Juan Carlos Zepeda
View from the Top

CNH Perspective on Industry Development

Tue, 01/22/2013 - 14:37

Q: What are the main challenges that the Mexican oil and gas industry is facing, and what are the roles of PEMEX and the private sector in addressing these challenges?

A: The definition of the strategy for hydrocarbons exploration and production must start by recognizing the strengths and weaknesses of Pemex, and the opportunities and threats that exist in the industry nowadays.

No company in the world aspires to be leader in the operation of all types of oil and gas fields. Companies specialize in deepwater, have competitive advantages in unconventional resources, or focus on non-associated gas. It is not feasible to oblige Pemex to keep exploiting its shallow water oil reserves successfully while also requiring the company to e·ciently exploit deepwater and unconventional resources such as shale gas, shale oil and Chicontepec’s oil. Pemex must build on its strengths and allow participation of third parties in some other areas. Forcing Pemex to excel on all fronts means losing competitiveness in those areas where it has the greatest potential, and it jeopardizes the company’s ability to reach its goals.

Pemex is the world’s number one producer of oil in shallow water. In the 1970s, it was a pioneer in drilling shallow water wells and it remains the most active company in this area today. Historically, 61% of oil production in Mexico has been extracted from shallow water fields, which represents 24.021 billion bbl of 39.695 billion bbl produced until January 1, 2012. Shallow water production is concentrated in the South-East Region, which has produced 99% of the marine production (23.709 billion bbl). In numbers, 59% of 2P reserves and 51% of 3P reserves are concentrated in the South-East Region. In light of this, Petróleos Mexicanos has clear strengths in areas with high commercial potential. Therefore, this is the area in which Pemex has to focus its financial and human resources.

Regarding Mexico’s deepwater, ultra-deepwater and unconventional resources – tight oil, shale gas and shale oil – I believe they must be developed via third party companies whose strengths lie precisely in these types of fields. Chicontepec is without doubt the project where Pemex weaknesses have been revealed; to date this project has not been able to meet the high expectations that we had for it. For every US$100 invested in deepwater exploration 14 barrels of oil reserves have been discovered, while in shallow water for the same investment 147 barrels of oil reserves have been discovered. For shale gas and shale oil, the scenario does not look any better. Despite Pemex’s regular exploration activities in the northern part of the country, these unconventional resources require technology, techniques and expertise that Pemex has not yet fully acquired. Mexico has su·cient oil and gas resources to increase hydrocarbon production; nevertheless, Pemex must invest its resources in its strongest areas – such as shallow water – and leave projects such as unconventional resources to specialized third parties.

The National Hydrocarbons Commission (CNH) was created as part of Mexico’s 2008 Energy Reform, and was installed on May 20, 2009 via the Presidential appointment of the five commissioners that form its governing body. Today, the CNH is headed by President Commissioner Juan Carlos Zepeda Molina, and four commissioners: Edgar René Rangel German, Guillermo Cruz Domínguez Vargas, Alma América Porres Luna, and Néstor Martínez Romero. Their mandate is to regulate and supervise the exploration and exploitation of Mexico’s hydrocarbons by ensuring that projects of Pemex and its subsidiary companies are performed in accordance with the following objectives: (1) optimizing the recovery factor and maximizing long-term production of hydrocarbons, (2) ensuring a reserves replacement rate that guarantees Mexico’s energy security, (3) using appropriate technology for exploration and extraction of hydrocarbons, (4) ensuring environmental protection and sustainability during hydrocarbon exploration and exploitation, (5) conducting activities in line with Mexico’s industrial safety standards, and (6) minimizing flaring and venting of gas and hydrocarbons.