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Mexico's CNH cancels Pemex onshore farmout auctions

Highlights

Fields have combined 58,000 b/d, 310 MMcf/d production potential

Follows earlier auction cancelations, moves to bolster Pemex

Houston — Mexico's Comision Nacional de Hidrocarburos has announced plans to cancel a joint venture auction for state-owned Pemex in seven onshore areas, previously scheduled for October, under pressure from the Lopez Obrador administration.

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The seven clusters combined produced 33,000 b/d of oil and 190 MMcf/d of natural gas in early 2018.

Following their farmout, a joint-venture partnership could allow Pemex to expand oil production in the onshore fields by an estimated 75% and gas production by over 60% at its peak, according to the CNH.

Cancelation of the auctions follows an earlier decision by the CNH in December to postpone the auctions by seven months--a move that also came at the behest of Mexico's president.

The blocks that would have been auctioned on October 31--Artesa, Juspi-Teotleco, Giraldas-Sunuapa, Bedel-Gasifero, Bacal-Nelash, Cinco Presidentes, and Lacamango--have seen minimal investment from budget-constrained Pemex in recent months.

According to a previous estimate from the company, production of hydrocarbons from the seven basins located in Veracruz, Tabasco and Chiapas would likely fall to a combined 14,100 b/d and 90 MMcf/d by 2020 if plans to pursue a joint-venture partnership were abandoned.

POLITICAL PRESSURE

In December, Mexico's newly elected president Lopez Obrador pressured the CNH to announce the cancelation of upstream auction rounds 3.2 and 3.3, previously scheduled for February, and to postpone the now cancelled joint-venture farmouts by seven months to October.

At the time, the administration argued that Mexico needed to evaluate existing contracts and its energy policies. Just days later, the AMLO government unveiled plans to dramatically increase Pemex's production to over 2.4 million b/d of oil and nearly 6.5 Bcf/d of wellhead gas by 2024.

At Thursday's CNH meeting, though, Commissioner Sergio Pimentel warned that the government's aggressive production goals for Pemex would be unachievable without private investment support.

"Cancelling the tender of these areas is a bad signal," he said, emphasizing the risk such a decision poses to Mexico's ability to further attract and secure private upstream investment.

In a webcast session of Thursday's meeting, Pimentel reminded other directing commissioners that earlier farmouts of the Trion deepwater and onshore Ogarrio and Cardenas-Moras fields, represented a $1.6 billion capital injection for Pemex.

"Cancelling these farmout tenders scraps the possibility of Pemex receiving a fresh resource injection from the private sector," he said.

PRODUCTION

According to Pemex, a larger budget granted to the state-owned company under the Lopez Obrador administration this year, which was lifted to a total $14.4 billion from $11.1 billion in 2018, could help the state-owned producer to achieve the government's aggressive production targets.

Through April, Mexican crude oil production, attributable almost entirely to Pemex, has averaged just under 1.7 million b/d, down about 200,000 b/d compared to the January-to-April average in 2018.

Total dry gas production has also continued to decline. Through mid-June, output has averaged less than 2.7 Bcf/d, down from a nearly 2.9 Bcf/d average over the same six-month period last year, S&P Global Platts Analytics data shows.

According to an earlier published 2017-21 business plan, Pemex's once aggressive farmout program, if successful, could have added some 267,000 b/d to domestic oil production by 2020, increasing the company's total output to nearly 2.1 million b/d.

-- J. Robinson, jrobinson@spglobal.com

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Edited by Jim Magill, newsdesk@spglobal.com