Pemex’s farm-outs: The big opportunity

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.

1.- PEMEX’S CURRENT FINANCIAL, TECHNICAL AND MANAGEMENT CAPABILITIES

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).


2.- FARM-OUTS, THE BEST AND ONLY SOLUTION TO INCREASE PEMEXS EXECUTION CAPABILITIES

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




Private operators in Mexico have a good chance to influence the process of reactivating fam-outs. Here some of our suggestions:

  • Government should recognize that Pemex has a big space to improve and that by partnering with key operators it could increase not only money but also technical and management capabilities.
  • One way to start could be to establish technical workshops to show Pemex and government agencies the advantages of partnerships.
  • It would be crucial to approach government and Pemex to present new technologies for increasing production and reserves rapidly in specific projects where Pemex has not obtained good results (e.g. deep water, EOR-IOR, shale, Chicontepec, marginal fields, others).
  • Government must recognize that service contracts like CSIEEs will not maximize investments, production nor oil rent.
  • Industry can help Pemex and government to review the terms and conditions of its JOA to increase competition in farm-out’s tenders.
  • Finally, Pemex’s farm-outs are consistent with the political intention of Pemex’s mission of rescuing energy sovereignty.



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