​After years of decline, Mexico’s oil industry is making a comeback

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An energy industry analyst describes the successful first deep Gulf of Mexico auction—part of the country’s historic reform to its energy sector and the end of the 80-year monopoly of state-owned Petróleos Mexicanos (Pemex)—as “a great day for Mexico.”

Mara Roberts, a New York–based senior oil and gas analyst with BMI Research, says the auction of 10 blocks and the successful joint venture announced for the nearby Trion block, another deep Gulf of Mexico asset, are transformative for the energy reform process.

“The successful auction and the Trion partnership will attract tens of billions of dollars to Mexico’s deep offshore Gulf of Mexico,” she says, adding that the National Hydrocarbons Commission (CNH), which had overseen the four auctions held up to that point, estimates oil production will rise by almost one million bbls/d.

Trion, which is a proven resource discovered by Pemex four years ago, could be producing at least 120,000 bbls/d by 2025 with more expansion in the future, Mexican officials say.

Australia-based energy and mining giant BHP Billiton outbid BP to win the rights to partner with Pemex in Trion. BHP bid US$634 million to hold a 60 per cent interest and included a more generous royalty to the government. The government estimates it will cost US$11 billion to develop Trion.

But the successful joint venture wasn’t the only good news from the auction. The CNH successfully auctioned eight of the 10 deep water oil and gas blocks in the gulf.

Most notable was the success of China Offshore Oil, a division of CNOOC, in winning two blocks. Those blocks are located in the much-prized Perdido Foldbelt, where offshore production on the U.S. side of the border just a few kilometres north has been ongoing for many years. The two blocks hold an estimated 1.2 billion barrels of mostly light oil.

French energy giant Total also made three winning bids, teaming up with ExxonMobil for a block in the Perdido area and with Norway’s Statoil and BP for two blocks in the more gas-prone Salina Basin further south.

Other successful bids include ones from the U.S.’s Chevron, Japan’s INPEX and Pemex on one block, Malaysia’s Petronas Carigali and Mexico’s Sierra Offshore Exploration on two, and the U.S.’s Murphy Oil and Britain’s Ophir Energy on another.

Ironically, it was a disagreement with Standard Oil, the corporate predecessor of ExxonMobil, that led to the nationalization of Mexico’s oil and gas sector in 1938.

That nationalization is now being unwound as Pemex, faced with a debt of about US$100 billion and pension liabilities of about US$70 billion, can no longer finance increasingly costly oil and gas development in the deep offshore and unconventional onshore fields. Despite the certainty that the deep offshore holds many billions of barrels and tcf of gas, Pemex has never produced a drop from the area.

And its production from shallow Gulf of Mexico blocks, where the bulk of Mexico’s production has come from, has plunged. Pemex estimates it will produce about 1.92 million barrels of oil equivalent this year. In 2004, Pemex produced 2.12 million bbls/d from the shallow Cantarell Field alone. Peak production of oil and liquids was almost four million bbls/d in 2007, but exports have plunged by more than half since then.

Mismanagement by Pemex, along with the government having used it as a cash cow and getting more than 30 per cent of its total revenues from the company when production and oil prices were higher, left the government with no option besides attracting outside, private capital. Aside from not having developed the deep Gulf of Mexico, Pemex has done little in the way of unconventional oil and gas development. There have been fewer than 50 fracs in the whole country.

It has also invested little in its six refineries, now running at about half capacity. Last year, they processed about 848,000 bbls/d, down about 20 per cent from the previous year. With demand at about 1.67 million bbls/d, the country needs to import half of its gasoline.

With the peso having declined by about 20 per cent relative to the U.S. dollar in 2016—and with most of that gasoline being imported from the U.S.—prices at the pump have increased by more than 15 per cent in the last few months. In the past, when Pemex held a monopoly, the government subsidized gasoline prices. However, those subsidies are being withdrawn as the country opens up its fuel products sector to competition. That price increase caused widespread rioting late last year and earlier this year, suggesting the energy reform process will not be without complications.

The country, which is industrializing rapidly as it shifts from a power sector reliant on bunker fuel, hydro and growing renewables to natural gas, is also importing growing volumes of gas from the U.S.

Mexico consumes about 8.2 bcf/d of natural gas now, up from 5.7 bcf/d in 2005, according to a recent report from PwC. It imports about 2.73 bcf/d now, but demand is expected to grow to almost 11.6 bcf/d in 15 years, much of which will be fed by imports, which could grow to six bcf/d.

David Madero Suárez, the general director of Mexico’s national gas control centre, told Canadian companies attending a midstream trade mission last October in Mexico City that the country wants to encourage companies to develop more domestic natural gas and promote energy self-sufficiency.

Pablo Medina, a Latin America upstream research analyst with Wood Mackenzie, says Pemex hasn’t been focusing on gas because it hasn’t been profitable to do so.

“I understand the talk about energy security,” he says, “but Mexico has to look at the advantage of being able to import cheap gas from the U.S.”

Mexico’s shale gas potential is substantial, with estimates from the United States Geological Survey that it has 545 tcf of resources.

Meanwhile, Medina says the government learned from the less-than-enthusiastic response to earlier auctions—oil and gas prices started plummeting just as the auctions got underway in 2015.

“I think they had a tough job,” he says. “They had to call an audible in the middle of the game. They listened to the industry and acted.”

