Alfredo García
Executive Managing Director
Siete Energy
/
Expert Contributor

At the Crossroads of Simultaneous PEMEX Projects

By Alfredo Garcia Mondragón | Mon, 08/09/2021 - 13:01

Many hoped that the midterm elections of 2021 would result in almost immediate changes in the country’s energy policy. In fact, there has been no change in the policy that has characterized the first three years of the government of President Andrés Manuel López Obrador.

The post-pandemic scenario has also put pressure on the oil industry from the acceleration of renewable energy and not only wind and solar energy, but also the arrival of hydrogen. This scenario, and the decrease in the consumption of petroleum products, has made oil companies consider the closure of refineries due to the imminent arrival of electric and hydrogen cars.

Some operators have announced they will cap their oil production by 2035. This begins to reduce the appetite for access to new basins to continue with the exploration rates of five to 10 years ago.

Although operators in Mexico are fulfilling their workplans, there are two projects that are well worth analyzing separately: Zama and Trión.

The Zama field was discovered by Talos. It is in an area attached to PEMEX and the reservoir is structurally shared. Talos carried out the appraisal of the reservoir, with four wells drilled and a series of studies that will help the validation of the reserves in the reservoirs. This project in its original design could result in new production of 150,000 bpd.

In the strict sense of field unitization, PEMEX had to verify that the field is located in its block, it had to drill the delimitation wells and, thus, be able to carry out the field studies in a comprehensive manner. But not everything is in the studies; the studies must be validated through wells in the PEMEX area. Knowing the exact volume or at least the closest thing to reality is the starting point of a successful negotiation.

The decision regarding designation in favor of the state oil company by the regulator, or by a government representative supporting the decision, based on an operational analysis of both companies is not justified. In practice, it should be a decision between partners, in which both believe in synergies and seek to maximize the value of the field in question. This is international practice.

Although the preunification agreement between PEMEX and Talos could help to carry out further studies, these are not validated until they are drilled. Even so, the regulator approved the development of the project and gave control to PEMEX, with the justification that the NOC has experience, personnel and infrastructure. But such a decision does not align with the interests of international operators, which is not only to develop the field but to develop it at competitive prices, using best international practices at a cost and time in compliance with development plans.

In relation to the Trión field, a project that arose from a farmout in which operator BHP’s field appraisal provided better-than-expected results. In this project, the workplan’s proposed goals have been met.

BHP recently announced its intention to withdraw from the oil industry due to the imminent arrival of renewable energies and the pressure from investors to focus the company on greener projects and return to its origins in mining. PEMEX views this announcement with enthusiasm since it is aligned with the presidential idea of ​​the recovery of energy sovereignty. This is a mirage and must be seen from an oil business perspective with international practices.

BHP in Mexico clarified that its intentions are to end the development stage of the field but there are no clear intentions to continue with the production stage.

Initially, BHP might sell its interests in Trión, which would be subject to an approval process by the National Hydrocarbons Commission (CNH), Mexico's regulator. If there is an interested operator, it must comply with the technical, financial and legal requirements imposed in the bidding process, which limits the options of a potential partner for PEMEX. The NOC signed up for the tiger raffle, as the saying goes, and won (in other words, be careful what you ask for!). Although it seems like a joke, it is not. This process could take 12 to 24 months.

PEMEX cannot prequalify to develop and operate Trión on its own and it would be a high risk to face the amount of development required in the field. Also, the objective of this project was not only that a partner could take control of the field, but that there would be a transfer of technology and operational practices.

Now, as mentioned, the project not only has the challenge of development, it has the challenge of procurement, installation of umbilicals and submarine equipment, installation of floating SPAR or Semi equipment and anchored, conductive lines. Linked to this is the large investment, which exceeds US$11 billion, announced at the bidding stage. The challenges do not end there. Once the development stage is completed, the challenge of production will begin while also ensuring the flow of production.

These two projects, due to the volume of investment, are besides the strategic projects that PEMEX itself is developing: the Dos Bocas refinery (US$11 billion), the reconfiguration of the refineries in Mexico (US$1.5 billion) and the field exploitation plan, land and marine development of offshore fields to increase oil production and the development of the Ixachi field, projects with an investment of US$6.4 billion, plus the cost of debt servicing, which should be around US$8-10 billion annually. In this way, taking on the operation of Zama and Trión becomes a difficult challenge to solve without the resources to develop both fields. And that's not counting the required jobs it has on the various exploration and extraction assignments.

The improvement in the fiscal regime for PEMEX gives it the opportunity to deduct 100 percent of the exploration and development expenses of the field as well as the reduction of the shared utility right to 54 percent, meaning it would be able to maintain the investment flow for its projects, but that is still not enough for the size of the projects it wants to tackle simultaneously.

Photo by:   Alfredo García