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CNH Perspective on Pemex's Exploration Strategy

Wed, 01/22/2014 - 10:02

Q: What were the exploration highlights in 2013?

A: During 2013, PEMEX was essentially focused on deepwater, where discoveries take much longer than in shallow waters and onshore. Deepwater wells were drilled in the south, such as the Piklis-1DL delimitation well and the Yoka-1 exploration well, both of which yielded natural gas reserves. In the Perdido Fold Belt, PEMEX has made significant discoveries through the delimitation wells of Trión and Exploratus. PEMEX is also facing a very interesting challenge, with the first saline well to be drilled in Mexican history, the Vespa-1 well. This marks a huge advancement and an incredible technological challenge. But all the wells where PEMEX has made initial discoveries are still in the drilling process and will take time to develop. This is the main reason why PEMEX did not reach its reserve incorporation targets for 2013. PEMEX should keep working on the opportunities that have been identified in the Southeast basins, both onshore and in shallow water.

PEMEX should prioritize the meeting of short-term results in terms of reserve incorporation without losing focus on deepwater, even while knowing that it takes longer to develop reserves in that segment. The shortterm strategic priorities should revolve around production and long-term ones around deepwater exploration projects. PEMEX officials also have to balance out reserve incorporation to guarantee short, medium, and long-term prospects. Mexico has an advantage here as its portfolio can be balanced to fulfill objectives in all three timelines, across exploration, development, and production.

Q: In what ways could PEMEX optimize its strategy to better manage 1P and 3P reserve incorporation targets?

A: PEMEX should focus on opportunities in the Southeast basins, both onshore and in shallow water. It should prioritize the meeting of quick results for reserve incorporation. However, it cannot lose focus on deepwater, as its strategy needs both short-term and long-term elements. The short-term components should revolve around immediate production while the long-term ones should look to deepwater exploration projects. PEMEX also has to balance out reserve incorporation across short, medium, and longterm prospects in exploration, development, and production.

Q: What should be PEMEX’s exploration priorities in the next few years, and how does the company’s Round Zero proposal fit those priorities?

A: We have to abide by what the law indicates, which foresees PEMEX keeping all the areas where it has made investments and where it can prove it has the right technical, operational, and financial capabilities. PEMEX also has to prove that it has an exploration plan capable of reaching the development phase within three years, which can be extended by two years. Considering Round Zero as the first instance of this process, we hope that PEMEX will be able to work within the restrictions set by the government. PEMEX’s proposal might be too broad, since it includes areas where it is planning to partner with other companies. This goes beyond what the Energy Reform Decree indicated. The secondary laws will determine if PEMEX has the right to partner in certain fields and complement its investment prospects that way. They will also determine if such partnerships happen during Round Zero or during subsequent rounds. However, the Energy Reform Decree only indicates that the purpose of Round Zero is to award PEMEX with the areas and fields for which it can prove to have adequate technical, executional, and financial capabilities.

Q: PEMEX is requesting 31% of prospective resources, what was the rationale behind its proposal?

A: PEMEX requested 15% of prospective resources in shale reservoirs, due to the fact that it does not have the capabilities to develop these areas yet. Therefore it needs to learn and partner with other companies that have sufficient expertise. In deepwater, PEMEX requested some areas, specifically in Perdido, to partner with other companies and implement new technologies. PEMEX decided to keep most onshore and shallow water areas and fields, where it already has a renowned expertise. That was the rationale behind PEMEX’s proposal. What CNH needs to do now, as a state-owned organism, is to balance out the two objectives of the Energy Reform: give PEMEX enough areas and fields to enable it to become a productive enterprise of the state and cobble together an attractive mix of exploration areas and productive fields to attract companies that can bring additional resources and capabilities to develop the industry through the subsequent licensing rounds. The main logic behind Round Zero is matching PEMEX capacities with the fields and areas it requested, without including prospective partners for these projects. Our assessment of PEMEX’s proposal will happen under these terms.