The first round, held in 2015, involved 14 shallow offshore blocks, and bidding only led to two awards, leading observers to call the process a failure. But a subsequent shallow offshore round that led to the award of three out of five blocks offered was deemed a success. Another highly successful land-based auction in December 2015 that led to the award of 25 blocks of 25 offered was touted as a huge win for the country.

Canadian company Renaissance Oil won four of the land-based blocks, and another Canadian firm, International Frontier Resources, won another with a Mexican partner.

Those earlier auctions were seen as somewhat of a rehearsal for the deep offshore bidding since most of Mexico’s oil and gas elephants are thought to be in the deep offshore. However, Medina says that doesn’t mean there isn’t significant potential onshore in the country.

“There are areas where producers could use tertiary development technologies, where production could rise from 500 or 1,000 bbls/d to 40,000 or 150,000 bbls/d,” he says.

The government recently announced it will make as many as 160 partnerships available to industry in onshore, shallow ocean and deep ocean blocks held by Pemex, largely as a result of the success of the Trion joint venture.

Medina expects those joint ventures to be bundled geographically, with perhaps 20–30 offered at one time during upcoming auctions. One will be in June for 14 larger onshore blocks.

With the four auctions in round one complete, the Mexican government announced plans for auctions to be held this year as part of round two.

The first will be on March 22 and include 15 shallow blocks in the southern part of the Gulf of Mexico.

The second auction will be in April and include 12 onshore oil and gas blocks in 39 fields that have already been explored. Nine are in the Burgos Basin, the country’s main source of non-associated gas; three are in the Chiapas area in southern Mexico; one is in the southeastern basin in the states of Tabasco and Campeche.

The third auction will be in November and include 14 onshore blocks in the Burgos and others in the highly prospective Tampico-Misantla region. Prospective resources there are 251 million barrels of crude equivalent.

The second round will be of great interest to the two Canadian companies that have won blocks previously in Mexico, especially the one that was the first non-Pemex oil and gas producer in the country. Both Vancouver-based Renaissance and Calgary-based International Frontier, which is partnered with Mexican petrochemical company Grupo Idesa as owners of Tonalli Energia, plan to become major players in land-based oil and gas development.

Renaissance is already producing 1,700 boe/d from three blocks in Chiapas, which it won in December 2015. Its three blocks—Mundo Nuevo, Topen and Malva—have collectively produced 48 million boe and still have an estimated 140 million boe in place.

In addition, last year it won the rights to develop the Pontón concession in the Tampico-Misantla area, which straddles the states of Puebla, Veracruz and Hidalgo. It is considered to be the country’s most promising unconventional oil and gas play. Kevin Smith, Renaissance’s vice-president of business development, said the Pontón was valued because it “gives us exposure to Tampico-Misantla.”

The highest price in the basin is in the Chicontepec field, which covers 3,800 square kilometres. It has been estimated that it has recoverable reserves of almost 59 billion boe in place. Pemex has spent billions to develop the field but has only achieved production of about 68,000 bbls/d.

On Jan. 11, 2017, Renaissance announced a deal for increased exposure to that field, which Smith called a company maker. Renaissance said Russia-based Lukoil, one of the world’s largest oil and gas producers with more than three million boe/d of production, has chosen it as a partner to develop the 230-square-kilometre Amatitlán block, which is adjacent to the Pontón.

The block, which was discovered in the 1960s and has produced 175,000 barrels of light oil, is estimated to have 4.2 billion barrels of crude and 3.33 tcf of natural gas in place.

Lukoil chose Renaissance as a partner, said Smith, because of its expertise with unconventional resource development.

Nick Steinsberger, a drilling and completions engineer at Renaissance, and Dan Jarvie, a consulting geochemist, are pioneers of shale oil and gas development in North America. They were the technical team that first developed the prolific Barnett Shale in northeastern Texas.

Smith said the Pontón, which has produced 800,000 barrels in the past, will also allow Renaissance to deploy unconventional resource development technology.

“The shale trend [in both areas] is similar to the Eagle Ford,” Smith said. “We were able to take core samples to Texas to analyse them, but it’s three times as thick a formation, so it will be very prolific.”

Renaissance acquired the 25 per cent interest in Amatitlán from investment fund Marak Capital. It has an option to purchase a stake of up to 62.5 per cent and will be the lead operator.

Smith said the partners plan to drill six to 10 wells on the block over the next year or two at a cost of US$1.5 million to US$2 million per well. It also plans to drill on its adjacent Pontón block.

Renaissance plans to participate in upcoming auctions and consider other farm-out opportunities, Smith said.

Steve Hanson, the president and chief executive officer of International Frontier, which won the rights to develop the 7.2-square-kilometre Tecolutla block in the Tampico-Misantla Basin, says his company also plans to participate in upcoming rounds and to look at joint ventures.

Although media interest centred around the deep offshore potential “the onshore opportunity is huge,” he says.

International Frontier is most interested in acquiring rights to develop blocks adjacent to or near its existing block, where it plans to drill two wells and perform one or two workovers this year.

Peak production there was 900 bbls/d, but the company believes it can exceed that substantially using Canadian unconventional resource development technology.

Both Hanson and Smith say there is ready access to skilled oilfield workers in the region, development costs are much lower than in Canada or the U.S. and the potential is beyond what can be expected in either country.

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