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Analysis

Mexico's Oil and Gas Roots

Wed, 01/25/2012 - 12:31

The first small quantities of Mexican oil were refined into kerosene near Papantla in Veracruz in 1868, and commercial production began at the turn of the 20th century. US company Doheny’s Cerro Azul No. 4 well became the world’s largest producing well in February 1916, producing 260,000 bbl/day, and over the next 14 years the well pumped 57 million barrels. While laying railway tracks for a line that was to run between the Atlantic and Pacific coasts, British company Pearson discovered Potrero del Llano, one of the world’s largest oilfields, in what came to be known as the Golden Lane region. Pearson formed a company called Mexican Eagle to exploit the reserves. The company was purchased by Royal Dutch Shell in 1918 for US$75 million, and was the dominant firm in the Mexican petroleum industry until nationalization. By 1922, Mexico was the world’s second-largest producer of crude oil. Until 1938, international interests, including Royal Dutch Shell, Exxon, the Pearson family, Sinclair, and Gulf Oil, largely controlled production.

President Lázaro Cárdenas intervened in a dispute between foreign oil companies and Mexican workers in 1938, when the workers were striking, demanding a pay increase and the introduction of welfare services. Citing the 27th article of the 1917 Constitution, which states that any oil produced in Mexico belongs to the nation, Cárdenas embarked on the expropriation of the foreign producers’ resources and facilities. The day after this step was taken, the Consejo Administrativo del Petróleo (Petroleum Administrative Council) was created in order to take charge of the assets the state had taken over. By August 1938, Pemex was founded.

One of the first major challenges that Mexico’s newly created oil company faced was an international economic boycott over the 1938 expropriation. This took many forms, from preventing Mexico from selling its oil internationally, to a ban on selling raw materials, replacement parts or vital equipment to the company. Mexico also saw foreign companies withdraw bank deposits that had been held in the country. Finally, after lengthy negotiations, the Mexican government agreed to compensate the oil companies for the expropriation to the tune of US$114 million. Payments began in 1940 and would finish in 1962.

Pemex was charged with the task of providing Mexico with oil and gas at the lowest possible price. It is important to note at this point that the prime directive of Pemex at its creation was not to generate a profit, but simply to deal with domestic demand for petroleum products.

Pemex inherited 1.276 billion Boe of reserves from the expropriation, and this steadily rose to 5.568 Boe in 1960 as a result of exploration activities onshore, concentrated in the Golden Lane oilfields in Veracruz state. Pemex increased its total reserves massively with the discovery of the Cantarell field 80km oshore in the Bay of Campeche in 1976. The field was named after Rudesindo Cantarell, a fisherman who complained that oil seepage was ruining his nets. When Pemex investigated, they found Mexico’s largest-ever oil field, which has to date generated almost US$500 billion in revenue for Pemex.

Mexico was self-sucient in oil and gas until 1971, and a net exporter of petroleum products. From that year onward, demand began to rise in the domestic market and Pemex had to revise its role in Mexico. In 1974, those in charge of Pemex strategy took the decision to double its prices at the pump and invest more money in exploration and production in order to reassert Mexico as a net exporter. This strategy, costing US$3 billion between 1974-1976, combined with the major discovery of Cantarell, and the later discovery in 1979 of the Maloob-1 field, allowed Pemex to reassert itself as a major global oil power.

This increase in exploration was not without a price. In 1979, Pemex’s Ixtoc-I exploratory well in the Bay of Campeche suered a blowout. Today, Ixtoc-I is still counted as one of the world’s largest oil spills, and during the 10 months it took to cap the well, it released around 3.5 million bbl of oil.

By 1992, Pemex was split into four operating divisions: Pemex Exploration and Production, Pemex Refining, Pemex Gas and Basic Petrochemicals and Pemex Petrochemicals.

By this point, Pemex’s fortunes had been tied to Cantarell field. While oil was flowing quickly and easily from Cantarell, this posed few problems for Pemex. In 1981 the field was producing 1.6 million bbl/day, but by 1995 this had dropped to 1 million bbl/day. Pemex began a nitrogen injection project in 2000 in order to increase production, and for a while it worked; that year production increased to 1.6 million bbl/day, in 2002 to 1.9 million bbl/day, and reaching 2.1 million bbl/day in 2003. By this point, Cantarell was the second-fastest producing field in the world.

In 2004 Pemex announced that Cantarell production was due to peak in 2006. When 2006 arrived, it was reported that, indeed, the field had already peaked and was declining at a rate of around 15% per year. Pemex made eorts to slow the decline using enhanced oil recovery techniques, which eventually proved successful, but it was clear from this point that Pemex could no longer count on Cantarell. Today, Cantarell is one of several fields that Pemex counts on for production, including its sister field in shallow water Ku-Maloob-Zaap, which is now Pemex’s largest producing field. In the longer term, Pemex hopes that its onshore production at huge regions like Chicontepec will grow, and is also looking to new areas like deepwater in order to augment production.

One major aspect of the plan to address declining production was an attempt at wide ranging energy reform by President Felipe Calderón. Opposition in Congress scaled back his ambitious plans for the Mexican energy sector, but one consequence was significant change to Pemex’s organization. The current head of Pemex, Juan José Suárez Coppel introduced a strategic plan in 2010 that would see Pemex renew its focus on exploration and production in new areas such as deepwater, whilst concentrating on maximizing reserves and production at existing mature fields.

development and production