Editor’s Note: This is one of a 14-piece series NGI undertook as the energy industry readied for the new year, with Lower 48 natural gas and oil supply continuing to surge in an uncertain environment as liquefied natural gas exports ramp up, Mexico markets remain shrouded and stakeholders demand more value. Get your complimentary copy of NGI’s 2020 Special Report today.
Both skeptics and proponents of Mexico’s new state-centric energy policy will be closely watching state oil company Petróleos Mexicanos (Pemex) in 2020 as it seeks to fulfill President Andrés Manuel López Obrador’s mandate to reverse years of declining oil and natural gas output.
In terms of natural gas, the most relevant indicator will be the pace at which Pemex develops the Ixachi onshore gas and condensate field in the Veracruz Basin.
Pemex has allocated more than $1 billion in capital expenditures (capex) in 2020 for Ixachi, the most significant gas-focused project in the company’s exploration and production (E&P) portfolio.
“Historically, Pemex has never developed in any meaningful way, natural gas fields per se,” Mayer Brown LLP’s Jose Valera told NGI’s Mexico GPI. “Most of the natural gas produced in Mexico is associated to the production of crude oil. Crude oil was always prioritized because it generated export revenues for the treasury.”
Non-associated gas plays, therefore, were “not economically attractive to Pemex or the government, and consequently, those fields were not developed.”
Ixachi, however, could prove to be the exception if it is developed correctly, according to Welligence Energy Analytics’ Pablo Medina, vice president of research. Medina told NGI’s Mexico GPI recently that Ixachi is the third-most valuable project in Pemex’s upstream portfolio, due to its high volume of natural gas liquids (NGL) and because of Mexico’s favorable tax regime for non-associated gas plays.
However, he said, Pemex’s development plan for the high-pressure, high-temperature reservoir could prove overly ambitious in terms of its timeframe and scope.
Gas production from Pemex assignation AE-0032, the area that contains the Ixachi discovery, totaled 45.9 MMcf/d last month, up from 13.1 MMcf/d in November 2018, according to upstream regulator Comisión Nacional de Hidrocarburos (CNH).
According to the Pemex 2019-2023 business plan, the company expects Ixachi gas production to reach 100 MMcf/d by the end of December, and 400 MMcf/d by end-2020. Pemex expects to reach peak gas output of 638.5 MMcf/d at Ixachi by 2022.
New OFS Contracts?
Pemex this month announced the discovery of the Quesqui field in Tabasco state. Pemex said it expects gas production from Quesqui to reach 300 MMcf/d in 2020, and 410 MMcf/d by 2021.
CEO Octavio Romero Oropeza said the company plans to develop 20 fields per year during López Obrador’s six-year term, although experts have expressed their doubts about the viability of this plan.
“Pemex is there to generate revenue for the government as much as possible, which means we’re going to invest as little capital as we can, and produce as cheaply as we can, to maximize the net revenues for the government,” said Valera, who co-leads Mayer Brown’s oil and gas practice in Houston.
Because of the natural decline of Pemex’s legacy megafields such as Cantarell and Ku-Maloob-Zaap, Pemex now needs “to explore, which means risking capital, and they are not keen on doing that, or go to deepwater or non-conventional areas where they lack the operational and technical capacity to do that.”
Having frozen bid rounds, farmout tenders, and the migration of oilfield services (OFS) contracts to E&P contracts, Pemex is pinning its production expectations on new OFS contracts, a strategy that has worked poorly for other national oil companies in Latin America, Valera said.
“Bolivia has done it for awhile, with results that clearly show that reserves are not being replenished,” Valera said. “Ecuador did it under [President Rafael] Correa, with the same effect.”
For 2019 and 2020, Pemex is projecting full-year average gas production of 3.56 Bcf/d and 3.89 Bcf/d, respectively.
The forecast “reflects the incorporation of new fields like Ixachi and other non-associated gas fields that will allow, gradually, the recovery of production levels…reaching nearly 5 Bcf/d in 2024,” the business plan states.
Legislators approved an upstream capex budget of 269.2 billion pesos, or about $14.3 billion at the current exchange rate, for Pemex in 2020. This is up from 210.3 billion pesos ($11.2 billion) in 2019, and 168.4 billion pesos ($8.94 billion) in 2018.
In acreage in which Pemex holds a 100% operating interest, the company reported gas production of 3.78 Bcf/d in November, up from 3.74 Bcf/d in the same month a year ago.
Including production from joint ventures, the November 2019 figure was 3.87 Bcf/d, up from 3.81 Bcf/d.
Dry gas production from Pemex processing facilities edged up to 2.37 Bcf/d from 2.35 Bcf/d in the year-ago month.
According to the business plan, Pemex aims to produce 4.92 Bcf/d by 2024.