Article

July, 2011

Pemex looks to develop deepwater assets

Lucy Miller, Analyst
Introduction Mexicos offshore oil and gas production comes from five main areas Campeche Bay, Burgos Basin (gas), Golden Lane, Tabasco and Veracruz, all of which lie in the Gulf of Mexico. Nearly 30 oil fields are located in Campeche Bay, the largest of which Cantarell, was discovered in 1976. The Cantarell complex was originally the largest offshore oilproducing complex in the world, second only to the onshore Ghawar field in Saudi Arabia, and accounted for upwards of 60% of Mexicos production. Lying in shallow water depths of 35 to 40m and produces from in excess of 30 platforms, Cantarell, amongst other major fields, is now in terminal decline the necessity to offset the declining production profile, particularly amidst robust commodity prices, is more important than ever before. The countrys reserve base has also decreased according to Pemex, proven reserves have fallen for a twelfth consecutive year to 13.8 billion barrels. Pemex Petrleos Mexicanos or Pemex, the national oil company controls the oil & gas sector with some production handled through Multiple Services Contracts with international companies. Pemexs budget must be approved by the Parliament each year. Pemex Exploration & Production (PEP) is the largest and most active group of Pemex, with approximately 50,000 employees, spread between their Mexico City headquarters and four operating groups (regions) based in Villahermosa, Ciudad del Carmen and Poza Rica. Each region has a number of asset teams (activos) related to a field or project. In addition, each Region contains a standard series of departments: planning, maintenance, operating coordination, HSE, finance & administration and drilling. In 2010 PEPs spent $17.4 billion, approximately 83% of Pemexs total investments during that year. In 2008 new legislation was put into place that aimed to reform the countrys oil sector and to reduce the decline in Pemexs production. Several administrative changes were made, such as adding new seats to Pemexs administrative board for outside industry experts, creating a new advisory board designed to provide independent coordination of long-term energy strategy as well as the establishment of a new hydrocarbons agency to regulate the sector. The reforms included the ability for Pemex to create incentive-based service contracts with private companies. As a result, Pemex received greater autonomy under the reforms, including the ability to issue its own debt and establish more flexible mechanisms for procurement and investment. Recent financial results illustrate a net loss of $3.8 billion despite an increase in income from crude exports given strengthened oil prices. This compares starkly with announced profits from Brazils Petrobras and is indicative of Pemexs monopolistic status and use as a direct funder of the countrys economy. The majority of revenue is injected directly into the economy through tax. Production Offshore oil production in Mexico peaked in 2004 at around 3 million barrels per day. However, much of this production came from the Cantarell field which, as previously discussed, is now in decline. In 2010, the Cantarell complex produced around 0.6 million barrels per day, approximately 22% of Pemexs crude oil production. In the 90s Pemex began a number of projects to reverse the decline in the Cantarell complex. A gas lift system, installed in 2005, initially stabilised output at around 1 million bbls per day. The company also stepped up its drilling and maintenance programs. This included the construction of maintenance and workover platforms and the drilling of over 2000 wells all aimed at slowing the rate of decline on the Akal sector, which accounts for 90% of the Cantarell complexs output.

Efforts to stem production decline were successful, with flat output reported between 2009 and 2010 although the longevity of this plateau is likely to be short-lived without further measures to allow foreign involvement. A review of these incentive-based contracts was publicised in March for small onshore fields, with the intention of using this as a trial run prior to the potential for opening larger offshore production licenses within the Gulf of Mexico. Additionally, in May of this year, Pemex stated that it may issue bonds of up to $3 billion to the international market possibly from as early as May 16th. Pemex is also undergoing plans to increase production from other areas, some of which are detailed below. Despite these developments, it is likely that Mexicos offshore production will decline further, with Datamonitor predicting that crude production will fall to 1.6 million barrel per day by 2015 and 1.3 million barrels per day by 2020, dictated in part by recent cuts in potential production levels on the Chicontepec prospect. Pemex have recently reduced expectations of oil production here to 150,000bbls/day down from 660,000 publicised in 2007. Drilling Activity
50 45 40 35 Offshore E&A Wells

