A New Era of DiscoveriesBy Pedro Alcalá | Thu, 07/22/2021 - 16:41
Despite the Mexican oil and gas industry's rocky journey throughout 2020, exploration activities exhibited not only resilience and continuity but also historic success. PEMEX, on the one hand, strengthened its reserves past investors’ expectations, while private companies proved their contribution to domestic oil and gas exploration and eventual production.
PEMEX’s latest report to Congress said the NOC had increased its 1P oil and gas reserves for a second year in a row, with a total of 7,382MMboe added to its portfolio from Jan. 1, 2020 to Jan. 1, 2021, which represents an annual increase of 4.8 percent, according to the report. PEMEX Director Octavio Romero wrote in the report that these numbers represented “a reserve-production relationship of 8.7 years for 1P reserves.” Most of this increase in 1P reserves came from the Ixachi, Kayab, Pit, Onel and Xanab fields, while reductions in reserves came from the Ayatsil, Julo-Tecominoacan and Xikin fields. By comparison, 1P reserves increased by 1,019MMboe in 2019.
These achievements came despite the NOC’s significant debt burden, which limited its ability to invest in exploration activities. In fact, this limitation is what originally led Moody’s to state that it was unlikely that PEMEX reached a reserve replacement rate of 100 percent given the NOC’s “lack of investment strategies and appropriate cash flow, coupled with a weak market affected by various global crises.” However, these results put PEMEX’s reserve replacement rate at almost 120 percent, blowing past Moody’s forecast.
Additionally, 2020 and 2021 saw significant discovery announcements on dates that coincided with the annual commemoration of oil nationalization and the creation of PEMEX (March 18, 1938). In 2019, highlighted discoveries included Ixachi. In 2020, one of the main discoveries was the entirely new field of Quesqui. In 2021, continuing this now established tradition, PEMEX and President López Obrador announced a new discovery at the onshore well Dzimpana-1 that is expected to contribute between 500MMboe and 600MMboe to PEMEX’s reserves and production levels. The newly discovered field is located in the areas of Valeriana and Racemosa, in the state of Tabasco, and its development could potentially result in the ground-up construction of infrastructure that would eventually amount to an entirely new oil production complex.
Whether these discoveries represent a positive addition to PEMEX’s portfolio or if the degree of investment that they need will end up turning them into burdens, more than assets, is still to be defined. The discoveries in Quesqui and Ixachi do have the advantage of being onshore discoveries located in close proximity to existing PEMEX infrastructure, so the degree to which drilling success can translate to productivity through a relatively fast and efficient transition timeline is ample. While PEMEX’s major draws in terms of day-to-day production remain in flagship fields in the Campeche Basin, the rate of depletion in these fields is accelerating. Ku-Maloob-Zaap’s mature and depleted nature has now reached the same status as Cantarell seven years ago. A transition to a majority onshore production portfolio could greatly benefit the NOC in terms of efficiency, considering these exploration and drilling successes are not complicated by high pressure, high temperature wells proving too challenging.
Given its financial status, PEMEX’s priorities should be in finding fields and reservoirs with the potential of lowering the cost per barrel extracted to levels that are eventually comparable to those of Ku-Maloob-Zaap and Cantarell. This is especially true since fewer barrels will be entering the international market as more are fed into the national refining system and other downstream processing facilities for the purpose of national self-consumption, which is the goal of the current administration.
According to Rafael Espino, Independent Adviser to PEMEX during the López Obrador administration, PEMEX has accomplished a great deal in terms of efficiency, getting the price for each barrel extracted down to US$14 in some cases. “This will drive its profitability to even higher levels.” By focusing on production levels and national consumption, the government is prioritizing a direct capitalization in the nation’s own currency that reduces the negative impact of the exchange rate. The president wants to stabilize national production levels around 2MMb/d, while prioritizing exploration and production projects that can boost profitability and continue reducing the average price for extracting each barrel. As Espino highlights: “Increasing production is only important when each barrel is worth more to the company.” This principle can be extended to the nature of PEMEX’s exploration efforts as well, especially since the government’s policy of not engaging in farmouts or other geological portfolio offloading would so far imply that PEMEX intends to develop the assets that it explores on its own.
Private Sector Contribution
Private operators also generated value through their exploration activities. Several new exploration and development plans from the private sector were approved by CNH throughout the pandemic. One of the more emblematic came from the one company already famous for being the first private offshore producer in Mexico in almost a century: Eni. CNH approved the company’s multimillion-dollar exploration plans to extend its search of the Saasken field at the end of 2020. The discovery the company announced in February could hold up to 300MMboe. CNH approved the exploration plan modification, which allows Eni to invest approximately US$126.71 million to widen the reserve potential from Block 10, located in the Cuenca Salina area of the Sureste Basin, about 65km from the coast of Tabasco. There are two areas with potential that Eni could drill within Block 10: Sáasil and Sinaán. Following the company’s characterization work, four other prospects have been named: Celestún, Sayulita, Holbox and Mazunte. There is a 39 percent chance of success finding light oil at the prospects, the drilling of which will be decided either in 2021 or 2022.
Exploration success came from steady private investments in Mexican projects throughout the pandemic. As Merlin Cochran, Director General of AMEXHI, explained to MBN: “Regardless of the pandemic, overall, the industry achieved important results: US$40 billion of approved investment and US$16 billion of executed investment.” Cochran highlighted that while the president and other public officials have impatiently demanded private operators increase their production levels, 70 percent of their members’ contracts are still in their exploration phase, where they have demonstrated tremendous success. “In 2020, the private industry presented six discoveries that have raised the national levels of resources and reserves by 40 percent,” says Cochran.
Even operators famous for being close to their production phase tallied up significant exploration achievements. For example, Timothy Duncan, CEO of Talos Energy, says that although he remains focused on Zama, which is a generational asset that will ultimately provide decades of production and cash flow once it comes online, that project is only one of numerous potential catalysts for the company’s operation in Mexico. “We recently announced a major discovery in the US Gulf of Mexico with BP and Chevron.” According to Duncan, Talos Energy will aim to enter more projects like that in the coming months that could result in significant discoveries. In general, operators like Talos Energy see the bountiful state of Mexico’s exploration campaigns as a sign that the global offshore E&P industry is ready for consolidation and that these same operators can achieve significant scale and diversity through M&As since they will be supported by these discoveries and the possibility of others in the short to medium term.
Exploration advances would not be possible without the crucial help of service providers that constantly mention exploration in Mexico as an area of interest. “Exploration is an area of significant interest for us that we continue to pursue. Lately there has been an incorporation of a number of new fields into the market portfolio and these need to transition from an exploration phase to a field development phase. Significant effort and investment are still needed in each of those fields to complete their transition,” says Hermes Aguirre, Mexico Country Vice President of Halliburton. These fields require state-of-the-art technologies due to the technical challenges they present, such as high-pressure, high-temperature wells, which require sophisticated, yet effective well designs and configurations. “Our services are important for the NOC’s latest discoveries, particularly in the initial phases of the exploration process. The challenges can include wells of Mesozoic depths with high structural and geological complexity,” adds Aguirre.
The technical teams of signature service providers like Halliburton work with the NOC on these wells to define their dimensions for a successful transition from exploration to development. Defining the technological procurement and application strategy for each well is essential, as well. These same service providers are applying these skills to work with others besides PEMEX, according to Aguirre. “Exploration is also a category that we consider more broadly. There are many private operators in Mexico with CNH exploration and development plans that help to achieve positive results and even unexpected discoveries sometimes.”