Mexico considers opening waters to International oil firms


Mexico considers opening waters to International oil firms


MEXICO -- As Mexico marks 75 years since it expropriated the oil industry from foreign companies, President Enrique Pena Nieto's government is working to overhaul the state-run sector to attract private investment to complex offshore resources.

At an event Sunday to mark the expropriation, Mr. Pena Nieto warned that if Mexico doesn't fundamentally transform the energy industry quickly, the country could be energy deficient by 2020. "That scenario is grave because it will limit our economic growth and the possibility of improving the lives of millions of Mexican families" he said.

The result is that Pemex is turning to the Gulf of Mexico's deep waters after eight years of declining output in the country's "easy oil" shallow waters of the southern Gulf.

Several hundred miles offshore from this Mexico-Texas border city, Pemex's Bicentenario rig is drilling in the hopes of finding a big crude oil deposit to add to a couple of nearby finds.

But how Pemex gets the oil out of the ground thousands of meters below the rig is complicated. The company is barred by Mexico's constitution from forming joint ventures (JV) with the international oil companies that drill on the United States side of the Gulf and doesn't have the expertise and resources to extract the deepwater oil on its own, analysts say.

Pemex faces a similar problem with oil and gas in sedimentary shale-rock formations, which often requires fracturing the rock with water and chemicals. Mexico likely has Bboe in shale and deepwater, but no commercial production in either.

Industry consultants say international oil companies would like to form JV with Pemex in which the foreign companies share the investment and the oil from the economically risky business of deepwater production. But Mexico's history of false starts on oil sector overhaul has made a lot of skeptics.

John Padilla, MD of IPD Latin America, says this time could be different, especially after Mr. Pena Nieto last week proposed to take on Mexico's top billionaires in the telephone and television industries. But given the nationalism associated with oil, Mr. Padilla says, major changes in the industry will be more difficult than in telecommunications.

Chevron and Shell say they welcome the possibility that Mexico will open up to outside investment. BP declines to comment.

Discussions among policy makers are still in preliminary stages, with a proposal likely months away. One idea under discussion is to follow a model used elsewhere, in which the state arranges with private companies to extract the oil and pays them market prices minus hefty royalties that reflect the country's continued ownership of the asset, several people with knowledge of the talks said.

But international oil companies need to book reserves to satisfy shareholders that future revenue is on tap. And Mr. Padilla says that might not be possible without a change to Mexico's Constitution, which holds that the oil is the country's property.

Other people in the industry say that hurdle can be overcome without a constitutional amendment. Under an "economic interest" accounting system, for example, companies can book reserves even if they don't own the oil, if they are involved in the production and if the financial outcome is tied to production.

George Baker, a Houston oil consultant who runs, remains a skeptic that international investment will arrive. President Pena Nieto's proposal "is going to be some intermediate step that can be backtracked on, because it's so politically hot" Mr. Baker says. "The rule in Mexico is that you don't stick your neck out on oil reform."

Pemex produced about 2.55 MMbopd last year, down from roughly 3.4 MMboopd in 2004. The decline in the huge Cantarell complex in the southern Gulf was responsible for much of the slide, and analysts say Pemex needs to explore and produce from unconventional sources of oil and gas quickly or face becoming a net energy importer, perhaps by decade's end.

In deep waters of the Gulf, Pemex's Bicentenario rig, with its international crew and high-tech equipment, is an example of what Pemex can do on its own, company executives say.

Chief driller Glenn Kroston, who comes from Manchester, England, and works on contract, sits in a cushy chair in a climate-controlled room with what look like videogame controllers. He watches monitors that show what is happening thousands of feet below the seafloor. "It's all swinging and dancing" he says of his working conditions. "It's the best of the best."

The floating platform is equipped with several motors, and computers and satellites keep it in a fixed spot during drilling. But Pemex only has a few such state-of-the art platforms, all of them for exploration, not production.

Bicentenario and a second Pemex rig are drilling in a geological formation known as the Perdido, meaning "lost," that already is producing oil on the United States side.

Carlos Morales, who heads Pemex's exploration and production unit, says there could be up to 27 Bbopd on Mexico's side of the deepwater Gulf. Pemex is hoping to discover several oil deposits in the Perdido, which would make production commercially viable, he says.

The question isn't whether Pemex can exploit deep waters, but how fast it can do so, Mr. Morales says. "The velocity with which we want to extract the resources is what dictates the need for having one, two, three, four, five players."

Dow Jones Newswires

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