Low oil prices hamper Mexico’s deregulation, limit potential Cuban development

Jorge R. Piñon

Mexico is the world’s 10th largest oil producer and has some of the largest reserves in the Western Hemisphere. Pemex, which for 76 years had a constitutionally mandated monopoly, lacks the funds and technology to exploit deepwater oil. The monopoly over oil production, refining and commercialization was scrapped by the Mexican Congress last year.

Jorge R. Piñon, a Cuban-American energy analyst at the University of Texas and a former Amoco executive, told World Oil that plummeting oil prices are severely hampering the deregulation process. “Mexico’s upstream development projects, particularly in the deepwater Gulf of Mexico, are long-term projects that would take between three and seven years to monetize,” Piñon said. “Therefore, the question for investors is not where the price of oil is today, but where is the price of oil going to be five to seven years from now?” 

“Conventional wisdom seems to indicate that a range of $75-to-$85/bbl will be an acceptable average reference price to make deepwater projects profitable. The fact that many U.S. Gulf of Mexico development areas, such as Perdido, are transboundary prospects contributes to making Mexico a very attractive long-term investment,” said Piñon.

 The funds generated by the auctions of rights to the first 23 oil fields that are being offered to investors, estimated at $21 billion, should start flowing into Mexico by the fourth quarter of this year, Energy Secretary, Pedro Joaquin Coldwell said. The drop in oil prices has forced Mexico’s government to slash $8.4 billion from its 2015 budget, with most of the cutbacks expected to come in the energy sector. 

CUBA’S OIL SECTOR DOLDRUMS 

Oil exploration in Cuba remains unaffected by the new American-Cuban détente, Piñon said, “Instead, five failed deepwater prospects in 2012, $50/bbl oil price, and new competition from less-contentious oil players limited activity. Hopefully, in the next five years, oil at $75/bbl or more would allow new exploratory prospects to ‘prove’ Cuba’s possible deepwater oil richness.”

“Cuba faces a number of hurdles toward a possible second round of deepwater, Gulf of Mexico, oil and gas development,” said Piñon. “The estimate by the U.S. Geological Survey (USGS) of 4–5 Bbbl of undiscovered oil and gas resources still has to be proven, particularly after five failed attempts in 2012 by international oil companies, which spent a total of over $500 million on five dry holes. High capital cost, unproven geology, low oil prices, along with competing markets, all make Cuba a very difficult area for upstream oil and gas investment.”

“They are shifting their focus and efforts to the known coastal reservoirs, rather than to the unknown offshore deepwater reservoirs,” Piñon added. “Cuba’s heavy crude fields have a recovery factor of about 10%, due to the viscosity of the crude, and the porosity of the rock formations from which it is extracted.”

“If successful, Cuba could increase its present oil recovery factor to maybe between 17% and 20%, adding an additional 12,000 to 15,000 bpd of new production, if not more, to their current level of approximately 50,000 bpd. The U.S. commercial embargo against Cuba can be lifted only by the U.S. Congress. This means that no action is going to be taken until after January 2017, when a new administration and Congress debate the issue,” Piñon concluded.