Exploration efforts tap into new hydrocarbons deposits in Mexico

With the reshaping of the energy sector opening up the industry to new investment, anticipation around how the reform will expand Mexico’s hydrocarbons reserves and push production upwards has been building. So far, important oil and gas discoveries – both by major oil firms as well the state-owned firm Petróleos Mexicanos (Pemex) – has already brought optimism to the sector. As opposed to downstream activities, where a flurry of fresh entrants is bringing quick change, the restructuring of the upstream segment will require more time. Licensing rounds, farmout deals and production-sharing agreements have brought foreign expertise and technology into exploration. This, combined with new discoveries, is expected to help Mexico reverse a gradual decrease in hydrocarbons production. From 3.4m barrels per day (bpd) in 2014, oil production reached 1.9m bpd at end-2017, according to figures from Pemex, its lowest level since 1980. Production was projected to remain at this level at the end of 2018.

Mexican authorities expect to reverse the negative trend in the medium term. Since 1938 Pemex was the only entity charged with hydrocarbons exploration and production, and the firm still accounts for most of Mexico’s oil output. But the country’s sweeping 2013 energy reform, designed to open the sector to competition, has allowed private international oil and gas players to bid for exploration and operation contracts. The reform’s repercussions are likely to be felt more acutely in Mexico’s deepwater resources.

Production Shortages

Because of a lack of expertise, technology and financial muscle, Pemex has traditionally favoured shallow-water exploration over the country’s deepwater potential. There were also historic reasons that prevented Pemex from enlarging its exploration efforts. Chief among them was the discovery of Cantarell, one of the world’s biggest oilfields, found off Mexico’s Yucatan peninsula in 1976. Absorbing much of Pemex’s attention and resources, production at the field began in 1979 and reached a peak of 2.1m bpd in the early 2000s. However, the oilfield’s output has progressively declined since, reaching 200,000 bpd in 2016 and falling to as low as 144,000 bpd in December 2017, according to local media sources.

While increased use of modern technologies and know-how could reinvigorate efficiency at some of Mexico’s existing wells, the case for ramping up exploration is in itself strong. “In the Gulf of Mexico, there is still a lot of potential for new discoveries,” Arturo García Bello, partner for energy and natural resources at Deloitte México, told OBG. “In addition, you have the shale gas and oil segment in northern Mexico, based on the same geological basin that has fuelled the US’ shale revolution.”

Recent Discoveries

Mexico began auctioning off oil and gas blocks in 2015, and ramped up bidding rounds over the first half of 2018, with the fourth round under way as of May 2018. Under the five-year Ministry of Energy (Secretaría de Energía, SENER) plan for the sector, by 2019 Mexico is expected to have put 914 hydrocarbon blocks up for auction: 670 of these will be exploration areas, while the remaining 244 will be made up of fields that are already producing. Combined, these areas are believed to contain over 104.8bn barrels of oil equivalent (boe), covering an area of 235,000 sq km.

The auctions have already yielded some results. In July 2017 a consortium made up of Mexico-based Sierra Oil and Gas, US firm Talos Energy and UK company Premier Oil announced that it had discovered vast oil reserves in Zama-1, in one of the two concession blocks the collective had won in the inaugural July 2015 hydrocarbons auction.

The block is located less than 40 km off the Mexican coast and is already being heralded as potentially one of the most significant petroleum discoveries of the past two decades, believed to contain between 1.4bn boe and 2bn boe, which exceeds initial estimates. Production at the site is expected to commence in 2021.

In March 2017 Italian company Eni announced the discovery of significant reserves in its concession in the Gulf of Mexico. As part of the first bidding round, the firm had signed a production-sharing agreement with the National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos, CNH) in November 2015 to extract hydrocarbons in the shallow-water areas of Amoca, Mitzón and Teocali, in the bay of Campeche. Eni announced that it found additional oil in the Amoca field, and the three fields are believed to have probable reserves of 69bn standard cu feet of natural gas as well as 107m boe. SENER has estimated that developing the three concession blocks will involve an investment of roughly $1bn. Eni currently has a 25-year concession to exploit the areas, with the possibility of two, five-year extensions. Under the contract, Eni will pass on 83.75% of the concession’s pre-tax profits to the Mexican government.

Another key discovery was made by state-owned Pemex, which in November 2017 found proven, probable and possible reserves of 350m boe in its onshore field of Ixachi in Veracruz. The onshore field is especially interesting for the company because of its close location to existing pipeline infrastructure. In the first quarter of 2018 Pemex was engaged in appraisal work on the new onshore find, which was set to include the drilling of a delineation well and the expansion of exploration efforts to determine the discovery’s size towards the south of the initial find, Carlos Treviño Medina, CEO of Pemex told OBG. The resulting data will determine the firm’s development plans for the field.

Shale Tender

The new regulatory framework has also opened the door for the development of Mexico’s unconventional hydrocarbons resources, an area of upstream activity that has remained mostly untouched. Economically, the move into unconventional hydrocarbons sources is a natural fit for Mexico’s energy sector. Not only are the country’s reserves believed to be significant, but they are conveniently located within reach of valuable resources and technological expertise. The shale revolution of the past decade, which has transformed global oil markets and re-shaped the structure of the industry, has put US-based shale oil and gas companies at the forefront of the sector. It is these experienced sector players that Mexico hopes to entice.

With an estimated 60bn barrels of unconventional oil and gas reserves, Mexico plans to auction over 300 unconventional exploration areas in 2015-19, and although the potential resources are massive, exploiting them will unearth a host of new challenges. Many of these resources are located in northern Mexico, in areas with poor infrastructure and high incidences of organised criminal activity. Furthermore, local environmental groups have already expressed opposition to shale exploration due to the high level of water consumption that comes with fracking techniques.

Exploitation of unconventional hydrocarbons sources, however, has been advanced swiftly. In March 2018 the CNH opened the country’s first shale auction, allowing international firms to bid on nine separate shale blocks in the northern state of Tamaulipas, bordering the US. The blocks, part of the Burgos Basin, are expected to be allocated in September 2018, Mexican authorities told international media. The contracts will allow winning bidders to explore both non-conventional and conventional resources included in their blocks, which are likely to be made up mostly of natural gas. SENER has estimated that the tendered areas contain over 1bn boe of non-conventional resources, as well as an additional 53m boe of conventional reserves.

“Hopefully the government has put in place adequate incentives because shale companies will likely have to invest more in infrastructure here in Mexico than they are used to in the US. Additionally, gas is already very cheap to extract in Texas, so we will need to compete with that,” Bello said.

In addition to the expected auction process, Pemex is advancing shale exploration through partnerships. In late March 2018 the company signed a contract with Texas-based firm Lewis Energy for exploration and extraction of shale gas in the Olmos field in Coahuila, in northern Mexico. The contract is expected to involve a $617m investment plan, with gas production projected to reach 117m standard cu feet per day by 2021, according to international media reports. Mexico’s upstream segment is well positioned to attract further exploration commitments from domestic and international companies – as recent discoveries have shown, a portion of the country’s oil and gas potential remains untapped – however, investment decisions will continue to be framed by the evolution of international oil prices.