[Tanada]

The Cantarell field is one of the worlds largest offshore fields Pstarr so what is it you are trying to communicate here?

[rockdoc123]

Both were produced by the Mexican nationalized oil industry under an expensive high-tech tertiary regime. There are no new fields to discover other than somewhere somehow deep under the GOM.

Although from the outside looking in the Mexican oil industry looks mature once you look at the details this is not the case. The last onshore bid round concentrated on old fields that had been operated by PEMEX for decades. For various reasons (no capital, incompetent management, lack of training, poor attention to data monitoring etc) these fields were largely underdeveloped. I think Mexico is in a place that Canada was several decades ago where large discoveries had been made and produced but little in the way of pressure maintenance, infill drilling, stepout drilling etc had been accomplished. How much this can add to the overall reserves picture of Mexico becomes a question but in the short term it can certainly help address production issues. An example in point is I had the opportunity to look at one of their oldest fields. Many of the wells were completed barefoot (no casing over the producing interval) had never had artifical lift employed nor had been subject to detailed 3D seismic investigation or field pressure maintenance. The wells were still producing at a few bbls a day but it is clear that simply running liner and putting downhole pumps in the wells would improve production immensely. Also the techniques employed by Pemex at fields like Chicontepec and likely KMZ are less than ideal in terms of modern standards. If Pemex and the MX gov't can ever get their act together correctly there could be some vast improvements in overall production without tapping deep water.

[ROCKMAN]

pstarr - A few of details. First, Catarell Field is actually 5 seperate reservoirs. And while the first was discovered in 1976 the fifth wasn't found until 1998. And while production has declined significantly, in 2014 PEMEX announced big plans to stabilize and perhaps increase production:

"Reuters - Pemex plans to launch a $6 billion investment in 2017 to maintain current levels of production at its Cantarell field over the next decade. Discovered in 1976, output from the offshore Cantarell field once supplied over 2 MMb/d, or more than half of Mexico's total crude production. But output at the field has fallen more than 80% since 2004 to hover around 340,000 b/d.

The Pemex nvestment will counteract the natural decline of Cantarell by squeezing out an additional 100,000 b/d per year via secondary recovery over the course of a decade. The plan includes stabilizing Akal, Cantarell's most productive sub-field, to keep its output steady at between 180,000 b/d and 200,000 b/d for a longer period of time. In May, Akal’s crude output stood at about 189,000 b/d."

Of course two important questions. First, will those results actually materialize. Second, can Pemex come up with $6 billion. Historically one of Pemex's big problem was the govt stripping it of revenue to support itself.

And no one is going to steal Mexico's oil. If a foreign company deverlops Mexican oil it will be done on terms the govt finds acceptable. If they aren't the Mexican govt is free to make the investment itself.

And again you are way, way overestimating the cost to develop Deep Waterr fields. Yes: spending several $BILLION souinds like a lot. But that's in absolute terms. But when you factor in the huge reserves in those fields the cost per bbl is actually some of the lowest. Which explains why companies have invested $TRILLIONS in developing them. Consider a field that costs $5 BILLION to develop. But if it produces just 300 million net bbls of oil at today's $50/bbl the company recovers $15 BILLION. And if it sells that oil for $80/bbl...do the math. Think about the Pemex plan: spend $6 BILLION to add only 100,000 bopd. Many DW fields come on at 2 to 3 times that rate.

[rockdoc123]

Of course two important questions. First, will those results actually materialize. Second, can Pemex come up with $6 billion. Historically one of Pemex's big problem was the govt stripping it of revenue to support itself.

precisely the reason the constitution was reformed and why the MX gov't has been having bid rounds open to both foreign companies as well as newly formed MX independants. Pemex and the gov't can't fund the appropriate programs so why not use someone else's money. Works everywhere else in the world. The gov't is on the right path they just have to shed themselves of the decades of corruption and civil servant entitlement syndrome.

And no one is going to steal Mexico's oil. If a foreign company develops Mexican oil it will be done on terms the govt finds acceptable. If they aren't the Mexican govt is free to make the investment itself.

LIke most countries the Petroleum Law states that all resources are the property of Mexico. Foreign companies can have the right to profit share or get paid a service fee for developing and lifting crude but they never actually own the resource. I think the US is one of the few places in the world where a company can actually own the oil it has subsurface rights to. Note that Pemex has actually participated in the offshore bid round, bidding as a consortium with a couple of foreign entities.

