am 

    Even if most or a good portion of those offshore and shale reserves turn out to be productive, it sounds like they aren’t even close to getting that oil out of the ground. They haven’t even gotten to the “five annual bidding rounds from 2015 through 2019” yet. There has to be some good reason(s) why the major oil companies haven’t exploited those “proven and probable oil reserves”. Sounds like a lot of talk to me, and not necessarily a good bet. Don’t start buying those Mexican oil futures just yet guys, no matter how good articles like this make them look.

  3. baptised on Sun, 30th Mar 2014 1:13 am 

    And I say to the title of this article. Good for them.

  4. Makati1 on Sun, 30th Mar 2014 1:17 am 

    Oil in the ground is not oil in the market, and may never be, but I support their desire to keep the best for themselves.

  5. rockman on Sun, 30th Mar 2014 1:55 am 

    “…but I support their desire to keep the best for themselves.” And that’s why Mexico’s oil production declined 30% just since 2005. They are keeping the best for themselves…in ground. Do you know what a million bbls of oil is worth sitting 10,000′ below the surface: absolutely nothing. And reason is clearly for their current predicament is obvious: PEMEX has had the great majority of their revenue used to run the gov’t instead of developing their assets. And where do they find themselves today: even fewer funds available as a result of their production decline. PEMEX is in an even worse position now then they were before the slide.

    If they want to get some of that “best” out of the ground someone has to risk the capex to do it. And PEMEX doesn’t have nearly the capex to do it themselves.

    You want me to risk my money to drill on your leases I get a piece of the pie that makes worth my risk. You don’t want to do that then you can sit on your reserves till you starve to death. I’m not a charity. You want money you can drop to your knees and beg the IMF for it.

    Again, it ain’t personal…just business. LOL.

  6. PapaSmurf on Sun, 30th Mar 2014 1:58 am 

    There has to be some good reason(s) why the major oil companies haven’t exploited those “proven and probable oil reserves”.
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    There are no technical reasons. The only reason has been Mexico’s law.

    Pemex lacked the offshore technical skills to go it alone, so very little drilling has taken place in the Mexican regions of the Gulf of Mexico. Until now, it was illegal under Mexico law to do deals with foreign oil companies. So these resources have never been developed. This is like the Gulf of Mexico off the coast of Texas and Louisiana 30 years ago in terms of unexploited oil reserves.

  7. Boat on Sun, 30th Mar 2014 5:39 am 

    Good news. No reason for tars sands to be imported in the US

  8. Makati1 on Sun, 30th Mar 2014 8:15 am 

    Rockman, the Mexican people will NOT benefit even if that oil is pumped by someone else. The profits will go to foreign oil companies as always. So, let it in the ground forever.

    Mexico is right to hold on to whatever resources it has as long as it can. If the US collapses first, the Mexicans will have the advantage. Maybe China will get to pump it or Russia. It does not have to be an American Company.

  9. Davy, Hermann, MO on Sun, 30th Mar 2014 11:14 am 

    Come on Makati, of all the countries with an oil economy Mexico has managed the returns well along with say Norway. Sure there is graft and corruption but plenty gets to the people. I might add a country much like your own that has way too many people for its carrying capacity very much needing anything generating hard currency. At least Mexico has oil and a two benevolent rich neighbors to the north and plenty of oil. Not a like yours with a country like China to the north bent on territorial ambition.

  10. rockman on Sun, 30th Mar 2014 3:05 pm 

    M – Normally I would give you a patient and detailed explanation of how little you understand about foreign oil concessions and national oil companies. But not this time. You have access to hundreds of independent reports on the subject on the www. Your choice, of course, but I’ll leave it up to you to self-educate to avoid embarrassing yourself on this subject. And from your posts I know you’re not stupid and are very capable. Just one more bit of unrequested advice: set your well-intended emotions aside.

  11. Boat on Sun, 30th Mar 2014 3:59 pm 

    http://www.moneynews.com/Markets/Mexico-fracking-drug-cartels/2014/02/21/id/554000/big in Mexico as it is in the US. Over 1

    Most of the above article was about off shore drilling potential. I instantly thought, where is the news about fracking as Eagle Ford is reported as mbpd.

    Turns out the problem is drug cartels.

  12. Boat on Sun, 30th Mar 2014 4:20 pm 

    I need to proof read better. I meant to convey the Eagle Ford field in the US produces over 1 mbpd and their may be that potential on the Mexico side of the field. With our refineries so close I expect this region to be developed quickly. Oil is one of the few products that draw the more power than drug cartels.

  13. rockman on Sun, 30th Mar 2014 6:14 pm 

    Boat – I’ve worked a number of the trends in S Texas along the Mexican border. There is a decades long history of the development of various geologic plays that end when you reach the Rio Grande. But you’re also correct: even without the cartels Big Oil wouldn’t have much interest in México other than the Deep Water. We’ve already developed such fields right up to the international boundary with one apparently straddling it.

  14. jimmy on Sun, 30th Mar 2014 7:23 pm 

    Mexico is the poster boy for the ELM. Their production peaked in 2004 and its ever declining production will intersect its ever increasing comsumption in about 2016. At that point they will no longer have a surplus to export and become an importing country. As the article points out the oil industry provides about 30% of government revenue. Not only will this create a crisis in Mexico but the U.S will lose about 900,000 BPD. About that the same time the Alaskan pipeline will reach a point (350,000 bpd) where it is no longer economic and therefore is shut down. The fracking boom should also be in steep decline will the coresponding lose of oil. The effect of these three events should trigger a financial crisis.

  15. rockman on Sun, 30th Mar 2014 8:08 pm 

    Jimmy – it’s actually worse today for México then you describe. Think on NELM…Net ELM. While México exports oil to the US they import refined products from US refineries worth about 25% of the value of their oil exports. So they are farther down the ELM path then some numbers would indicate.

    And there’s another potential factor reducing oil imports from México: there is already a small pilot program exporting their oil to China. And one of the big Chinese oils has already announced they are going to go after those new leases México will be offering now that they’ve changed their constitution to allow foreign companies in.

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