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Low Gas Prices Curtail Work in Mexico, Says Halliburton

November 30, 2009
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Halliburton last week reported a "major reduction in activity" by Mexico's Petroleos Mexicanos (Pemex) in 4Q2009, which it said was caused by "low natural gas prices and other constraints."

The Houston-based oilfield services company, which has operated in Mexico for more than 60 years, said work in the gas-rich areas of Burgos, Veracruz, and southern areas of the country had been impacted by the state-owned oil company's decision to significantly reduce activity because of low gas prices. Floods and heavy rain in eastern and southeastern Mexico in early November also caused at least 90 gas and oil wells to stop working.

The reduced activity is expected to result in a 2 cents/share reduction in Halliburton's 4Q2009 earnings, the company said.

Halliburton's news followed an earlier report last week by Noble Corp., which is the largest supplier of jack-up rigs to Mexico. Noble said it may lose up to one-third of the leases for its shallow-water rigs because Pemex could allow the contracts to expire in 2010.

Pemex suggested just months ago that it might add rigs in 2010 to boost gas and oil output, but now it may renew only eight of 19 jack-up rigs under contracts that expire next year, energy analyst Jefferies & Co. said in a note to clients. Noble is the most exposed oil services company working with Pemex, but Dallas-based Ensco International Inc. and Hercules Offshore Inc. also could lose rigs contracted to Pemex in the coming year, the analyst noted.

"A reduction in activity would be a negative surprise," said Jefferies analysts. Pemex could be attempting to renew contracts temporarily "at much lower rates." However, the analysts cautioned "that it is still too early to draw an overly bearish conclusion given the unpredictable nature of Pemex's budget and spending patterns."

Pemex budgeted a record $19.5 billion this year for exploration and production (E&P) to offset its sharpest drop in oil and gas output since 1942. The company likely will spend a similar amount on E&P in 2010, Pemex CEO Juan Jose Suarez Coppel said recently.

Earlier this month Pemex and the Secretaria de Energia (Sener) said they were preparing risk contracts to offer to producers -- both domestic and international -- to accelerate the country's search for new energy reserves. Sener urged the country's regulatory institutions to speed up a new legal framework that was approved in 2008 by the legislature.

Sener said it was urgent "to speed up the discovery of new oil fields and the incorporation of reserves, as well as increase Pemex's execution capacity, particularly through new contracting schemes so that specialized companies can support its activities."

The new incentive-based structure for oil and gas contracts with Pemex is expected to begin sometime early next year, said Suarez. Pemex has not issued any details about what project may come first, but when they are implemented, the new contracts are meant to give private firms more flexibility in service contracts with Pemex. They are in some ways similar to the company's multiple service contracts, which so far have met with limited success (see NGI, June 22).

A recent legal challenge to the new risk contracts could delay implementation, Suarez warned. However, he said Pemex would "make sure they comply with the spirit of the law" and make any necessary changes.

Mexico's largest oil field, Cantarell, was producing 2.2 million b/d in 2005, or 60% of total oil production, but by December output from the field is expected to fall to 550,000 b/d, or 21% of Mexico's petroleum production. Cantarell will be producing an average 423,000 b/d between 2009 and 2017, and after 2017 output is forecast to fall to 255,000 b/d, or 8.4% of national production, according to Pemex forecasts.

Fitch Ratings earlier this month cut the sovereign rating on Pemex by one notch and said the government's recently approved tax increases to boost output were not enough to address the fiscal deterioration in public accounts. Pemex has stated that its net debt may increase by up to $4 billion in 2010 as it borrows money to continue its E&P investment program. Pemex officials also have said they are confident that Mexico will sustain its oil production at 2.5 million b/d through 2012.

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