Russia's Lukoil joins Mexican shallow water project Area 4

Russia's second largest crude producer Lukoil said July 5 that it has signed an agreement to acquire a 50% operator stake in the Mexican shallow water project Area 4.

The acquisition adds to its involvement in blocks 10, 12, 14, 28 and Amatitlan in Mexico, which the company sees as a strategic region for its international upstream development.

"The new project, where we will be the operator, is notable due to its considerable explored reserves and significant production potential. It naturally complements our existing portfolio of projects in the Gulf of Mexico," Lukoil CEO Vagit Alekperov said, according to a company statement.

Area 4 includes two blocks located 42 km offshore in the Gulf of Mexico, at a sea depth of 30-45 meters. The project contains two oil fields -- Ichalkil and Pokoch. The fields' recoverable hydrocarbons reserves are estimated at 564 million barrels of oil equivalent, of which over 80% is crude oil.

The deal includes Lukoil acquiring the operator's holding company and is worth $435 million plus expenditures incurred in 2021 as of the completion date. It is subject to approval from Mexican authorities.

Production of first oil at the project is scheduled for the third quarter of 2021. Planned for development in three phases, peak production is expected at more than 115,000 b/d of oil equivalent.

The project is being developed under a production sharing agreement signed in 2016 for a period of 25 years, with the option of an extension of up to 10 years. PetroBAL, the oil and gas subsidiary of Mexican conglomerate Grupo BAL, holds the remaining 50% interest in the project.

Existing operations

Lukoil entered the Mexican market in July 2015, when it joined the project to develop the Amatitlan block. Crude produced at the 230 sq km block is shipped by truck to the Soledad collection system, 30 km away. Operator services for the production of hydrocarbons are on a cost-recovery basis.

In 2017 Lukoil joined Block 12 in the southern part of the Gulf of Mexico. In November 2018, Lukoil and Eni signed a farm-out agreement on Blocks 10, 12 and 14. Lukoil assigned 40% in Block 12 to Eni, and retained the remaining 60% stake and operatorship of the project. In turn, Eni assigned 20% in Block 10 and 20% in Block 14 to Lukoil, and remains the operator of both projects. The blocks are located in the promising Sureste Basin in the shallow waters of the Gulf of Mexico.

In March 2018, a consortium led by Eni in which Lukoil holds a 25% stake won the contract for Block 28 offshore the Gulf of Mexico, at water depths between 20 and 500 meters.