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Pemex reserve discovery boosts Mexico's oil ambitions

Petróleos Mexicanos SA de CV's largest hydrocarbon reserve discovery in 30 years is boosting the Mexican government's confidence that the troubled state-run enterprise can reverse a more than decadelong decline in crude oil production.

An analysis of initial production results and seismic data from the onshore Quesqui field led to a confirmation and announcement Dec. 12 of the discovery's 500 million-barrel proven and probable and possible, or 3P, reserve potential.

By 2020, Pemex, as the state-owned company is commonly known, expects to drill 11 new wells with total field production of 69,000 barrels per day of crude and approximately 300 MMcf/d of natural gas, CEO Octavio Romero Oropeza said in a news release. Crude production is forecast to reach 110,000 bbl/d and natural gas production 410 MMcf/d by 2021, he added.

The field's onshore location in Mexico's southeastern state of Tabasco is considered significant for its comparatively low production cost and for its light crude output, which commands a higher export price.

The Quesqui field was discovered by Pemex in May, followed one month later by the completion of Quesqui 1, an exploratory well producing about 4,500 bbl/d of crude oil.

Mexican President Andrés Manuel López Obrador, who toured the field Dec. 12 with Romero Oropeza, emphasized the Quesqui discovery as fundamental to the government's strategy to reverse declining production at Pemex.

"For the first time in 14 years, petroleum production isn't falling," he said. "We're providing resources to Pemex for the development of new fields ... and we're starting to recuperate production."

In October, Pemex reported its first quarterly production increase since 2005. At the time, the company said it had lifted crude output by 21,000 bbl/d, or about 1.2%, during the third quarter to an estimated 1.694 million bbl/d. Natural gas production was reported at a gross 4.86 Bcf/d for the third quarter, representing a 96 MMcf/d or 2% increase over the prior three-month period.

In a five-year business plan announced in July, Pemex's chief executive said the company would grow oil production to 2.7 million bbl/d by 2024 and simultaneously balance the budget by 2021.

The new strategy has seen Pemex increase investment in the shallow water fields of the Gulf of Mexico this year, slash spending on administration, and cut costs related to fuel distribution and fuel theft.

As part of its effort to revive oil production in Mexico's southeast, Pemex is developing the Quesqui field, along with three others in Tabasco state: Cibix, Valeriana and Chocol. The company plans to drill 21 exploratory wells there in 2020, followed by an additional 24 wells in 2021.

Pemex's strategy to accelerate drilling and exploration activity and resume production at old wells arguably has merits for growing production in the short term, according to Luiz Manuel Martinez, senior director at S&P Global Ratings.

The risk for Pemex, though, is that current spending priorities come at the expense of much-needed investment in the company's proven reserves, its financial stability and its management, Martinez told an audience at a recent industry conference in Mexico City.

With short-term political goals and an approaching midterm election likely driving the strategy at Pemex, Martinez called into question the company's ability to maintain production growth in 2020 and beyond.

In its third-quarter earnings report, Pemex said its proven reserves would increase to 7.2 billion barrels of oil equivalent in 2020, up from a low at 7 billion boe this year. Executives did not provide quarterly results on the company's estimated change in proven reserves.

The company's financial stability, which could affect future investments in Pemex's operations and core businesses, came under increasing strain during the most recent reporting period. For the third quarter, Pemex reported a net loss of nearly 88 billion Mexican pesos, which compares to a net loss of 53 billion pesos in the second quarter and a 27 billion peso profit in the third quarter of 2018.

As of Dec. 11, US$1 was equivalent to 19.17 Mexican pesos.

Jonathan Robinson is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.