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In the Hopes of Achieving an Optimal Oil Industry

Gaspar Franco - UNAM Engineering School


Tue, 01/21/2020 - 15:22

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Q: What do you consider to be a realistic oil production target for 2024, how could this target be achieved, and what roles should PEMEX and private operators have in the process?

A: To determine realistic production goals, it is necessary to have relevant data. Information should include oil fields, deposits, wells, facilities, human resources, financial resources and technologies. Available opportunities and technical capabilities must also be clearly defined. Other elements should also be considered, such as political and social events, natural phenomena, accidents and hydrocarbon prices. All of these factors influence the assessment of the goals that should be achieved. Although it is necessary to define a production goal, we must take into account the appropriate combination and balance of the technical, economic, environmental, social and political elements.

Key variables to consider include the allocation of government financial resources to strengthen PEMEX and the creation of an investment strategy aligned with the interest of the country. Other variables include the production outlook for the 415 assignations for exploration and production of hydrocarbons given to PEMEX, as well as the 111 active contracts and corresponding fields that are at different stages of the field life cycle, meaning benefits will require time to be delivered. The reactivation of more than 450 mature fields will require studies and analyses that are necessary to implement secondary recovery and enhanced oil recovery (EOR), having a direct impact on future production levels. These fields have recovery factors that sometimes average 10 percentage points below the international average. Final variables relate to the policy framework, including reviving the tenders through CNH, reviving the process of farmouts of the assignments in which PEMEX needs to increase its capacities, and using the integrated exploration and extraction contracts (CSIEEs) in combination with previous instruments.

Considering these variables improves the chance of meeting the oil production target. Additionally, they can foster the participation of many industry players, generate jobs, give opportunities to businesses and help increase production capacity. They can also employ new technologies; help diversify risk and reduce the uncertainty of compliance in production programs.

Q: What do you expect to be the role of deepwater, shallow water and onshore areas?

A: Due to technical challenges and the large amount of resources demanded by deepwater activities, exploration and evaluation will be crucial in the short and medium term to ensure ideal production benefits in the long term. Onshore areas will undoubtedly have more operators producing hydrocarbons in the short and medium term. The long-term outcome will depend on the technologies they are willing to implement, such as methods of secondary recovery and EOR. Shallow waters will continue to be the major production area due to the presence of different companies and their overall potential. PEMEX’s investments in 18 oil fields in shallow waters, plus the investments of four more operators, will surely make the shallow waters of the Gulf of Mexico the most important component in achieving the government’s production goals.

Q: What role should PEMEX’s flagship offshore assets play in the reversal of its production decline?

A: PEMEX’s flagship assets, such as the Akal field of the Cantarell complex, Ku-Maloob-Zaap and Xanab, should have optimal production levels. At Akal, an examination is required of its technical and economic feasibility to implement tertiary and advanced recovery processes to optimize its facilities or analyze if the project should be abandoned. Regarding KuMaloob-Zaap, it is necessary to properly steward its deposits, analyze the feasibility of implementing EOR and look for the most efficient ways to maintain production at optimum levels while maximizing its economic value. It is important to apply the variables mentioned above so that other potential oil field can be kickstarted.

Q: What can be done to strengthen CNH as the administrator of upstream contracts and what risks are associated with a weaker CNH? A: Mexico has 111 active contracts for the exploration and production of hydrocarbons. CNH has the constitutional mandate to manage them. To strengthen the managementof contracts, it is necessary to supervise oil-related activities in a stricter manner. It is fair to say that CNH played an extraordinary role in the bidding rounds. It has improved the process of approvals of plans, wells and authorizations. The risk is that CNH stops managing the technical aspect and only focuses on administrative matters. CNH’s proficiencies should concentrate on supervision to propose better decision-making.

Q: What is your perspective on the government’s focus on service contracts rather than farmouts for PEMEX?

A: When the Energy Reform was announced, some had doubts about tenders, contract models and authorizations to handle seismic information, among other topics. Now, there is a new energy policy that includes variables that can help the country create certainty for investors regarding the proposed goals. However, not every aspect of the new policy is desirable. The administration has announced suspensions, but also the possibility of reactivating tenders in a couple of years. This will depend on the results that the 111 active contracts deliver. Therefore, there are service contracts that PEMEX now wants to use instead of migrating assignments to exploration and extraction contracts. This is an available option for oil companies that participate in the sector. However, the big companies will not want to participate under this scheme. This was demonstrated with the 2008 reform, in which the Contratos Integrales de Exploración y Extracción were allowed and in which large operators did not participate. Whether contracts are beneficial depends on the contractual area, on the technological challenges the area demands, on the capacity of the service companies and on the skills of the specialists involved. It should be clear that PEMEX would assume all the risks with the service contracts. Yet, it will be necessary to examine the contract model to ensure the conditions it proposes. The process of the tenders to assigned contracts also needs to be familiar to investors.

Q: How does the evolution of existing licensing contracts illustrate the areas of opportunity with that contracting model?

A: The largest areas of opportunity are in the capacity of all involved parties to improve their work. The tenders, contracts and, for the most part, applicable regulations are known by all. They were applicable in different aspects for the fulfillment of the clauses. There are contractual areas where the capacity of those involved has led to increased production. They have found a greater potential of hydrocarbons, reactivated the operation of closed wells, detected areas of opportunity, generated jobs and revived the economic activity of the area. All companies that have licensing contracts on land areas are growing, maturing and learning how to do a better job. Companies with deepwater licenses are in the exploration stage. If they discover oil, they will later evaluate and subsequently start production.

Q:  What upstream policy measure would you recommend to the administration?

A: I would suggest that the administration focuses on projects that will yield production in the short term, ensure higher efficiency and communicate to all stakeholders how they should meet the requirements of a strategic project. The government should use all legal tools available to strengthen the oil and gas sector as a whole. Five-year migration plans for assignments would support midterm goals. Improving the utilization of all geological and geophysical information collected in Mexican territories thus far would allow state apparatus to identify areas with the highest potential in the country and focus resources accordingly. Defining an exploration strategy and supporting it technically and economically is essential to fulfilling the administration’s goals. A large part of this is increasing the recovery factor in Mexican deposits, which is included in the Hydrocarbons Law with accompanying technical guidelines. Improving the measurements of hydrocarbons and more closely monitoring the behavior of major fields would also help in this respect, as we know that less than 30 fields account for more than 70 percent of Mexican production.

Another measurement that could be helpful is to enforce a rule similar to the one Norway inserted into its own oil and gas market. These rules cover strategies for the production of gas within national territory and force zero burning and gas venting by operators. Norway is absolutely strict in the application of this rule and operators do whatever is necessary to comply. A similar rule here in Mexico would be welcome.

Other vital measures that will deliver benefits for the future of the industry would be to promote Mexican national content and the technological transfer. The need to develop human resources strengthen the commitment to industrial safety and environmental protection should also not be forgotten. There are other issues, including the marketing of hydrocarbons, clogging of wells, abandonment of facilities, taking advantage of the reserves of extra-heavy crude oil and gas fields, unconventional accumulation issues and finally project management and oil processes. All these suggestions should be considered within the national hydrocarbon strategy.


Gaspar Franco joined the CNH in 2010 after six years as a superintendent in PEMEX E&P. He became a CNH commissioner in 2016. Franco retired from this position in February 2019 to teach at UNAM, where he originally graduated in 1996.

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