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Pemex Reversing Gas Decline, Output Forecast to Reach 8 Bcf/d by 2010

Petroleos Mexicanos (Pemex), Mexico's state-owned oil and gas company, is reversing a decline in its natural gas production and by 2010, output is forecast to be around 8 Bcf/d -- nearly double what it was three years ago, a company executive said last week.

Mauricio Alazaki, the associate managing director of finance for Pemex, said the increased gas production followed a decision to refocus Pemex resources on exploration. He spoke Wednesday at the UBS Global Oil & Gas Conference in Austin, TX.

""Exploration is our main focus," and about 80% of Pemex's budget is now directed toward finding new oil and gas reserves, said Alazaki. "The company did little in terms of exploration until 2003...We did not explore for about 20 years. Today, we're only exploring about 26% of the prospective areas, mostly along the Gulf of Mexico. A lot of potential sites remain to be explored, mostly in the deepwaters of the Gulf of Mexico."

All of the renewed effort to explore has led to gains within oil and gas production. In 2002, Pemex's gas output was about 4.4 Bcf/d. This year, production is forecast to reach 5.3 Bcf/d. And despite its declining gas production, Pemex remains an oil powerhouse. It is the ninth largest integrated oil company in the world, and it ranks 10th in the size of reserves. It also is the third largest producer of crude in the world. But the declining gas output has made Mexico a net importer for its growing needs. Alazaki hopes that will not always be the case.

This year, Pemex will invest around $2-3 billion a year "in pure exploration," he said. "Gas has become a very important focus for the company. Ten years ago, we flared the gas, we had no use for it. This has been a new area of business for us in the last few years, and we're starting to see the results of this investment."

Pemex has invested in comprehensive seismic studies to complement its drilling. So far, the studies have indicated "prospective resources" of about 53.8 billion boe across the country and offshore, which would be more than the 3P [proved, possible and probable] reserves now on the books. "The potential reserves combined with the earlier 3 P reserves would be around 100 billion boe," he said. Most are estimated to be in the deepwater, in regions that Pemex has hardly begun to explore. But by most estimates, Alazaki said that within four years, Pemex should be able to replace 100% of its gas reserves a year, a dramatic turnaround.

"We expect production to be almost 8 Bcf/d by 2010," he said. Most of the increased gas output will come from Mexico's prolific Burgos Basin, but gas output also is accelerating from "several gas deals all around the Gulf of Mexico."

Part of Pemex's long-term strategy is to connect more pipelines into the United States.

"With our own production and energy projects, and some that the private sector is doing...including [liquefied natural gas] LNG plants, we expect we might be able to start exporting gas to the United States at some point in the future." Pemex has not been involved in LNG; it is handled by the government-owned electricity company, Comision Federal de Electricidad (CFE).

But Alazaki cautioned that Pemex still needs more private investment -- a thorn that sticks in the side of some of the country's leaders. Mexico's constitution bars direct foreign investment in Pemex, but Alazaki said the multiple service contracts, which were recently reenacted to allow foreign investment but not foreign ownership, have been a major step toward reforming the system.

On Jan. 1, Pemex began a "new fiscal regime," which has given it a more corporate structure, designed to make money and improve production (see NGI, May 30, 2005). Unlike in years past, when Pemex was a cash cow used by Mexico to fund government programs, it now is able to use more of its cash flow on internal projects.

"Now we are more focused as a business unit and not just a provider of services," said Alazaki. Pointing to other state-owned national oil companies, he said Pemex was "attempting to do with the company what other countries have done in the past. We're not inventing anything new. A lot of national oil companies have moved to company-line structures; a lot have gone public." Alazaki said the revamped strategy toward focusing on exploration is working, and he expects to see more positive developments in the years ahead.

A presidential election is scheduled for July 2, and some of the candidates have voiced their support of modifications to the constitution to allow direct foreign investment in Pemex. Other Latin American countries, including Venezuela, Bolivia and Ecuador, are slowly becoming nationalized, and Alazaki said Mexico is considering how Pemex can "share the responsibility" with foreign companies and CFE. If it succeeds, the changes would give Pemex "more access to financial markets, more transparency and more accountability."

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