Edgar René Rangel Germán
Former Commissioner
View from the Top

Issues Pertaining to Mexico's Reserves

Wed, 01/20/2016 - 11:11

Q: What is your perspective on the development of Mexico’s reserves volumes?

A: Reserves pose a significant problem, because our most important mature fields are declining more than expected. Most of the production around the world comes from mature fields and everyone is concerned about where new production will be coming from, which is why unconventional resources are so relevant. There are no real alternatives to replace current production volumes, and we might reach 100 million b/d soon. Given that mature fields are declining faster than expected, there will be a substantial drop in reserve levels in the next two to three years.

Deepwaters could also pose a problem. Although the volumes are there, we have not developed the right strategy for deepwater. We can validate this since it is never clear why well locations have been selected. However, it is not within our remit to assess or evaluate PEMEX’s exploration strategy, so we must receive the proposal and treat the submission like that of any other company. In the year when a well is drilled, typically a huge volume of reserves is announced. In the years following this announcement, PEMEX then makes revisions that often substantially reduce reserves, in some cases down to zero, since the volume is there but production is not economical.

Adding the oil price factor given that prices dropped from US$100 to US$30, then many of the deepwater reserves are contingent resources, and when resources are contingent to price then oil companies are unlikely to make the large capital investments necessary to start production. This means that we are expecting another large drop in reserves this year and next. In order to evaluate reserves, producibility is calculated as the unweighted arithmetic average of the price of the Mexican mix on the first day of each month within a 12-month period. Therefore, when calculating the reserves for January 1, 2016, we still have a good oil price since the average of the Mexican mix is over US$50, and for light crude oil it surpasses US$60. But the average for 2016 will be less than US$30, which means that not only deepwater projects, but also other projects will be affected.

The third potential problem is Chicontepec, which has tight oil, meaning that it is not possible to drill a well that continues to drain oil. Chicontepec has small sand lenses and thousands of reservoirs from a technical point of view, so many wells must be drilled to reach each of those reservoirs. The most significant development plan that PEMEX developed for Chicontepec included 50,000 wells, which is beyond the capabilities of any company on the planet.

Many people will say that Chicontepec is extremely important because 40% of Mexico’s 3P reserves are located here, but only a tiny piece, less than 1 billion barrels, are 1P reserves. To produce the 3P reserves, all 50,000 wells must be drilled. Of course, following the migration of the COPS and CIEPS, new operators are not going to want to drill the quantity of wells required to produce the 3P reserves of Chicontepec. For example, new operators might plan to only drill 200 wells instead of the 5,000 planned by PEMEX for the same area, which would have a detrimental effect on future reserve calculations, and we will see this development during the current and next year. As we move forward, we must develop a strategy to prevent the loss of those reserves.

Another factor that will affect reserves is that some of the mature fields have not seen their development plans delivered in terms of advanced and enhanced recovery. Most of these cases are in the southern region, in fields such as Samaria or Jujo-Tecominoacán, where PEMEX only drilled a fraction of the planned wells due to budget constraints. If PEMEX is ultimately only able to deliver one well instead of 20 for several years in a row, then this also affects the production profiles of these fields. In some cases, private operators taking over such fields and increasing investment will support a recovery of the reserve levels to a certain extent, but I do not see this happening in Chicontepec. In summary, in the short term, poor reserves numbers are coming in 2016 and 2017.