Juan Javier Hinojosa
Director of Development & Production
View from the Top

Striking a Production and Saving Balance

Wed, 01/20/2016 - 12:14

Q: What has been the impact of the recent budget cuts on PEMEX’s production outlook in the short and medium term?

A: PEMEX Exploration and Production will contribute to the budget cuts with a reduction of almost MX$47 billion. Although it is a substantial reduction of our original budget the impact on oil production output has been minimized. The strategy is to generate efficiencies and reduce costs in order to allocate the budget to the most profitable production opportunities. The estimated production for 2016 is 2.13 million b/d. We expect to maintain production at the current levels for the next few years but PEMEX’s production platform will depend on the price evolution and the CAPEX available. The strategy being implemented by PEMEX is focused on three elements. Firstly, PEMEX will develop the most attractive onshore fields, which will allow the NOC to take advantage of existing infrastructure and deliver production in the short term. Secondly, the development of recent discoveries is in the process of optimization with the purposes of reducing cost and starting production in the short term. Finally, we are improving the process of reservoir management in order to mitigate the decline of base production. The program considers a strict monitoring of the reservoir and well performance as well as an intensive workover program.

Q: What criteria are used in the selection of fields and projects where planned investments will be deferred to achieve MX$27.5 million cost saving without impacting the short term production?

A: The selection of deferred projects considers the generation of economic value and the risk involved in its execution. We delayed activities in exploration that deliver reserves in the long term, like activities in deepwater and unconventional areas. In addition, we deferred activities in high-cost projects. The activities in the development of the Lakach deepwater gas project and extra heavy projects like Ayatsil-Tekel-Utsil were delayed until the price scenario improves. The main challenge is to develop profitable projects under the scenario of limited budget yield by low prices. Therefore, the strategy is to delay the development of the more complex reserves of PEMEX’s portfolio such as deepwater assets, extra-heavy oil fields, and unconventional reservoirs, which require costly technology compared to the conventional reserves we have in the shallow waters fields and onshore fields. PEMEX is focused on improving project execution and therefore is reviewing different processes in our value chain to deliver more efficiency in the execution of new projects. For example, PEMEX is reviewing the processes to optimize drilling cost, improve efficiency of offshore logistics, and increase well productivity.

Q: What has been the evolution of PEMEX’s production and development costs since 2014, and how is this benchmarked against IOCs and NOCs?

A: The increment of production costs from 2010 to 2014 was due to the high cost of services and more complexity of the fields due to the fact that they are mature fields. The production cost for 2015 is almost US$10/boe, an increment that is due basically to the addition of  a royalty that was not included prior to 2015. The total effect of this royalty accounts for almost US$3/boe. Therefore, if we consider similar conditions for 2015 with respect to 2014, the production cost was almost US$7/ boe, which is a reduction of more than US$1/boe in the production cost. These results were obtained because of the optimization of several processes and we expect that additional reductions can be obtained in the future. In terms of the development cost for 2015, we expect this to increase because low prices affected the new addition of proven reserves. Once the reserves certification process is completed, the final cost will be released.

The international benchmarking of costs has not been completed for 2015 but based on preliminary figures, PEMEX’s production cost will continue to be one of the lowest in the industry. In terms of finding and development costs, we expect that PEMEX’s cost will rank in the second quartile and the NOC’s efforts will be concentrated on improving this. The current low price scenario represents a substantial challenge to launching new projects, so we are optimizing different processes in order to execute these projects, add more reserves, and improve the finding and development cost.

Q: What is the possibility of PEMEX increasing its hydrocarbon production without farm-outs?

A: The production increment is feasible if additional execution capacity, technology, and financial capabilities are implemented to develop new reserves. Therefore, the challenge is to define the opportunities that can be developed under the current circumstances and guarantee that they are profitable under any adverse price scenario. PEMEX can increase production, but CAPEX is limited so the expected growth under this situation would be very slow. Therefore, farm-outs are a mechanism to accelerate the development of new projects by bringing in new technologies that, combined with our expertise, would increase the economic value of our projects. In addition, increased CAPEX will be added from potential partners, which would help to deliver production faster than PEMEX could by itself.

Q: What are PEMEX’s objectives and trade-offs in selecting fields for farm-outs in terms of attracting investment, production technology, and execution capacity?

A: PEMEX’s strategy is to attract partners for developing mainly high-cost and complex reservoirs. Therefore, PEMEX is analysing both situations. PEMEX selected extra heavy and deepwater fields in the first set of farm- outs, which require more technological capabilities than conventional reserves for development. Similarly, we chose some medium size mature fields, which are not as important as Cantarell and Ku-Maloob-Zaap but that required technology to optimize production and increase ultimate recovery. PEMEX’s objective is to become one of the main producers in deepwater in the long term, so it is looking to partner with the most important operators in this segment and develop the capabilities to become one of the main players as quickly as possible. In summary, PEMEX’s strategy is to attract partners both for new developments, which are extremely complex, and to optimize production of legacy assets to increase ultimate recovery. I believe there are plenty of opportunities in the PEMEX portfolio, and we want to take advantage of the new mechanisms established by the Energy Reform in order to attract more partners.

Q: What is the strategy being implemented to keep Ku- Maloob-Zaap at its current production plateau, and what new technologies will be implemented to achieve this objective?

A: The main strategy is based on a strict control of reservoir and well performance in order to minimize decline rate of existing production. Gas reinjection will be implemented as a complement to nitrogen injection for pressure maintenance. In addition, newly designed wells will be drilled in order extend their economic limit of production by delaying water or gas eruptions, and artificial lifting methods are being optimized to keep operations stable. Electric submersible pumps are being installed, so combined with gas lifting methods, this will guarantee the operation of producing wells. In order to improve water handling, we will install a dewatering and desalination system with electrostatic technology, with a capacity of 200,000b/d. Finally, PEMEX is also analysing new potential areas that can be developed in the next year, and as a result the NOC acquired seismic information to define the areas that will be added to the development plan of Ku-Maloob-Zaap.

Q: What will be the anticipated production contribution in 2016 of fields under development or recently producing, and their anticipated short and medium-term contribution to Mexico’s production portfolio?

A: The production of new fields for 2016 is minimal because of limited CAPEX available for 2016, so development is not possible at this time. However, we expect that new discoveries will contribute in the next few years with at least an additional 10% of current production levels. Onshore fields are key assets in PEMEX’s strategy for future production since there are existing facilities in close proximity to these fields, and taking advantage of this situation, PEMEX can deliver production faster in onshore fields than in offshore fields. Therefore, PEMEX is updating development plans of onshore fields in order to take advantage of all available opportunities and maintain competitive costs.