In February’s one-pager, we stated that López Obrador’s administration will realize sooner or later of the necessity of private investment in upstream activities just as the two former administrations did during the last 12 years. Today, we believe that “sooner” will prevail as we have identified clear signals that farm-outs will be reopened soon representing a major opportunity for oil and gas operators as Pemex has been struggling in developing the largest oil and gas potential in Mexico.
In August 2014, Pemex was awarded with 83% of Mexico’s 2P Reserves and 21% of Estimated Resources through a process known as Round Zero regulated by the Mexican Constitution where Pemex should request only the areas for which it has financial, technical and management capabilities. This request was evaluated by the Ministry of Energy (“SENER”) and the National Hydrocarbons Commission (“CNH”) and, as a result, Pemex was awarded with 489 blocks (108 for exploration and 381 for extraction).
After five years and 72 entitlements modified, it is clear that Round Zero was too much for Pemex to handle. According to SENER, by the end of 2018, 65 of 101 exploratory entitlements have not fulfilled their work commitments and 136 of 259 extraction entitlements have no activities.
Pemex’s financial, technical and management capabilities were insufficient to stop declining produc-tion and to maintain 2P reserves awarded in Round Zero (20,589 mmboe in 2014 drop 34% by 2018).
Last week, CNH approved an ultra-deep-water drilling permit to Pemex’s Block 5 of Perdido Area of Round 2.4. Since Pemex has no experience in deep water development, it will be necessary to farm-out this block in case it confirms a commercial discovery. This is a positive signal that government will reacti-vate farm-outs soon. However, this benefits would come in the long run and the government requires results in the short run as it needs to increase production by 700,000 barrels per day in 5 years.
Considering that CAPEX of the last 10 years (average of 17 billion from 2009 to 2015 and an average of 10 billion from 2016 to 2019) was not enough to stop declining production; it seems impossible to achieve short run results unless Pemex starts farming-out fields in development and production stages in shallow water and onshore, where there is a vast potential of more than 2o,000 mmboe in 3P reserves.
Farm-outs would represent the greatest opportunity for private investors to partner with Pemex and, for the government, to achieve its goals. With an adequate approach, oil and gas industry could persuade the government that this is an excellent opportunity to relaunch an Energy Reform 2.0, where farm-outs and Pemex would become central