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Expected oil discovery announcement in Mexico taken cautiously amid hurdles

Highlights

Pemex expected to announce discovery on March 18

Potential resources comparable to those found at Quesqui, Ixachi

Premature to speak about success, observers say

Mexico City — Mexico is due to announce later this week a sizable oil and gas field in the Tabasco region, but observers doubt the find will be a game changer or if it could be developed at all.

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Pemex has made "a big discovery" in Tabasco, the company's CEO Octavio Romero Oropeza said March 14 on public television. Previously, President Andres Manuel Lopez Obrador had briefly mentioned the discovery during his daily press conference.

"It is a large field surrounded by smaller ones that could together hold prospective resources comparable to those found in Ixachi and Quesqui," Romero Oropeza said without giving further details.

PODCAST: Mexico aims to make a revitalized Pemex an engine for economic development

Ixachi is an onshore field discovered in 2019 where Pemex has estimated almost 2 billion boe of recoverable resources mostly gas, Romero Oropeza said. Quesqui, discovered in 2020, holds almost 1 billion boe, he said.

More details of the new discovery will be made on March 18, during a national event to commemorate the anniversary of Mexico's expropriation of foreign oil assets in 1938, he said.

Familiar area

A lot is known already about the onshore fields in the area from the lessons learnt at Ixachi and Quesqui, said Gonzalo Monroy, CEO of Mexico-based consultancy GMEC.

At Ixachi, Pemex has been able to ramp up production of natural gas relatively quickly after its discovery, Monroy said.

Pemex began production at Ixachi with 6.13 MMcf/d in April 2018, data from the National Hydrocarbons Commission (CNH) shows. In January, the company produced 196.5 MMcf/d, up considerably compared to the 44.7 MMcf/d registered the previous year.

However, we know the wells at Ixachi and Quesqui have high temperature and high pressure, which translates into higher costs, Monroy said, adding that at current prices gas projects do not help alleviate the main problems of the company like the excessive costs of its production chain.

"It is not a game changer in any way," he said.

Not so fast

Marco Cota, CEO of Mexico-based consultancy Talanza Energy, warned it is premature to call this a success.

Over the years, Mexican presidents have traditionally made big announcements during the March 18 celebration, most of them regarding oil discoveries, Cota said. These announcements tend to be only political marketing, particularly during an election year like 2020, he said.

After any discovery is made, the law requires that companies notify CNH first.

Then, companies have six months to come up with an evaluation plan where they determine whether or not it has commercial potential.

Only after the discovery has been identified as commercially viable, can one speak about success, Cota said, adding that over the years Pemex has identified dozens of potential areas, but has been unable to develop them.

"At the end of the day, Mexico has no shortage of reserves, it is the environment for investments in the country that is deteriorating," he said.

When coming to power in late 2018, president Lopez Obrador cancelled the upstream auctions that had attracted foreign investment in the sector after over seven decades of monopoly in an attempt to strengthen Pemex. The reluctance to bring in private capital has remained -- despite suggestions by regulator CNH -- despite the huge investments needed to develop the resources available in the country.

A CNH representative was not immediately available for comment.

Ailing production

Despite the efforts of the government to stabilize Pemex operations by injecting roughly $17 billion in the last two years, the state oil company has been unsuccessful at increasing its crude production.

During 2020, the company managed to keep output close to 1.6 million b/d, but consistent underinvestment in exploration has led to a dramatic drop in the country's reserves from almost 45 billion boe in 2001 to less than 16 billion boe in 2020, according to CNH data.

According to S&P Global Platts Analytics, Pemex production is expected to average 1.66 million b/d through 2030.

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