Q: What kinds of challenges does PEMEX face in finding new oil reservoirs in deepwater, shallow waters, and onshore areas?

A: PEMEX has shown a significant advancement in exploration, specifically in onshore areas in the southeastern territory. It has done a great job in exploring the reservoirs in the Mesozoic area, specifically in the Cretaceous formations, where the best oil deposits have been found. One of the areas where we have the best exploration prospects for the future is the Tertiary formation, which contains proven reservoirs. However, they are not as important as the more profound areas where we have already conducted exploration efforts. On the other hand, there are several prospective areas for shale oil and shale gas located in Chihuahua, Coahuila, Tamaulipas, Nuevo León, and Veracruz, territories where we have already found unconventional reservoirs. It is clear that such reservoirs present a great opportunity for Mexico, since, besides containing gas, some of them hold substantial volumes of liquid hydrocarbons. One of the greatest challenges now facing the Mexican oil and gas industry lies in assessing the potential of these areas. PEMEX has scarcely invested in delimiting their potential, leaving a huge opportunity both for PEMEX and for other companies that may come to Mexico interested in the shale business. Although the largest companies may not be interested in them, specialized small and medium sized shale operators could find great possibilities here.

The largest number of deepwater wells has been drilled in the Perdido area. This is also the most explored region in US deepwater and has yielded very good results north of the border. We have followed certain structures where the Trion-1, Maximino-1, and Exploratus-1 wells are located but western part inside Perdido has been less explored, given the complexity of its saline structures. PEMEX already started drilling the Vespa-1 well there, but more sophisticated technology is needed to continue exploring and drilling in that area. Farther south, we have found geologically complex cases in the Cordilleras Mexicanas area but PEMEX has not invested much money in the seismic acquisition of data from there. This area stretches from the southern region of Perdido to the Lakach gas region but still requires several surveys, since the geologic risk is higher than in the northern region of Perdido. After that, we also have the deepwater gas region where PEMEX has made the Lakach, Piklis, Labay, and Yoka discoveries. This is less risky in geologic terms, and we believe PEMEX will probably keep this region despite the interest being shown by other companies. After this zone, we have a transition area towards another deepwater oil region in the Cuenca Salina area, which is characterized by its saline regions. PEMEX has already conducted some surveys here, specifically in the Han project area, but exploration opportunities remain. All combined, the Gulf of Mexico will remain to be a fascinating area for exploration.

Q: What is PEMEX doing to discover new opportunities in and around fields that it has explored exhaustively, such as Ku-Maloob-Zaap and Samaria-Luna, where new discoveries were recently made?

A: When a reservoir is discovered, the exploration process follows several stages to reach the development phase. The reservoir is delimited and characterized before the start of development operations. However, larger extensions are sometimes found for delimited reservoirs. Therefore, PEMEX can find new opportunities in the same geologic horizon or in different ones, both in less and more profound formations. For example, PEMEX is well-versed in exploring the Cretaceous reservoirs that consist of fractured limestone, which it has focused on in southeastern regions, both onshore and offshore. Yet, we have found new exploration and future production opportunities in Tertiary and Jurassic formations. To better exploit these opportunities, we need to carry out geophysical, geological, and geochemical tests in order to ensure that said formations contain hydrocarbons in a mature state. In shallow water we have found evidence of hydrocarbons in areas where PEMEX has drilled previous wells through less profound formations. This has allowed us to analyze these manifestations. For more profound formations, we need to reprocess seismic data to analyze the possibilities of finding reservoirs there. This is how PEMEX has found new possibilities in areas where it is already producing.

Q: How could PEMEX’s exploration budget for next year be optimized?

A: Its budget will be close to last year’s budget of MX$33- 34 million (US$2.5-2.6 million). This is not much compared to what other operators invest. We expect that PEMEX’s new ability to form partnerships will help it to increase the reach of its exploration budget. PEMEX would be successful if the current budget was dedicated to achieving short-term goals. In so doing, partnerships could be established to fulfill its medium and long-term goals. These two approaches could combine to form an ideal strategy.