FEATURE: Private E&P companies make strides in Mexican shallow waters; challenges remain

Mexico City — Private exploration and production companies are making progress in Mexican oil blocks in the Gulf of Mexico long neglected by state Pemex.

The success of the private companies in finding reserves is a result of the studies conducted prior to bid rounds through which they won the contracts, organized by the previous administration, sources told S&P Global Platts this week. However, hurdles lay ahead for these companies to ramp up production profitably, they said.

Companies that won production contracts in oil blocks located in shallow waters during Mexico´s oil rounds are reaching first oil or increasing their production faster than expected, even as the government suspended many of industrial activities because of the coronavirus pandemic and government offices remained closed.

At the end of May, Argentina-based Pan American Energy began production at its Hokchi 4-DEL Field, which it won in September 2015 during the second auction of the first round of oil blocks awarded by the previous administration of President Enrique Pena Nieto

First oil at Hokchi 4-DEL, located offshore the state of Tabasco, began May 24, ahead of schedule, PAE said two days later. The company estimates its initial production will climb to around 3,500 b/d as it builds necessary infrastructure that it expects to complete by September. At its peak, Pan American expects Hokchi 4-DEL to produce around 30,000, according to data by Mexico's National Hydrocarbons Commission, or CNH.

A Pan American representative declined to comment June 2, while both CNH and Pemex did not respond to repeated requests for comment.

Italy´s Eni, which also won blocks during Round 1.2, is ready to drill a fourth well to increase production to almost 20,000 b/d, sources said. That is almost as much as the 21,500 b/d of increased production Pemex is obtaining at its most recently announced wells, which the government considers a priority.

An Eni representative did not respond to requests for comment.

VALUABLE DATA

The success of these companies shows these fields were known to contain abundant resources, and that information, efficiency and capital can maximize production, said Gonzalo Monroy, founder and CEO at consultancy GMEC in Mexico City. The large amount of available information led to a highly competitive auction process that increased the government take companies were willing to pay for the blocks, way above the minimum required, Monroy said.

During Round 1.2, the government take, a measure of how much companies pay for contracts including royalties, capital expenses and taxes, was above 70% of operating profits, according to official data by CNH, which conducts the rounds.

Private companies are proving that by using technology and their experience they can prove there are more resources than Pemex thought, according to John Padilla, managing director and partner at consultancy IPD Latin America in Bogota.

"This proves the benefits of having different people looking at things in a different kind of way," said Padilla, offering that Mexico had never allowed private companies to operate independently before the rounds, but only as contractors to Pemex.

CHALLENGES TO GROWTH

Despite their successes, companies will face challenges in profitably ramping up production, sources said.

For projects to be profitable a limiting element is the availability of pipelines, Padilla said. Eni is now moving its production on Pemex pipelines, but also plans to use a floating production, storage and offloading vessel now under construction and expected ready in 2021, allowing it to ramp up production to its expected 90,000 b/d peak.

Pan American said May 26 that it would initially use Pemex infrastructure. According to the plans it presented to CNH, the company could in the future opt to build its own. The total production the company expects from Hokchi 4-DEN over its life is 147.8 million barrels of crude and 45.4 Bcf of gas, according to the plans.

An independent oil consultant, who asked not to be identified, said companies operating in shallow waters will also face another risk for profitable growth: the complexity of the wells in the Gulf of Mexico. The conditions in Mexico´s shallow-water deposits,located in carbonate formations, have historically shown that they tend to fracture, and decline quickly, increasing the costs.

"That will soon begin to happen to Hokchi too," said the consultant, who worked at Pemex for most of his professional life.

Other consultants agreed on the complexity of the area, but said it was not clear whether the fields of either Pan American, Eni or Houston-based Fieldwood, a third company winning bids, are comparable to those operated by Pemex in the past.