Private Operators Drive Mexico’s Offshore PortfolioBy Conal Quinn | Wed, 09/21/2022 - 15:24
Of the bidding rounds that took place under the previous administration, both shallow and deepwater fields were put up for auction, noted Javier Mundo, Development and Energy Specialist, KPMG. “Of the more than 100 contracts awarded, 57 of these were offshore,” he added. According to statistics from CNH, in July 2022, national crude production currently sits at 1.6MMb/d of which 1.3MMb/d comes from offshore fields. Of these figures, private operators contribute 57Mb/d.” Compared to PEMEX, this figure may seem minute, but it is significant, as private operators are advancing some of Mexico’s most emblematic offshore projects, especially in deepwater.
With offshore set to figure more in Mexico’s oil and gas future, the importance of private operators is set to grow, as Mundo explained: “Offshore activity is by far producing most these days, as well as leading investment in exploration. This is because of the nature of offshore projects which tend to be much larger and require the most investment, first in the exploration and evaluation phases and then development. In this regard, private operators have adopted some of the important strategies that serve as points of reference for the industry to advance offshore projects.”
Hokchi Energy, a Mexican oil & gas company and subsidiary of Argentine IOC Pan American Energy, is one of these private players advancing offshore projects. Andrés Brügmann, VP, Hokchi Energy, shed light on some of his company’s recent activities in Mexico. “We participated in four blocks following the bidding rounds. Of these, we invested in the exploration stage for two of these, which proved to be unsuccessful. We also operate our namesake currently-producing Hokchi block, off the coast of Tabasco in the shallow water Southeast basin, in addition to Block 31, in the same basin but located off the coast of Coatzacoalcos, Veracruz,” he said. Brügmann added that the company was awarded Block 31 in June 2018. It then drilled two exploratory wells in 2019, of which one, Xaxamani-2EXP struck oil. “Hokchi has since progressed onto the evaluation face of Xaxamani this year, with plans to drill two delineation wells, Xaxamani 4 and 5, sometime between October and November. This will allow us to carry out tests to corroborate the future productivity and commercial viability of these wells,” noted Brügmann
The company’s Hokchi block, meanwhile, is already in the development and production phase, with an output of 26Mb/d and a target to surpass 32Mb/d of crude by the end of 2022. “We drilled 14 wells in total, 7 of which are for producing and 7 for water injection. Hokchi is also served by two offshore platforms connected to an onshore facility where the separation process takes place,” he added, noting that water re-injection water is crucial for maintaining pressure at the field: “By 1Q2023, in line with sustainability commitment, we plan to ensure all the water used is treated and conditioned to remove salt on site and then re-injected back into the seabed. As production increases, so will the quantity of water used.”
“Hokchi has designed unconventional well completions for wells located in tertiary rock formations where production does not typically reach beyond 1Mb/d. Hokchi, however, is now averaging a rate of 6Mb/d per well on average, owing to the well-completion techniques employed. Production therefore depends on a combination of the geology of a formation and the strategies and techniques employed to maximize this potential. That is how we set our benchmarks,” Brügmann concluded.
As to how operators justify well development strategies from a financial perspective, Gabriel Gómez, Country Manager, Murphy Oil, said “just over half of these contracts awarded were offshore and to international companies. Aside from Hokchi and Amoca-Mizton-Tecoalli awarded to Eni, both discovered by PEMEX, all the contracts handed out were for exploration. IOCs were more interested in these offshore opportunities, while Mexican companies tended to focus on onshore projects.” Given these contracts were handed out between 2016 and 2018, with an initial phase contemplated of 3 to 4 years, “we are now reaching crunch time with a real spike in activity as companies scramble to satisfy their contractual obligations.” Gómez noted that the COVID-19 pandemic and other delays meant that many companies have not drilled all the wells set out in their approved plans. “Now, we are really going to have a much clearer idea of the reserves out there and the potential productivity of these fields,” he added.
