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Pemex prepares to expand oil production

Pemex prepares to expand oil production thumbnail

Oil production at Pemex has touched bottom after a decade of decline, according to the head of exploration and production at Mexico’s state-controlled energy group, and a new era of deals with private companies should fuel its recovery.

“Things are looking good,” Gustavo Hernández told the Financial Times in an interview, just weeks before the first contracts with private operators are due to be unveiled on May 13.

The statement may sound rash — output at what has been Mexico’s sole hydrocarbons producer for nearly 80 years has been sinking inexorably since 2004, when the giant shallow-water Cantarell field was at its height, and the company has already cut its 2015 production forecast once this year.

Furthermore, Pemex, the main contributor to the federal budget, is shouldering the brunt of public sector cuts in a government austerity drive as it seeks savings of some $4bn this year.

The latest official production goal is 2.29m barrels of crude oil per day, down from the hoped for 2.4m bpd this year and a far cry from the peak of more than 3.38m bpd in 2004. Average production, which Mr Hernández said was 2.33m bpd this month, also remains below last April’s output of 2.48m.

Yet Mr Hernández said he believed production has touched bottom: “We are in the process of reversing a trend . . . to stop falling and start growing.”

Current production remains slightly above the annual target. This is despite an explosion on a platform on April 1, cold weather conditions in January, which reduced output, and a switch to daylight saving time that means only 23 hours a day of production are counted, he said. “I can feel confident that we’ll meet the forecast.”

The government has set a goal of increasing Mexican oil output by 500,000 barrels per day by the end of President Enrique Peña Nieto’s term in 2018. Just over half of that is expected to come from shallow-water and extra-heavy oilfields being tendered this year, officials said.

Chart: Pemex crude production

The decade of declining production and Pemex’s inability to invest more to increase it — because the company hands most of its revenue to the state in tax — are the driving forces behind a historic Mexican energy reform that is flinging open the sector to private investment in exploration and production.

Companies had been limited to service contracts with Pemex, but that will change on July 15 as Mexico awards the first of the fields and blocks that it is tendering in a bidding round this year. That will mean Pemex will have to compete with rival operators for the first time since its creation in 1938 after international oil companies were ejected and their assets expropriated.

But Pemex’s first tie-ups with private companies will come next month. It is already “migrating” an initial 11 of its 22 service contracts into new-style deals — complete with tax incentives to boost production, Mr Hernández said, which in some cases will mean new operators coming in.

Pemex has negotiated the transfer of all 11 contracts — one Latin American oil company and a private equity fund have told the FT they have struck deals but declined to be named — but Mr Hernández said the finance ministry had still to finalise the tax terms deal by deal.

“We will have the first migration on May 13, and then the others will cascade from there,” he said, declining to name the field or investors involved. “In some cases, [current] service contractors don’t want to take on the risk and will leave,” he added.

Pemex is also seeking partners for 14 fields that it retains in its portfolio — a practice known as “farm-outs”. Those partnerships will be approved in tandem with the tender rounds this year and Mr Hernández said the collapse in oil prices had not prompted the company to increase its farm-out plans because “if we put more fields in, we won’t meet the timetable”.

Farm-out partners will be chosen by the regulator, after comment from Pemex.

The company, meanwhile, is trying to weather the low-price environment by seeking the same 15 to 30 per cent reduction in day rate costs from its contractors as international oil companies are squeezing from theirs, Mr Hernández said.

Pemex is in the throes of revamping its corporate structure to become more efficient and focused, and is betting that its deep knowledge, both of Mexico’s hydrocarbons prospects, and its business environment, will give it the edge in what looks set to be a fiercely competitive new landscape.

“We are preparing to compete and to win,” Mr Hernández said. “We’ll see who knows their stuff. We’re excited.”


9 Comments on "Pemex prepares to expand oil production"

  1. jjhman on Tue, 21st Apr 2015 7:12 pm 

    No mention in the article just exactly where Pemex has all of these unexploited reserves.

    I have to accept it as fact that Pemex somehow needs to share ownership of its national resources with outside multinationals but that somehow Aramco doesn’t but I don’t understand why there is a difference.

  2. Plantagenet on Tue, 21st Apr 2015 7:14 pm 

    Mexico has tremendous oil potential in the NE where the Eagle Ford formation extends from Texas southward into Mexico.

    However, any new Mexican oil production is likely to make the current oil glut even worse.

  3. Plantagenet on Tue, 21st Apr 2015 7:17 pm 


    Mexico is desperate for foreign help because their conventional oil production peaked several years ago and has been dropping ever since.

    Aramco doesn’t see the same need for letting foreign oilcos in because their oil production hasn’t peaked……yet.

  4. anarky321 on Tue, 21st Apr 2015 11:29 pm 

    i have to give mexico credit for making the downslope very gentle over the last 10 years but their bottom is not in

  5. Go Speed Racer. on Wed, 22nd Apr 2015 12:18 am 

    Too bad Cantarell has just ran out of oil, faster than an old VW 300 miles out of Vegas.

  6. Lawfish1964 on Wed, 22nd Apr 2015 7:08 am 

    “a switch to daylight saving time that means only 23 hours a day of production are counted.” LMFAO! Isn’t it cool how we manage to make the earth spin faster by switching to daylight savings time?

    This is a classic corn porn article. We’ve set a goal for more production, therefore more oil will exist.

  7. BobInget on Wed, 22nd Apr 2015 9:53 am 

    Apologies: Here’s more news concerning Venezuela’s loan obligations to China.

    Venezuela has received $5 billion of new financing from China, as President Nicolas Maduro battles Latin America’s deepest recession and record shortages of basic goods.
    “With the alliance with China, we just received $5 billion of financing for development,” Maduro said on state TV Sunday. “We are working on other tranches, I will be informing you when they arrive.”
    The collapse of oil revenue has sent Venezuelan foreign reserves to about $20 billion, near a decade low. The benchmark dollar bond due in 2027 fell to 45.6 cents on the dollar Friday on concern the country won’t be able to service its debt.

    another snippet:

    China has awarded Venezuela $5 billion dollars for unspecified “development plans,” President Nicolas Maduro said Sunday, approximately three months after an official visit to China — .

    According to published reports, the loan is part of a $10 billion deal to be completed in the following months. The second part of the deal will go to develop oil fields, a senior official at state oil company PDVSA told Reuters.

    Venezuela has intensified its diplomatic and trade relations with China over the last nine years, supplying it oil to the tune of 640,000 barrels per day – amount set to increase to one million in the coming years.

    Poster’s notes:
    I hope you all understand.
    The US and Saudi Arabia are in an ‘economic war’ with Venezuela. Many observers say an attempt at ‘regime change’.

    China’s efforts at corralling the world’s oil reserves for future use also happens to create a deficit of potential oil imports to the U.S.

    IOW’s what China gets, the US doesn’t.

  8. BobInget on Wed, 22nd Apr 2015 10:12 am 

    Mexican oil also in hock to China.

    One chemical use for oil are plastics.–2-billion-0522201201

    Pemex (two Billion)

    Angola, China imports: Two Billion USD loan
    (Angola’s exports all go to China)

    Ecuador, OPEC member: Multi loans over 7.5 Billion

    This latest list just scratches the surface of China’s future imports and US denial of same.

    When I write China’s oil apatite for crude is insatiable, people think I’m just some perma-bull.
    They are wrong.

  9. Brent on Wed, 22nd Apr 2015 11:00 am 

    My thaughts exactly Lawfish. In the article it says investment has been lacking, but now that we want investment their will be investment. Just a very small mention of the low oil prices that will keep investors away.

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