Greater Investment in Unconventionals and Deepwater Needed
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Greater Investment in Unconventionals and Deepwater Needed

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Conal Quinn By Conal Quinn | Journalist & Industry Analyst - Thu, 10/06/2022 - 18:25

On Thursday, October 6, experts, analysts and top decision-makers from Mexico’s oil and gas industry met for the second day of the World Energy Council's Combined Congress of Mexican Energy Associations. The industry insiders agreed that more investment in the development of unconventional and deepwater resources is needed in the next decade if Mexico is to meet its 2030 energy demand.

Schreiner Parker, Senior Vice President and Head of Latin America, Rystad Energy, noted Mexico is unique in the world as one of the countries that boasts both shale gas and deepwater hydrocarbon reserves, two sectors expected to play a bigger role in meeting the energy demand this next decade. On deepwater potential in the wider region, Parker noted, “52 percent of global deepwater discoveries over the last two decades were made in the Latin American and Caribbean region. This was primarily driven by Brazil and Guyana, where most discoveries have been made and reserves have since been de-risked enabling production.Mexico, to date, has accounted for just 5 percent of this regional share, but the nation boasts a further 12 percent of so-called unaccounted reserves in Latin American deepwater.” 

Parker also said that the lessons learned from Brazil and Guyana can be exploited to get deepwater projects up and running at a faster pace in Mexico, noting that the time taken from initial discovery to first oil has been reduced to as little as four years, making deepwater an even more viable option for near-term results than ever. According to Parker, deepwater upstream activity has the advantage of a lower emission intensity: Rystad analysis shows 9kg of co2/boe is produced on average in deepwater, around half the global upstream average.

To make the most of Mexico’s deepwater potential and ramp up production, Parker underscored the need to let operators that make discoveries be unfettered in developing these fields. Parker was also keen to point out that the regional energy matrix is highly exposed to the volatility arising from dependence on energy imports. Moreover, Mexico imports pipeline gas and is therefore vulnerable to liquefied natural gas (LNG) spot prices. This is problematic from both affordability and energy security viewpoints. For this reason, the incorporation of deepwater gas reserves promises to alleviate supply chain woes and address the looming living costs crisis.

Alma América Porres Luna, Commissioner, CNH, noted that incorporating new reserves is not a process that can be carried out overnight. Rather, the cyclical process begins with exploration, something Mexico has not invested in sufficiently. Subsequently, Mexico failed to diversify its upstream portfolio to adequate levels meeting production targets. “Mexico has conditions for both self-sufficiency and to contribute globally with exports,” noted Porres Luna, adding that the nation has suffered from a drop in reserve replacement rates ever since reaching peak oil at the turn of the century when the Cantarell megafield entered decline. 

The exception to the rule is condensates from dry gas reserves, owing to PEMEX’s most recent landmark discoveries, Ixachi and Quesqui. Crude replacement, meanwhile, has leveled out: PEMEX managed to halt the decline but has not managed to offset diminishing 1P reserves with new reserves at a rate that would enable the NOC to increase production year-by-year in line and hit government targets. For 2022, Mexico’s restitution rate sits at 0 percent, with no important discoveries made to incorporate new reserves to replace what was produced in 2021. The discoveries that have been made in the past year were deemed not commercially viable. Meanwhile, 1P gas reserves have not diminished thanks to the extensions of Ixachi and Quesqui. However, as a general trend, 3P and 2P reserves should be replaced at a rate of 100 percent year-over-year to prevent a declining replacement rate. As it stands, Mexico is set to see a strong decline in the coming years without discoveries.

Nonetheless, Mexico has great potential in terms of prospective resources, with an estimated 112.9Mboe, most of which comes from unconventional reserves of shale gas. PEMEX is currently assigned 36 percent of Mexico’s prospective resources, 20 percent of which is gas and 80 percent crude. Contracts meanwhile, awarded in bidding rounds account for 12 percent, while 52 percent remain unassigned.

Porres pointed out the disparity between the upstream sectors in Mexico and the US. Over the past 6 years, the US drilled 303 deepwater wells in the Gulf of Mexico, compared to just 50 drilled by Mexico. In the same period, from 2015 to 2022, Mexico drilled 110 shallow-water wells compared to the US’s 22, outlining a clear contrast in the respective countries’ offshore strategies. Onshore, meanwhile, 66 times more wells were drilled in the US, the vast majority of which sought to incorporate shale gas. Such an upstream approach has allowed the US to replace crude at a rate of 323 percent and gas at 171 percent, while from 2012 onwards, Mexico saw negatives of 17 percent and 15 percent, respectively. 

Warren Levy, Founder and CEO, Jaguar E&P, believes his company has what it takes to “unleash Mexico’s vast natural gas potential, bringing both social and economic benefits from the commercialization of the ever more lucrative fuel to Mexico's most deprived communities.” With operations spanning across the Burgos, Tampico-Misantla, Veracruz and Southeast basins, Jaguar is the biggest private gas producer in the country. It also has the largest assigned surface area in its upstream portfolio after PEMEX. “Natural gas is not just an energy necessity but a political weapon as we have seen with the war in Ukraine,” Levy explained, adding, “if the wealth of our subsoil is not extracted in the next 3 or 5 years it never will be, and Mexico and its people will never see the benefit of the country’s vast natural resources.” 

Levy also noted that 80 percent of all gas consumed in Mexico is imported,  at prices that often exceed US$12/Mcf according to IEA data. Furthermore, fuel oil, which possesses a sulfur content between 4 and 8 times higher than natural gas emissions, still accounts for 8 percent of the electricity produced in Mexico. For these reasons, Mexico has some of the least developed natural gas infrastructure among comparable resource-rich countries. Levy puts this down to a “conscious decision made by PEMEX not to focus on gas due to the existing infrastructure and cheap prices offered by the US.” As Levy notes, however, Mexico currently spends US$15 billion on annual gas imports, around 4 to 5 times more than if the same quantity of gas was produced domestically. For the world’s ninth-largest consumer of gas, this is a major oversight, especially in light of the current administration’s push for energy sovereignty.

Jaguar won its current portfolio of gas fields from PEMEX in the bidding rounds. Between 2018 and 2022, Jaguar has managed to increase the reserves recorded in these fields 4 times over, and is poised to increase prospective reserves 11 times over through its current activities. The company is also determined to enhance the supply to Mexico's southern states, which trail behind in development compared to the north. To achieve this, Jaguar plans to collaborate with CNH to expand Mexico’s pipeline network. This collaboration will also see the pair assessing maritime infrastructure required to lucratively export LNG to Europe and China.

The panelists agreed on the need to facilitate the development of Mexico’s natural gas sector, with Levy pointing out the considerable savings such action would generate for the Mexican treasury. “The same barrel of LNG is 10 times more expensive in Europe compared to where it is produced in Texas. Such an opportunity, to save on imports and score gains on exports, Mexico would be loath to miss,” Levy argued.”

Photo by:   @AMEXHI_Oficial

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