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Analysis

Pemex’s Natural Gas Strategy

Tue, 01/22/2013 - 17:17

In 2012, the average wellhead price for natural gas in the United States was US$2.66, down from the 2011 price of US$3.95, and the 2008 high of US$7.97. This has had a serious impact on the natural gas strategy of companies around the world, including Pemex. Mexico is also experiencing a period of increasing demand for natural gas, as the country makes the transition to gas-fired power generation, and reduces its dependence on fuel oil as a power source. Pemex expects that demand will continue to rise in the mid-term, as a result of the country’s industrial growth.

In 2011, Pemex produced an average of 6.59 bcf/d of natural gas, and in 2012, this figure actually dropped to 6.39 bcf/d; however, imports increased from 790.8 mcf/d in 2011 to 1.09 bcf/d in 2012. In the first months of 2013, this average had already risen to 1.22 bcf/d, showing a continuing growth trend in natural gas imports. In the last months of 2012, and even as recently as March 2012, Pemex issued critical alerts to industrial zones in central and eastern Mexico, warning that there was not enough gas in the system to meet demand.

As a result of these conditions, Pemex’s natural gas strategy is currently focused on filling the gaps between supply and demand with a new round of infrastructure projects, designed to connect Mexico’s industrial zones to gas supply from the US, and ramping up imports. In October 2012, Sempra Energy was awarded the contract to build a pipeline that would run from Arizona to Guayamas, in northwestern Mexico. In November, two pipeline contracts were awarded to Transcanada, to build the El-Encino to Topolobampo pipeline and the El Oro to Mazatlan pipeline.

Pemex Exploration and Production assigned substantial investment to non-associated gas projects in 2012. According to figures from the National Hydrocarbons Commission (CNH), Pemex spent US$5.18 billion on nonassociated gas projects for the year, 24.05% of Pemex E&P’s total annual project investment budget. This represents a 0.05% increase in investment in this area between 2011 and 2012, albeit a 13.05% drop in comparison to the amount spent during 2010. For 2013, there is an assigned budget of only US$2.14 billion for non-associated gas programs, according to the CNH, which represents a 60% drop in Pemex E&P’s investment in gas projects.

Of the US$2.14 billion assigned to non-associated gas projects in 2013, US$563 million, or 26%, was designated for exploration projects, US$702 million, or 33%, was allotted to development, and 40%, or US$944 million, was designated for investment in production. The remaining US$26.2 million was earmarked for general research and development in the area of non-associated gas during the current year.

Pemex E&Ps two main non-associated gas regions are the Burgos basin and the Veracruz asset. In total, Pemex plans to invest US$927.6 million in the Burgos asset, with 6% allocated to exploration, 52% to development and 41% to production. At Veracruz, 19% of the asset’s budget will be allocated to exploration, 28% of the investment budget is set aside for development, and50% to production. The remaining 3% is reserved for research and development. Pemex has also allocated funds for non-associated gas exploration in deepwater in the Holok area, as well as development and production investments in Lakach. The former will receive US$410.9 million, while the latter will draw US$279.6 million from the planned budged for 2013. The remaining gas assets are grouped together in what Pemex calls its Strategic Gas Program. The fields included in this classification will receive US$23.9 million, which equates to 1.12% of Pemex E&P’s total budget for nonassociated gas projects

The current low price of gas has reduced the NOC’s incentive to increase natural gas production since the economics of investment in oil production are more attractive than the return on investment in natural gas. As a result, natural gas production fell 6% in 2011 and 4% in 2012. Critical alerts issued because of natural gas shortages, and the resulting power shortages have cost the Mexican economy billions of dollars. The increasing pressure to solve this problem has pushed Pemex to expand its natural gas imports. Furthermore, the NOC is currently developing its gas pipeline infrastructure in order to be able to import more cheap gas from the US.