Mexican state oil company Petróleos Mexicanos (Pemex) will seek to allocate $1.04 billion of next year’s capital expenditures (capex) to the Ixachi onshore natural gas and condensate project in Veracruz state, making Ixachi Pemex’s third-largest upstream project in the country.
The figure is part of President Andrés Manuel López Obrador’s 2020 budget proposal, which the Finance Ministry presented to congress on Sunday.
Pemex is seeking a 2020 budget of 523,425 billion pesos, or about $26.8 billion, an 8.8% increase from the amount approved by legislators for 2019.
The document proposes a capital expenditure (capex) budget of 269.2 billion pesos, or about $13.8 billion, for the company’s upstream unit, Pemex Exploración y Producción (PEP), a 28% increase from this year.
Ixachi is one of 20 fields for which Pemex is accelerating development in order to reverse more than a decade of declining hydrocarbon output.
Of the 20, Ixachi is by far the most relevant in terms of expected natural gas output.
Pemex in June obtained approval from upstream hydrocarbons regulator Comisión Nacional de Hidrocarburos (CNH) for a $6.4 billion development plan at the field. Pemex plans to drill 47 wells at Ixachi, where natural gas output is expected to peak in 2022 at 638.5 MMcf/d.
Finance minister Arturo Herrera said Sunday that the budget also includes an 86 billion-peso support package for Pemex, comprising a 46 billion-peso capital injection and a 40 billion-peso reduction of its tax burden.
PEP’s proposed 2020 budget also includes 6.2 billion pesos ($316mn) for the Chicontepec formation in the Tampico-Misantla basin, nearly double the amount allocated for 2019.
Pemex so far has been unable to tap Chicontepec’s vast oil and gas resources, due to the formation’s technical complexity.
CNH in June approved a $39 million plan by Pemex to drill a horizontal exploration well at Chicontepec at a depth of nearly 12,000 feet. A day later, López Obrador said he would “suspend” the authorization, citing his opposition to hydraulic fracturing (fracking).
However, Pemex’s 2019-2023 business plan confirmed that the company planned to continue investing in unconventional drilling.
“Frack, baby, Frack!!,” tweeted Mexico City-based energy consultant Gonzalo Monroy on Sunday, above a photo of the Chicontepec line item in Pemex’s 2020 budget.
The budget also allocates $238 million for seven shale oil and gas pilot projects in the Sabinas, Burro-Picachos, Burgos, Tampico-Misantla, and Chihuahua basins, up from $171 million approved for the same projects in 2019.
The budget increase for these projects indicates that Pemex has obtained at least some promising early results in the unconventional plays, Monroy told NGI’s Mexico GPI, adding, “but it’s still too early to tell.”
Other gas-focused line items in the budget include the Integral Veracruz and Burgos projects, which received allocations of $384 million and $157 million, respectively.
These amounts are nowhere near enough to have a meaningful impact on production, Monroy said.
The finance ministry said Sunday that the budget presupposes combined oil output from Pemex and private sector drillers reaching 1.951 million b/d in 2020, up from 1.675 million b/d in July 2019.
This would be an increase of 276,000 b/d from July 2019, a goal about which Monroy said he is “very skeptical,” due to the rapid ongoing decline of Pemex’s legacy mega-fields such as Ku-Maloob-Zaap (KMZ) and Cantarell.
Monthly crude oil production at KMZ averaged 844,000 b/d from January-February of this year, down from 879,000 b/d for the same period a year ago.
“If the decline for some reason is accelerated in Ku-Maloob-Zaap and/or other fields, that is going to take a huge toll,” Monroy said.
Monroy also said that Pemex’s integrated exploration and extraction services contract (CSIEE) model has been poorly received by the industry, a worrying sign, given that Pemex’s business plan depends almost entirely on CSIEEs to increase oil and gas production.
The finance ministry said it expects Mexico’s Maya heavy sour crude oil blend to fetch an average price of $49/bbl in 2019, due to lower demand as a result of increased trade tensions, deceleration of industrial activity globally, and the entrance into effect in 2020 of the International Maritime Organization’s 0.5% cap on the sulphur content of shipping fuel. The current limit is 3.5%.
By comparison, the U.S. Energy Information Administration (EIA) said in August that it expects West Texas Intermediate (WTI) crude prices to average $59.50/bbl in 2020.