PEMEX Banking on Deepwater Farm-Outs

Q: How has the drop in exploration investment and activity impacted the evolution of PEMEX’s 1P, 2P and 3P reserves?

A: Exploration activity has fallen on a global level in the past few years due to the drop in oil prices, which also affected PEMEX. The company’s budget was cut last year by around MX$100 billion, roughly US$8 billion. Of that cut, 75 to 80 percent was taken from E&P. We had to focus on our primary activities and that is why we reduced our exploration budget and investment in some studies. We tried to direct our remaining investment toward safety and maintenance issues.

We have kept our exploration focus on the two largest basins, which have high prospective-resource potential. This includes the deepwater basin on the Mexican side of the Gulf and the Campeche Basin, which has been prolific. It accounts for around 75 percent of Mexico’s total oil output since 1904, which is roughly 58 billion barrels of oil. Seventy-five to 80 percent of that originated from the Southeast Basin, both onshore and offshore from the Chiapas Tabasco area and the Campeche area. We focus our exploratory activities there and in the Perdido Fold Belt and southern Salina Basin, and in shallow waters.

Q: What do you think are the successes of last year’s exploration and development activities?

A: We are exploring deepwaters and the regulation for this type of area only allows for the incorporation of 3P reserves. For this reason, it is difficult to discover proven reserves in deepwaters because the radius associated to a single well- bore is very small. Even so, we made successful deepwater and shallow-water discoveries in 2016. We added around 580 million boe in 2016, which is not a bad result.

Due to the oil price, some of our discoveries did not count as reserves but rather as contingent resources. We discovered roughly 200 million barrels of contingent resources that could not be counted as reserves but from an exploration perspective we successfully made these discoveries.

Q: What is the expected impact from farm-outs on the evolution of PEMEX’s 1P, 2P and 3P reserves?

A: The deepwater farm-outs will have a big impact on PEMEX’s reserves because we will be able to reclassify 3P reserves into 2P or 1P reserves, once the projects are sanctioned and approved and a development plan is proposed.

First, we need to delineate and propose a development plan but then we can develop these deepwater fields with our new partners. This is also an important addition to our indicators for reserve replacement rates. Future exploratory farm-outs will also help to reclassify reserves and maybe finance new discoveries.

Q: What are the investment priorities for the Trion block?

A: BHP Billiton contributed US$540 million in minimum carry, and an additional US$624 million as their tiebreaker offering, which comes to around US$1.19 billion to invest on behalf of PEMEX. Before the reform, PEMEX used to operate in deepwater alone but this development gives us the chance to share capital and risks, making it a very good deal.

Q: What contribution can BHP Billiton expect from PEMEX to make the Trion farm-out a success?

A: Many people do not see our expertise but we have drilled around 50 deepwater wells in Mexico. We are bringing geological and seismic experience in our basins to this partnership. As part of the deal, in the JOA there is an operational committee that consists of half PEMEX geoscience professionals and half BHP counterparts. The operational committee makes important investment decisions for the Trion fields. Under this committee there are three more, the technical subcommittee, the financial subcommittee and the procurement subcommittee. All the decisions to allocate CAPEX, continue delineation wells and start the first phases of development on these fields will be decided by these committees. Our team has already been working since we signed the contract in March 2017 with BHP Billiton.