Contracts Inspire Optimism, But More To Be Done
BMI View: The recent awarding of contracts at the country's mature oilfields is an important step towards moderating the country's falling oil production and could pose a modest upside risk to our forecasts. At the same time, comprehensive reforms are required to create a more sustainable future for the energy sector. Yet, the political challenges facing Mexico's new president may prevent these reforms from being made in the near term.
Mexican state-owned Pemex has awarded oilfield services company Petrofac the contract to further develop the Arenque offshore oil field in the Gulf of Mexico (GoM). The company will drill horizontal wells and utilise secondary recovery techniques in order to boost production from the current rate of 5,000 barrels per day (b/d) and to improve the field's low recovery factor of 11%.
Pemex had previously failed to award contracts for the Arenque and Atun fields in June, primarily due to the low rates that Pemex was willing to pay to develop the fields. Whereas Pemex had set its maximum rate at US$7.25 per barrel (bbl) for Arenque, the four companies that had placed bids - Dragados Offshore de Mexico, Burgos Oil Services, SAIMEXICANA and Petrofac Mexico - offered between US$10.78/bbl and US$24.00/bbl. For the contract that was awarded in August, Pemex and Petrofac have agreed on a US$7.90/bbl rate.
Petrofac has also been awarded two other Mexican contracts in the past year. In August 2011, the company clinched rights to develop the Magallanes and Santuario onshore blocks in Tabasco State, which have been in operation since the 1960s and have a combined daily production rate of 14,000b/d. The other contract, which is shared with Schlumberger, was won in June 2012, for the Pánuco Contract Area, which contains four mature onshore wells with total combined production averaging 1,500b/d. The two companies are expected to begin field operations at Pánuco in early 2013 ( see our online service, June 20 2012, 'Lessons To Be Drawn From Second Round').
The following table shows the results of the International Bidding Round in June, as well as Petrofac's Arenque contract.
|San Andres||Veracruz||Onshore||Monclova Pirineos Gas/Alfasid Del Norte||US$3.49/bbl|
|Tierra Blanca||Veracrus||Onshore||Monclova Pirineos Gas/Alfasid Del Norte||US$4.12/bbl|
New Investment Poses Moderate Upside Risks
Although it is too soon to precisely gauge the extent of production increase from these investments, BMI believes that production growth from these mature fields poses a moderate upside risk to our forecasts. Our current view, however, is that this could slow the current rate of decline, but will not be able to reverse a downward trend in output.
For now, we are forecasting an output of 2.95mn b/d for 2012, which will then decline at an average rate of 2.5% through to the end of our forecast period in 2021.
|Draining Reserves, Falling Production|
|Mexican Proven Oil Reserves, Oil Production, Oil Consumption|
Mature Fields: Just One Part Of The Problem
The Mexican government and Pemex are keenly aware of ongoing troubles in the country's oil sector. Although oil revenues account for approximately 33% of the federal budget, a lack of exploration and production (E&P) investment, combined with rapidly declining production at the country's mature fields, has led to a considerable fall in total oil production and weakened the oil sector.
Despite this, the state only granted Pemex around US$18bn for exploration and production (E&P) investment in its 2012 budget - a figure well below the amount suggested a recent report by Mexico's National Hydrocarbons Commission (NHC). According to the report, investment of at least US$22.86bn a year would be needed simply to sustain output at around 2.8mn b/d.
A considerable increase in Pemex's E&P budget, along with the establishment of partnerships with foreign companies and an improvement of the overall business environment, will be critical to reviving the oil sector.
Change In Policy Generates Long-Term Optimism
BMI believes that much needed oil reforms will occur over the medium and long-term. Yet swift changes to policy in the wake of the July 2012 presidential elections will face significant headwinds.
President-elect Enrique Pena Nieto ran on a platform which emphasised the need for oil sector reform, including deeper constitutional reform to lure foreign investors into investing in the country's deepwater Gulf of Mexico (GoM) acreage. However, the results of the senatorial elections denied Pena Nieto's party, the Institutional Revolutionary Party (PRI), the two-thirds majority necessary to enact constitutional changes for the substantial reform of Mexico's energy sector. Consequently, moves to overhaul the current business environment may not be as successful as hoped, particularly in the short term. Mexico cannot afford to delay the reform for too long if it wants to avoid a steep decline in its upstream segment.