Pemex’s 20 ‘priority’ fields won't sustain output

Becoming dependent on Pemex’s 20 “priority” fields could induce a sustained decline of Mexico’s oil sector, an expert said.

The director of energy consultancy GMEC, Gonzalo Monroy, said at the Energy Mexico 2020 conference that “there’s no field in the Pemex Exploración y Producción [PEP] portfolio that’s going to change the pathway.”

He added, “that’s the fundamental point. These 20, that’s all there is.”

The “expectations are so elevated,” Monroy said of President Andres Manuel López Obrador's (AMLO) strategy to turn around declining oil output. “The results of those 20: only four are in production. The output [from the four], is practically a fraction of what they were projecting,” Monroy said.

ACCELERATING DECLINES DEMAND NEW STRATEGY

The proximate cause dates back two generations, with an idleness to devise a national energy strategy and invest in diversifying output following the easy oil days after the massive Cantarell field entered production.

Cantarell was a game-changer, a single well producing so much oil up until the 1990s that it eclipsed national output of Norway or Brazil.

But its decline over the past decade has not been offset by the implementation of a coherent oil and gas strategy.

The national energy reform of 2013/2014 brought in foreign operators that should continue to deliver dividends through 2048, according to CNH estimates.

But efforts by the administration of Enrique Pena Nieto did not check Cantarell’s output problem. Whereas the cost of oil recovery from the field in 2007 was US$4.15/b in 2007, it was nearly US$38/b in 2018.

Now, AMLO has canceled more energy auctions through 2021, effectively giving up on what Monroy called the “free money” of private investors coming into Mexico, and depriving Pemex of the technology flows it needs to harvest oil from either the deep waters in the Gulf of Mexico or through fracking onshore.

“They [Pemex] are not learning anything of value for the long-term,” Monroy said, and mentioned a cutoff between the private technology that Pemex needs to produce oil this decade and the demand set by the government. 

HIGH-RISK STRATEGY

Monroy said AMLO’s support for Pemex is the latest strategic error by a Mexican government. 

Despite massive capital injections last year, and a permissive regulator - CNH approved PEP’s plans at 17 of the 20 priority fields in 2019 - the company has already fallen behind. 

The output from the four of 20 fields where Pemex is producing oil is minuscule, averaging less than 1,600b/d, according to November data. 

More worrisome, Monroy identified a set of factors that attest to technical incapacity that would prevent getting other fields rapidly online and ramp up output over the decade. 

Of the 28 wells planned across the 20 priority fields last year, Pemex only drilled three, “a catastrophe” in terms of exploration, Monroy said.  

Meanwhile, private operators have quickly transitioned from exploratory wells to production, opening a divide between the efficiency of private firms and Pemex that Monroy said went counter to the “oil narrative” of the AMLO government. 

That narrative, which aims to situate self-sufficiency in oil production as necessary for Mexico’s prosperity, misunderstands the reality of global energy, not only cutting Mexico off from foreign investment but leading the country to underestimate the value of importing gas from the US at record-low prices. 

“It’s very probable that 2020 will be a year of important discoveries by private operators,” Monroy said, pointing to Shell’s current drilling of the Chibu-1 well in ultra deepwaters, as well as exploratory wells planned this year by BP. All these activities stem from contracts won in 2018.  

If anything, that will only increase the gap between private firms and Pemex, and for Monroy government rhetoric is at odds with reality. 

“There’s no communication between the government and operators in the fields,” Monroy said, which prevents feedback about technical needs and likely output from reaching the higher echelons of the government.