Gaining an Insider Perspective of Mexico’s Oil and Gas PotentialBy Conal Quinn | Thu, 09/22/2022 - 18:56
Experts agreed that a higher level of investment and firm political support for market players are essential if Mexico is to maximize its potential to develop hydrocarbons in abundant deepwater and unconventional areas.
As Carla Quiñónes, Oil & Gas Consultant, EY Mexico, noted, the oil and gas industry has a long and successful history in Mexico, but as it looks toward the future, the question of reserves and hydrocarbon potential becomes paramount. Carlos Morales Gil, General Manager, PetroBal, shared in celebrating the industry as a storied and primary driver for economic development, which allowed Mexico to position itself as one of the world’s top producers in the past century. Morales sought to clarify, however, that the wealth of hydrocarbon reserves in Mexican territory also belonged to the nation, even before the 1938 Oil Expropriation. What changed under President Cárdenas with the creation of PEMEX was ownership of installations and the means of extracting these resources. Since then, there have been plenty of changes in legislation, none more notable than the 2014 Energy Reform that allowed private companies to participate once again in the upstream sector for the first time since the 1920s.
Morales also highlighted the important role played by CNH as a regulatory body to administer this new operating framework. With the “great advantage” of the presence of all these private companies, it is important to have such a body to align private interests with those of the state, outline clear regulatory norms and foster best practices. “This historical perspective helps us set the scene for a discussion on reserves, which is ultimately an economic topic and a question of investment. Mexico undoubtedly has vast resources to exploit, but now we also have the robust regulatory legislation necessary to make the most of this potential,” explained Morales, adding that “reserves boil down to finances. It is not enough to know there are accumulations of hydrocarbons in the subsoil. This must be accompanied by the intention of extracting them, which only comes with the necessary investment. Therefore, we need to make sure the incentive is there to invest.”
Pol Palacios, CEO, XWELLS, also approached the topic of reserves from a financial viewpoint: “Despite certain difficulties and challenges, Mexico undoubtedly remains an attractive destination for investment given the wealth of resources available here,” he said. “As a foreigner, my voice has often been valued within the local industry as offering a balanced opinion on such issues regarding Mexico's appeal to foreign capital in the oil and gas industry,” added Palacios. In his view, Mexico’s oil and gas industry often suffers from low self-esteem. “Mexicans demand much from their oil and gas sector, and sometimes this leads them to underestimate how attractive the industry is for foreign investment.” Palacios shared Morales’ outlook that global participation in the development of strategic reserves is the key to the continued success of Mexico's oil and gas industry, especially when it comes to new technologies.
Palacios also noted the role the government has in funding exploratory activities: “It is no secret I have long pushed for increased public spending in deepwater exploration. Until very recently, this has not been a priority for the government but deepwater simply cannot be ignored much longer.” Palacios cited the example of the Lakach gas field, the development of which was forestalled as gas was of no interest to investors in Mexico as it could be purchased cheaply from the US for around US$3/MMbtu. “At that time, I felt like I stood alone. Now, with the situation in Ukraine, the whole of Europe is starving for gas that Mexico could have supplied if we had not neglected investment in the past,” Palacios explained, adding that “my message to the industry now is: invest in new technologies, invest in new talent and do not underestimate Mexico’s potential to become a major player in deepwater with the necessary investment. These are the steps necessary to maintain Mexico’s position as a first-rate global producer.”
On the topic of legacy perspective and the evolution of Mexico’s oil and gas reserves, Gustavo Hernández García, International Vicepresident, Unión Mexicana de Asociaciones de Ingenieros, drew attention to some key dates. “Before 1941, practically all the oil produced in Mexico was exported. With the Mesozoic discoveries in Chiapas and Tabasco in the 1960s, production started to really take off. In 1976, with the discovery of the Cantarell field that entered production in June 1979, Mexico’s production surpassed 1 billion barrels annually for the first time in 1982. Current production levels of around 600MMb annually have us back at 1979 levels, which was before Cantarell started producing.”
“There is no secret formula or quick fix for reserves. That is why it is important we have plenty of dialogue surrounding Mexico’s hydrocarbon potential,” noted Hernández Aside from the role played by PEMEX, he pointed toward some of the privately-operated fields from the Energy Reform’s bidding rounds, including Eni´s Amoca and Mizton, Fieldwood Energy and PetroBal’s Ichalkil and Pokoch and Hocki Energy’s namesake field.
According to Hernández García’s estimates, 3P reserves sit at 22.2 billion boe as of January 1, 2022. Of prospective resources, an estimated 64.2 billion boe are to be found in unconventional reserves, “more than what we produced over the course of 116 years,” he noted, with a further 48.7 billion boe in conventional plays. “What concerns me most is that the aforementioned 3P statistics have not changed in the last four years,” said Hernández. Notably, crude oil accounts for 6.05 billion barrels of the total 8.01 billion barrels of 1P reserves, while condensates make up 30MMboe and gas 10.78Bcf. Hernández praised the work of all operators incorporating 7MMb of 2P and 16MMb of 3P reserves this year through discoveries, as well as the success of all businesses, including those in the private sectors, in maintaining 1P levels consistent since 2016, a difficult task considering each year the number of barrels produced is subtracted from 1P figures.
Óscar Roldán, Director Oil & Gas Division, R9 Holdings, used the US as a point of reference for Mexico’s own hydrocarbon reserves, given the similarities in both geography and geology. “Our countries share the Gulf of Mexico, a province rich in reserves. Notably, Mexico managed to achieve the lion’s share of its historical production with just one operator, compared to the hundreds of businesses active on the American side. For this reason, we should feel proud of what PEMEX has accomplished as a Mexican institution.” While Roldán highlighted that at least offshore, Mexico has got more out of the Gulf of Mexico historically than its neighbor to the north, onshore production tells a different story. “Unconventional resources are the biggest difference between US and Mexican onshore operations. While Mexico has evaded the issue, the incorporation of unconventional resources has allowed the US to transition from a net importer of oil and gas to an exporter.” Some practical benefits to unconventionals cited by Roldán included the shorter time frames to get projects producing as well as the flexibility they offer for such a volatile market. “When prices are lower, you can slow the pace of production much more easily and ramp it back up again when prices inflate,” noted Roldán.
While voicing concern about how water shortages could dissuade the development of Mexico’s unconventional Burgos basin, Palacios agreed wholeheartedly with Roldán's comments on offshore's potential. In terms of eventually developing such infrastructure, Roldán praised the wealth of information acquired by private players. This has enriched the upstream sector in Mexico, especially in the case of the seismic studies carried out in deepwater of the Gulf of Mexico. “I am particularly intrigued by the outcomes of Shell’s exploratory drilling in Mexican deepwater, given the infrastructure and success they have already achieved on the US side in shared basins such as Perdido Fold,” added Palacios. Deepwater exploration takes time, however: “With the most diplomatic intentions, it does not help when there are political hurdles that make an investment in such projects less attractive. By comparison, I worked on similar projects with BP in Egypt, and with government support, we were able to speed up the process.” Palacios also called attention to Wintershall Dea’s activities in deepwater, as well as the alliance between PEMEX and Woodside. The latter could become a model for how the federal government can work with private companies to bring the necessary foreign technology and capital to advance high CAPEX and risk-intensive deepwater projects going forward.