[Zarquon]

Foreign companies can have the right to profit share or get paid a service fee for developing and lifting crude but they never actually own the resource.

Isn't that one of the biggest obstacles to foreign investment, that they offer service fees to companies who want booked reserves instead?

[ROCKMAN]

Z - As far as booking reserves by US pubcos the Mexican law has been a huge roadblock. Even if it's a good return for the US pubco they could not book any in ground reserves. It might seem like a minor technicality but not to the US govt's SEC: Mexican law stipulated that as long as the oil is in the reservoir it belongs to the Mexican govt. So even if the concession allows the US company to get 75% of the oil sales it cannot book $1 of Proved Unproduced Reserves...that oil belongs to the Mexican govt. The SEC does not recognize an asset unless the pubco has the title of ownership for the oil. Just like the title on your house: you don't own it until you have the title to it. Public companies live and die by how much Proved Unproduced Reserves they add to their books.

Doc may know: has that as aspect of Mexican law changed?

[rockdoc123]

Z - As far as booking reserves by US pubcos the Mexican law has been a huge roadblock. Even if it's a good return for the US pubco they could not book any in ground reserves. It might seem like a minor technicality but not to the US govt's SEC: Mexican law stipulated that as long as the oil is in the reservoir it belongs to the Mexican govt. So even if the concession allows the US company to get 75% of the oil sales it cannot book $1 of Proved Unproduced Reserves...that oil belongs to the Mexican govt. The SEC does not recognize an asset unless the pubco has the title of ownership for the oil. Just like the title on your house: you don't own it until you have the title to it. Public companies live and die by how much Proved Unproduced Reserves they add to their books.

Doc may know: has that as aspect of Mexican law changed?

The SEC is somewhat vague, which has caused the biggest part of the problem. Up until late 2014 MX was subject to service agreements with foreign entities. Under those agreements you were paid a fee for conducting oil and gas activities on behalf of the MX government. You did not own the oil or the right to "lift" it but the biggest problem was you were not taking on any form of "risk" according to SEC viewpoint. After the constitutional change foreigners have a right to "lift" and sell oil, they still do not own it but because there is the provision for production sharing contracts and other forms of agreement where it is seen that the foreign entity is taking on risk and can sell oil for a percentage of the profit it is the viewpoint of pretty much all of the reserve audit companies I have spoken with (Ryder Scott, McDaniels, Gaffney Cline) that companies would be able to book reserves. It hasn't been tested yet of course and until that happens there is no guaranty but the reserve auditors feel confident. Note that in Canada you do not own the oil, nor in Algeria, Brazil, Indonesia, Malaysia, Qatar, UAE, Gabon, Nigeria....etc etc. As I've mentioned the US is one of the few countries where the operator and lease holder is actually deemed to own the oil. Ultimate ownership hasn't been the real problem with booking reserves but it has been blamed in the past due to a poor understanding of exactly what the SEC was asking for.

[Zarquon]

I don't quite understand - reserve replacement has been discussed here for ages, but you say that only US reserves can be booked, according to the SEC? Or are we talking about two different things?

[rockdoc123]

I don't quite understand - reserve replacement has been discussed here for ages, but you say that only US reserves can be booked, according to the SEC? Or are we talking about two different things?

What I was saying is that actually owning the reserves is not really what is required by the SEC since there is virtually no place in the world outside of the US where the country or State/Province is not the owner of the reserves. The difference is in how those reserves are shared with foreign companies. So a US company investing in oil and gas operation is Canada can never own the reserves beneath their land...that is the sole property of the provincial government. The company exacts a share of production through doing work to get the hydrocarbons out of the ground. Because they are compensated in hydrocarbon volumes and have the right to lift the oil and market it and more importantly because they take on risk drilling for hydrocarbons the SEC recognizes the reserves as bookable. But in countries like Iran and Mexico (up until recently) where foreign companies were explicitly precluded from owning reserves or being compensated in oil and generally were just payed for providing a service companies were not allowed to offically book those reserves. Some companies active in Iran who were European based but traded on the NYSE got around this but having a line item on their annual financials that outlined oil production taken in kind (i.e. that production they had in places like Iran that they could not officially book but for which they did receive revenue).