“As an international company, Mexico is an interesting country for Murphy since for years, foreign investment was shut out of the oil and gas industry. That is until the opportunities afforded to us by the previous administration,” Gómez continued. “In my view, PEMEX has done an admirable job developing the industry, but it is very difficult to take on this task alone, especially with regards to exploration and the investment required. With our global footprint and interest in diverse areas, we manage a dynamic portfolio,” he added, noting that “each dollar invested is therefore screened by a process of project evaluation and comparison. So, if we make a discovery in Mexico, this is going to compete for resources elsewhere.”
Brügmann explained how Hokchi evaluates prospects and assesses development plans, focusing on incorporating as many resources as possible with the least cost, though the reality of the statistics behind often-unprofitable exploration makes this a more complicated effort. What is more, external factors like the availability of processing ships to carry out production tests complicate the efforts of the company. “That is why we try to strike a balance between exploration and developing the fields with proven resources already in our portfolio.” Gómez concurred, adding that “worldwide, one in every five wells drilled strikes oil. And if we factor in which of these are commercially viable, this figure falls to as low as one in 10. So, in the case of Mexico, one in every three wells drilled being successful is very promising.”
How can offshore-focused private operators align their own success with that of the government’s plans for energy independence, however? “Much of what is reported is not how issues are seen by the industry. The reality is our interests are much more aligned than what is described. In terms of energy self-sufficiency, for example, this does not mean private companies have to reduce production. The recent reforms make clear that resources belong to the nation, and all the contracts we have as private operators are based on this principle, to guarantee the benefits for the Mexican people,” said Gómez, highlighting how between two-thirds and three-quarters of the developed resources go back to the state. Because of the risk of investment, the government stands to gain from private participation: “It is more of an art than a science,” said Gómez about developing oilfields. Therefore, private companies are better positioned to gamble on a field. “If we add together the contractual quotas and government taxes, we pay US$5 million each year with our associates for the right to run the risk of looking for oil. PEMEX may have a vital role, but we play our part too, especially when you consider the work we are doing in deepwater, which has not been carried out before to this level. In that sense, our interests and that of the government are perfectly aligned,” he concluded.
As Mundo concurred, Brügmann highlighted how public-private interests are more aligned than some make out: “If we look at what the government takes from private offshore projects, it is currently more than 90 percent. Therefore, our investment complements their efforts to achieve energy security. Every business worldwide has some limitations: money, technical resources and expertise, as well as supplies. We bring all this to Mexico with our international connections,” he said. Unlike other businesses, the upstream sector does not compete once the fields have been awarded. “On the contrary, we share resources, costs and expertise. We find out how we can work together for the benefit of the industry overall. PEMEX still carries out most upstream activities in Mexico, but now they can benefit from our presence as well. It is an ecosystem with a lot of synergies.”
For now, new bidding rounds have been suspended nevertheless. “We need to reactivate the bidding process as soon as possible, since the most important resource in our industry is finance. PEMEX simply cannot exploit all the geological potential that exists in Mexico alone. And the time to extract these resources is now, in the most sustainable manner possible of course, since we are set to undertake an energy transition over the next twenty years. At the end of this, oil will be a niche commodity,” explained Brügmann. The vast amount of geological data acquired via the exploration activities of companies awarded contracts from 2015 onward is a further benefit that Mexico could acquire.
“The rounds are fundamental to the development of offshore infrastructure,” noted Gómez, adding that “unlike the US Gulf, where operators benefit from infrastructure transferal, outside of the area of the Bay of Campeche where PEMEX has worked for years, the infrastructure is non-existent. We are lucky that our Tulum well in Block 5 is located right in the heart of the Salina Basin next to other contractual areas awarded to major operators such as Shell and Repsol. As neighbors, we can develop this much-needed deepwater infrastructure together, sharing costs and expertise and interconnecting our development projects.”