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Pemex should clarify E&P plan: oil regulator

04 May 2018 17:04 (+01:00 GMT)
Pemex should clarify E&P plan: oil regulator

Mexico City, 4 May (Argus) — Mexican oil regulator CNH suggested state-run Pemex clarify its E&P strategy, as the company's ability to meet an intense drilling program looks increasingly uncertain.

Pemex's progress report presented yesterday shows that the company completed drilling six wells out of 56 included in its CNH-approved E&P plan, which ends in August.

The plan includes minimum work programs for each of the 421 areas the government awarded to Pemex in August 2014 as a result of the energy reform that swept away the company's monopoly. They do not include any of the blocks the company has won in public auctions since then.

Pemex initially had until August 2017 to meet its minimum work programs, or else the blocks would return to the state to be included in future public auctions.

But falling global oil prices shortly after the reform and two government-imposed budget cuts impaired the company's investment capacities. Pemex was given another two years to comply with its investment plan, until August 2019.

According to the new pledge, Pemex must drill 128 wells in the next two years and invest an estimated Ps85.4bn ($1.6bn).

As of 31 March, or halfway through the first 12-month period, Pemex had drilled six exploration wells, or about 10pc of its annual goal of 56. Another eight wells are in the process of being drilled, 13 have been authorized by the CNH and two in the process of being approved.

"The numbers we are seeing … are not so encouraging, and the commitments that were established are difficult to comply with," said commissioner Héctor Acosta Félix.

The problem, Acosta said, is that Pemex is almost solely judged on the number of wells it is drilling, based on the energy secretary's established success measurement.

"The additional period of time that was established … ends up being very brief for the amount of commitment that Pemex must assume in order to keep the areas," Acosta said, arguing in favor of a proper re-evaluation of the situation sooner rather than later.

Commissioner Héctor Moreira Rodríguez, said Pemex might be able to reach the target, but wondered if it was in the company's interest, while another said that the heavy focus on drilling activities might become a "perverse incentive, to drill just for the sake of drilling."

As a result of the 2014 reform, Pemex was freed from its mandate to produce at all costs, now focusing on becoming a profitable, competitive business.

At the end of the presentation, several commissioners agreed that Pemex should clarify its strategy now and define which blocks it is genuinely interested in keeping. The discussion did not constitute a formal request to Pemex.

In this year's budget, Pemex has earmarked Ps168.4bn for E&P activities, the same as in the previous year, of which Ps13.2bn were allocated to exploration, up 3pc from 2017. As of 31 March 2018, Pemex had spent Ps44.5bn, or about 26pc of its total E&P budget.

But even so, industry participants have said that Pemex lacks the capital to develop all of the exploration acreage on its books.

Another way for Pemex to keep the areas it cannot afford to invest in is to look for a partner through a CNH-supervised auction, also known as farm-outs. Farm-outs would allow Pemex to share risks and investment, and are thought to be the quickest way for the company to ramp up its declining production.

But Pemex is far below its original target of holding 60 farm-outs, as stated in its 2017–2021 business plan. So far, it has managed three successful farm-outs, two others elicited no bids, and another seven license contracts will be up for grabs on 31 October.

On average, Pemex has organized six farm-outs a year, so far falling shy of the planned 60 tenders by 2021.