Pablo Medina
Latin America Upstream Research Analyst
Wood Mackenzie

Deepwater, the Key to the Future of the Industry

Wed, 01/20/2016 - 13:22

The new reality of US$40-50/b is forecasted to remain, and in this likely scenario, Pablo Medina, Latin America Upstream Research Analyst at Wood Mackenzie, believes that “PEMEX’s survival will very much depend on its ability to adapt and upgrade its portfolio by focusing all of its attention on its core business areas”. In the previous market environment, it was compulsory for the national oil company to be an expert in all areas of the hydrocarbons industry, but the Energy Reform has wiped out this obligation. Medina sees three non-core upstream areas in the NOC’s operations.

“Given the fast growing amount of cheap gas imports from the US, it is not in PEMEX's best interest to continue its heavy investments in areas that produce non-associated gas such as Burgos, Lankahuasa, or Lakach,” he reasons. “The marginal fields in Tampico-Misantla, which represent the tail of PEMEX’s portfolio, are a good example of this. We already saw in R1-L03 that small companies are eager to access such assets. Finally, Chicontepec has yielded minimal production compared to the significant investment in the tight-oil play arena. PEMEX would be much better off establishing various partnerships with experienced tight-oil producers to unlock the field’s considerable resource base. A leaner PEMEX should focus on fields in shallow water and larger onshore fields, in both of which it has noteworthy experience.” In his mind, the NOC could gain the expertise it needs in deepwater projects through joint ventures in the long term, as it seeks to tap the tremendous potential of the deepwaters of the Gulf of Mexico.

“PEMEX’s involvement in the midstream could also be revised, given the company will become leaner, and in line with this change, will focus its attention on the upstream segment,” Medina adds. The NOC’s midstream presence has decreased both through the sale of stakes in important pipelines and as a result of CENAGAS’s takeover of many of its midstream assets. Medina also comments that the eventual liberalization of refined product prices may well force PEMEX to re-assess which markets are still attractive enough for it to participate in.

When asked about the different improvements that Mexico can expect from the upcoming deepwater bidding round, Medina talks about Round One’s biggest prize. “The untapped potential is immense,” he prompts doubtlessly. “On the US side of the Gulf of Mexico, no less than 1,200 deepwater exploratory wells have been drilled, but on the Mexican side, unfortunately there have been fewer than 40. The participation of the most experienced deepwater operators in R1-L04 will be vital for the new industry’s rapid development.” Nevertheless, he reminds that it is essential to take into consideration the long lead times typically involved in these projects, which he thinks will delay any contribution to Mexico's oil production until the mid-2020s at the earliest. While waiting for the impact of deepwater operations to reach the industry as well as the economy, Medina believes that results from farm-outs could fill the gap, considerably boosting production in the medium term.

Another industry impacted by the low price of oil is without a doubt the unconventional one, fields from which are expected to be tendered in R1-L05. Medina explains that the development of these resources will be challenging in the current environment, and points out that these plays have rarely taken off outside North America. He sees three main challenges to doing so in Mexico. “Firstly, the Central American country has mostly found non-associated gas, making it hard to compete against cost-efficient US gas imports. Secondly, logistics create an extremely adverse situation for the development of unconventional resources, particularly in the northern part of Mexico, because of the limited infrastructure and sparse water availability,” Medina lists. “Finally, security is an important concern in this region of Mexico, predominantly for smaller operators and service companies.” When prices rebound, however, he thinks the government could create economic incentives to attract companies to develop the country’s unconventional potential, avoiding onerous work commitments and tight timelines in order to attract the right type of players.