Last updated: November 25, 2013 7:44 pm

Energy reform stirs Mexico’s deepwater opportunities

More than 50 miles after leaving the Mexican port of Veracruz, with nothing on the horizon but the odd fishing boat, the huge red Centenario rig with its imposing metal tower suddenly rises up out of the Gulf of Mexico.

Welcome to the offshore, deepwater Lakach field, which state-owned oil company Pemex believes holds a total of 4tn cubic feet of gas – equivalent to more than a year of gas supply for the UK. In the ancient Maya language, lakach means “everything”, and it illustrates all that there is to play for in Mexico’s energy reform, which plans to allow private investment in the sector for the first time since 1938.

The hydrocarbons potential from the deep Gulf of Mexico waters is huge for a country that has seen crude production decline by nearly a quarter in the past decade and which imports about a third of its natural gas. However, developing it is expensive for Pemex, which funds a third of the government’s budget via taxes.

The Centenario rig – one of four Pemex deep water exploration platforms – costs $500,000 per day to rent from private Mexican oil services company Grupo R. Pemex invested 69bn pesos ($5.3bn) in deepwater exploration between 2002-12, an expense it cannot maintain.

“The probability of commercial success in deep waters ranges between 20 and 50 per cent . . . This implies that for every 100 exploratory wells, there is a loss on average of between $14bn and $8.75bn in dry wells,” the government says in its energy reform plan document. “Naturally, this level of risk is unmanageable for public finances.”

Carlos Morales, Pemex’s exploration and production chief, reckons Mexico has total hydrocarbons potential of 160bn barrels. Proven crude reserves stand at around 10.36bn and gas reserves at 17.22tn cubic feet, according to the US Energy Information Administration. He says that to exploit this and meet growing domestic energy demands, there needs to be $60bn annual investment over the next 60 years – more than double Pemex’s expected investment of $26bn this year.

Clearly that level of investment is way beyond Pemex’s pocketbook – which is where the energy reform comes in. Mexico ejected foreign oil majors and nationalised the sector 75 years ago, but while Enrique Peña Nieto has made clear privatisation is not on the cards, he is determined to amend the constitution to open the door to new investment and fuel future economic growth.

Emilio Lozoya, Pemex’s chief executive, told the FT in August that to reach production forecasts of another 1m barrels per day, he expected extra investment by Pemex and other companies of some $10bn a year until 2025.

A vote in Congress could come as early as this month, and is expected to open the door to the return of multinationals like ExxonMobil and Royal Dutch Shell.

Despite hard bargaining among parties, it is expected to pass. However, the details will be nailed down in secondary legislation next year.

How attractive Mexico will prove to be will depend whether the government allows investors to book reserves and handle their own sales – as yet unclear. But Mexico’s little-explored deepwater prospects, as well as a shale formation that is a continuation of Eagle Ford, one of the richest in the US, are already whetting investor appetites.

“I think, for American investors, it’s a must to consider Mexico as a place to come,” Pemex’s Mr Morales says. Lawyers advising potential investors also see interest from Russian, Chinese and European companies. Pemex says it is the biggest producer of hydrocarbons in shallow waters, with output of 1.92m barrels per day. A key producer has been the Cantarell field which accounts for 40 per cent of the company’s reserves, but is now in decline.

The company has drilled 28 deepwater exploratory wells, of which 15 were successful, but gas is not due to start flowing from Lakach, which will be Pemex’s first producing deepwater field, until the end of 2015. “Out of the potential the country has – not just Pemex but the country – the contribution of deepwater could be as high as 30 per cent,” says Mr Morales. “Right now it is zero.”

Out of the potential the country has – not just Pemex but the country – the contribution of deepwater could be as high as 30 per cent. Right now it is zero

- Carlos Morales, Pemex exploration and production chief

In October, Pemex reached an eight-month crude production high of 2.54m bpd.

Aboard the Centenario, drillers joke that their workstations “look like a giant X-Box”. From what resemble high-tech black dentist’s chairs, they control the 40 metre-long pipes that connect together and attach to the drill bit, scanning a battery of screens and manipulating the gigantic machinery outside with joysticks. They have now almost reached 3,000m, just under a quarter of the well’s total planned 12,192m depth.

For the crews under contract to Pemex – some of them veterans of North Sea rigs, or exploration in Russia, Brazil or Nigeria – Mexico’s energy reform opens up the prospect of a wealth of new jobs in the years ahead.

Conditions are good in Mexico, they say: lobster and shrimp are fixtures on the Centenario’s menu, welcome luxuries amid the one month-on, one month-off routine of 12-hour shifts on a rig with about 180 people in the middle of nowhere. But hurricane season in the Gulf brings 15 metre waves lashing over the decks.

Pemex expects to continue developing Lakach solo, but Mr Morales sees the reform opening up “a whole set of alternatives” for future projects. Though Pemex has had the market to itself for decades, “we are going to be able to grow and be a stronger company”, he says. “We need to evolve.”

 Getting deeper: 6 points on Mexico’s offshore energy production

– Pemex’s solid offshore record in shallow water, for which it is the largest producer, should mean it won’t be out of its depth as it moves to deep water production.

– According to Wood Mackenzie, the energy consultancy, Pemex is already the third-biggest offshore producer worldwide (including both shallow and deep production). Here’s WoodMac’s overall global offshore production ranking for 2013 (thousands of barrels of oil equivalent per day):

a) ExxonMobil: 2,785.029

b) Saudi Aramco: 2,544.980

c) Pemex: 2,333.650

d) National Iranian Oil Company: 2,205.690

e) Petrobras: 2,129.770

– Pemex is the world’s fifth-biggest crude producer (behind Saudi Aramco, National Iranian Oil Company, China National Petroleum Corporation and Kuwait Petroleum Corporation) and ranks 13th in crude reserves.

– Mexico is the third-biggest crude supplier to the US, behind Canada and Saudi Arabia. Since 1938, Pemex has been the state monopoly in Mexico.

– Pemex says it is the most cost-efficient producer in the world. The cost per barrel of oil equivalent in 2012 was $6.84. The next cheapest is Norway’s Statoil, at $7.55. Pemex’s costs are half those of Brazilian giant Petrobras and 58 per cent lower than those of Royal Dutch Shell and BP. It also says its says its exploration and production costs are second only to Shell in the industry.

– The company exports at an average price of more than $100 a barrel, racking up exports last year worth $35.8bn (and the same amount in the 10 months to October this year). But Pemex pays nearly all its profits to the government in tax. Alone, it finances about a third of the national budget. Under the government’s energy reform plans, however, Pemex faces changes to its tax structure.

This article has been corrected since publication to reflect the fact 4tn cubic feet of gas is equivalent to more than a year of gas supply for the UK.

With additional reporting by Guy Chazan in London

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