Deepwater dreams
  from: Offshore Engineer
  by: Marshall DeLuca
  Wednesday, October 26, 2005

Despite mounting internal and external pressures, Mexico is not likely to open its doors to foreign investment in offshore production any time soon. Marshall DeLuca reviews the current state of a market that continues to stay hot for some but untouchable for others.

The problems begin, says analysts Wood Mackenzie, with the fact that while Mexican oil production may be at an all time high, it is also at its peak and within the next two to three years decline will begin. The chief culprit behind this demise is the mainstay of the country's supply for the past 25 years, the giant Cantarell field located in the Bay of Campeche.

This field, which ranks as the world's second largest, provides more than 60% of the country's oil at a rate of over two million b/d. But this rate is expected fall to about half that level by 2008 leaving a gaping hole that will need to be filled.

In response, Pemex expects to add around 800,000b/d of oil from the Ku-Maloob-Zaap project and another 250,000b/d from the 18-field Litoral de Tabasco plan by the end of the decade (see Feature Picking up Cantarell's slack).

But according to WoodMac's production forecast, which takes these projects into account, they will be insufficient to counteract the decline of Cantarell.

'Pemex recognizes the problems that Mexico has and the potential problems coming up in the next few years,' explains Matthew Shaw, WoodMac senior Latin America analyst. 'There are a few other developments that might enable the country to maintain production for a little bit.'

However the bigger problem, he adds, is that there are no big new discoveries out there waiting to be developed, though there is an easy answer.

Deepwater holdings
The key to Mexico's future, says nearly everyone, is the deepwater. Last August, Pemex CEO Luis Ramirez Corzo, who was then E&P director, said following a threeyear $4.55 billion exploration campaign, the country's deepwater, based on a conservative estimate, holds untapped reserves in the range of 45 billion barrels, four-fifths of which remains unexplored.

'All the indications are that the deepwater is very prospective,' agrees Shaw. 'There are not many untouched basins around the world. In fact I can't think of any untouched basins around the world, with such high potential that remain unexplored. Add that to the fact that it is on the doorstep to the US, it is a very stable political country with a long history and good international relations, and you can understand why oil companies would love to be able to access that basin.'

But here again, Mexico runs into problems. While Pemex would love nothing better than to tap these reserves, it has very publicly admitted that it possesses neither the capital nor the technological expertise to do so in deepwater. The company has said it plans to invest $15 billion a year for the next 15 years to gain this knowledge, but several outsiders doubt this would be enough, including ExxonMobil exploration president Tim Cejka who felt it would take 40 years and cost upwards of $250 billion.

Political roadblock
On the other hand, foreign companies with this capital and know-how would like nothing better than to help Mexico access these reserves in return for a share in the production. However, according to the Mexican constitution, foreign ownership of the country's reserves is forbidden.

'If Pemex is going to bring in private companies, the only way constitutionally they can do that is through service contracts,' adds Shaw. 'But under these service contracts the contractor cannot actually have its profits tied to oil or gas production.

'Now if you are Shell, BP or Exxon, do you want to get paid for just drilling some wells?

'What they need are reserves to book, produce those reserves and get the upside from them. So you have a kind of fundamental stumbling block. It is no one's fault; it is just the way the constitution is written at the moment.'

While there is a growing initiative supported by Pemex senior management to reform these protectionist clauses in the constitution, Shaw and most other industry observers feel change any time soon is not likely, especially given the 'good times'.

'The writing is not yet on the wall except for those within Pemex who have been forced to look three or four years down the road,' he says. 'It's hard to see things changing rapidly in Mexico. Those within Pemex and those within the government who do see the problem coming are getting more and more vocal and more and more practiced in their arguments and maybe they can change public and political opinion, but nobody I know is expecting a quick change.'

Another catalyst that could swing the vote decisively one way or the other is the presidential election to be held next year with the victor taking office in January 2007.

'Whoever is the president at that point will set the scene for the direction that Mexican energy reform goes for the next five or six years after 2007,' Shaw says. 'That is going to be the crunch time because very soon after that person takes office, oil production is going to start going down and who knows what might happen to oil prices. So very quickly into that new presidency, there may be some bad news beginning to hit Mexico.'

At the moment, the current frontrunner is the former mayor of Mexico City who has publicly opposed any privatization of the energy sector.

Still trying
But Pemex is not sitting idly by. The company has been working to establish some sort of service contract to entice foreign participation in the deepwater without breach of law and expects to have something to offer the industry as early as next year, though Shaw feels that it will likely be very unattractive.

The company is also actively trying its hand in deepwater and remains positive. Late last year the company drilled its first deepwater discovery, Nab-1, located in 2200ft of water and thought to hold between 100 million and 200 million barrels of heavy oil and plans are on the books to drill another eight to ten deepwater wells in the next two years.

'We have experience, but not in the deepwater so we will need help from service companies and others to gain that knowledge,' says engineer Ricardo Palomo Martinez, Pemex E&P subdirector of the drilling unit and well maintenance for the southwestern marine region. 'But we will do it.' OE

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