No. of Wells

30 25 20 15 10 5 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Exploration activity has significantly increased in Mexico over the last decade. In 2003, it is estimated that around 24 exploration and appraisal (E&A) wells were drilled offshore. This number rose to 44 through to 2011, a drilling level which is hoped to be maintained over the period to 2015 as Pemex seeks new prospects for development to counteract its declining production. The company plans to invest a reported $23 billion this year to boost oil production. Around 50 development wells are drilled each year, the majority of which are drilled in shallow waters, many of which are surface completed to fixed infrastructure. Notable subsea developments include Noxal, Lalail, Labay, Leek and Lakach all of which lie in the deepwater Coatzacoalcos basin. Pemex has recently announced plans to increase the number of drilling rigs under operation in Mexican waters and assuming successful this goes ahead (indications appear positive), the volume of both exploration and development activity may increase. In March 2011 the company agreed to lease seven jack-up drilling rigs from Noble Corporation with dayrates ranging from $58,000 to $100,000 per day. In addition, the company has also extended the leases of 25 rigs currently under contract, many of which are shallow water jack-up rigs similar to those leased from Noble. Pemexs plans to lease, rather than buy these rigs, reduces lead times and allows the company to step up its drilling campaign more quickly. In total, around 40 rigs are said to be required over the next few years. Pemex has recently announced plans to award $5 billion worth of platform construction contracts over the next two years. The fifty new production platforms will be installed on Campeche Bay on fields including Ayatsil and Tsimin. Pemex estimate that those two fields contain reserves of up to 622 million barrels of oil. Deepwater Exploration & Development Historically, the lack of foreign investment and expertise has limited Pemex to largely rely on shallow water prospects and only a limited volume of deep exploration and production has been carried out to date. However, the majority of prospective reserves lie in deep waters and it has been the focus of recent company strategy to explore and develop

the huge potential volume of hydrocarbons off the Mexican shelf. It is expected that follow recent announcements, Pemex will begin to offer deepwater drilling contracts to foreign players by early 2012, although the eagerness of foreign participation is yet to be determined. The NOCs desire to enter the deepwater market was recently confirmed with the signing of a five year contract of $850 million for SeaDrills brand new Pegasus ultra-deepwater rig. The first deepwater exploration started in 1999 with Chuktah-201 (513m) and Nab-1 (2000, 681m), but moved into a higher gear with Noxal (2005, 689m, also known as Deep Coatzacoalcos). This was the first of a series of ten exploration wells Pemex planned to drill in the area off Veracruz state. The Lakach-1 wildcat well (2006, 988m) is close to Noxal-1 is considered a much better proposition. Initial output from the Lakach field is expected in 2014 with its 1.4 trillion cubic feet of reserves likely to be developed in conjunction with satellite fields including Ahawbil, Labay, Piklis and Kuyah. Another possible deepwater development is the Lalail prospect which lies in water depths of 792 metres. Lalail is expected to come onstream in 2015 and may well be tied back to a floating production platform. During 2011 Pemex expects the Bicentenario rig to be drilling in water depths between 940 and 2,933 metres. The semi-submersible is managed by Industrial Perforadora de Campeche and is contracted to 2016 at $530,000 per day. In wake of the Macondo incident, the National Hydrocarbons Commission has unveiled new safety procedures for deepwater areas which follow similar guidelines set by the US government. Pemex must now prove that it has adequate insurance to cover any loss or compensation from a deepwater accident. While such incidents are infrequent, the variance in deepwater drilling experience between Pemex and a company such as BP is considerable. If Pemex wishes to avoid such a disaster, technical expertise from more experienced foreign players would prove valuable. Besides deepwater drilling, the construction and installation of subsea production and processing equipment is a key area where foreign participation is likely. In its deepwater strategy presentation, Pemex highlighted that the procurement of subsea trees, risers, umbilicals, flowlines as well as separation and injection systems is high on its list of priorities. FMC technologies has previously supplied subsea trees for the Cantarell project in 2007 while companies such as Aker Solutions, Cameron, Drill Quip and GE Oil and Gas have experience in other Latin American markets. It is possible that Pemex will follow a similar trend to Petrobras by offering multi-year frame agreements for certain subsea equipment. Pemex is likely to follow Petrobras trend of utilizing FPSOs as early production systems and long-term infrastructure on deepwater fields. However, unlike Brazil, Mexican yards do not have FPS construction capabilities; therefore such vessels will need to be sourced from foreign shipyards. Pemex currently operates the Yuum K'ak'naab FPSO on its Ku-Maloob-Zaap shallow water development which is leased from BW Offshore.

Conclusions Pemex is investing heavily in the exploration and development of its shallow water fields, despite significant production decline from many of its mature basins. It is the companys assets in the deepwater Gulf of Mexico, however, that hold the key to increasing future output. Given Pemexs relative inexperience in the sector, considerable foreign expertise will likely be required, especially in key areas such as deepwater drilling, subsea hardware and floating production systems.

ENDS
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