Edgar Rangel
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A Closer Look at Reserves Replacement

Tue, 01/22/2013 - 17:22

Q: New discoveries represented a 1P reserves replacement rate of less that 10%, how does Pemex reach a 1P reserves replacement rate exceeding 100% for 2012?

A: Because they have very large volumes of 2P and the 3P reserves, which are moving from possible to probable, and from probable to proved categories through reclassification. Reclassification of the large reserves from fields such as, Cantarell and Ku-Maloob-Zaap gives Pemex the opportunity to replace its 1P reserves. It is an interesting analysis.

Q: Does this mean that the exploration results in recent years have not been true success stories?

A: Not necessarily. You also have to take into consideration that this is the nature of the exploration game. Pemex has a decent success rate for its exploration wells, but the company has a budget similar to major international oil companies, and it allocates a similar amount to exploration. However, I have the feeling that the return on investment could be optimized by better allocating this investment.

Q: How would you do that?

A: Last year, Pemex E&P drilled two successful wells, from the exploratory standpoint, in ultra-deepwaters: Trión-1 and Supremus-1. A rough estimate of the cost of these two wells would be US$500-600 million, but Pemex has been able to incorporate no more than 500 million bbl 3P reserves, a small amount of 2P reserves, and zero 1P reserves. On the other hand, the onshore well Navegante-1, in the southern region, which was very expensive as it was drilled to great depth to reach the Jurassic formations, probably cost US$50 million, but might enable Pemex to incorporate around 300 million bbl of 1P reserves in the short term. If you look at the immediate return on investment then, one could argue that there is a significant amount of oil to be discovered in the basins, such as the Southeastern basins and the Tampico-Misantla basin. If you add shale oil, there is a lot more. Even with the same amount of money to invest in exploration, optimizing its allocation could add more value.

Q: The 3P reserves discovered in ultra-deepwaters will eventually be reclassified as 2P and 1P reserves?

Does this justify the investment of US$600 million? I agree with the fact that they could eventually turn into 1P reserves, but I do not believe this is inevitable. I would call the ultra-deepwater discoveries a success from the exploration side: we proved that the petroleum system exists, that the rock is impregnated with oil, and we will see production in several years. I would not stop the deepwater program, because it is focused on long-term production sustainability. Of course we have to continue, but is this the right share of the exploration budget to allocate towards these projects? It is a di·cult question because that is part of the discussion in the upcoming energy reform. We must create the optimum mix of investment, risk and reward: combining money from Pemex and other partners in the model that is comparable to deepwater exploration and production contracting models used globally, with joint ventures or some other type of partnerships. Forcing Pemex to make all the investment and take all the risks – geological and financial- is not the way the deepwater game is played in the world. When you are onshore or in shallow waters, you can do that: Pemex is one of the world’s leaders in shallow waters production, so they can manage these kinds of risks.

Q: To optimize the allocation of the budget, would you not drill for gas in deepwaters, shale gas or Chicontepec?

It depends, because there are di†erent levels of risk analysis and short-term and long-term objectives. If you want to maintain a production plateau, or increase production, then you also have to manage the future risk to invest in projects that hopefully would give you a lot of reserves and more production in the long-term. If you just concentrate on short-term results and net present value, then you would shut down every natural gas project – deepwaters or shales – and Chicontepec, and you would focus all investment on the big fields in the southern or marine regions, but we do have to balance it out. That is one thing, from the economic point of view. But you also have only one operator, and Mexico needs natural gas, so Pemex has to produce it. This means that it has to allocate investment budget to produce that gas, even though it is not the most profitable of its portfolio. However, the investment budget is allocated based on an investment attractiveness ranking of potential targets, which it topped by projects like Ku-Maloob-Zaap and Crudo Ligero Marino, while natural gas opportunities are ranked lower on this list. If this capital investment planning scheme would be applied strictly, then all these gas projects would stay on the bottom of the ranking and would never be developed. This is one of the reasons why Mexico has become a net importer of natural gas. Mexico has substantial natural gas reserves and huge natural gas resources, but we have problems bringing the molecule to the surface and its final destination.