Noxal 1 Discovery
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Ocean Worker
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The last several weeks have seen some interesting news coming from south of the border in Mexico, so this week we will take a look at the developments there.

Major Discovery at Noxal Well Offshore Veracruz
Mexican President Vicente Fox announced the discovery of a potentially world-class oil discovery in the deep waters about 60 miles off the coast of Veracruz. The Noxal 1 well was drilled by the Diamond Offshore semisubmersible Ocean Worker, which went on location at the end of November 2005. The well was drilled in approximately 3,000 feet of water to a depth of over 13,000 feet. The Ocean Worker is still on location and is contracted to remain at Noxal until at least June.

This new field, Deep Coatzacoalcos, has been estimated to hold as much as 10 billion barrels of crude oil. As such, this new discovery could help to reinvigorate the Mexican oil industry, which is facing the inevitable decline of its main oil producer, the Cantarell oilfield, which accounts for almost 60% of the country's daily output of 3.3 million barrels.

The Noxal well is also important because it opens up a new oil exploration province for Mexico, which to date has focused primarily on shallow water drilling. Only within the last 3 years has Pemex contracted more than 4 semisubmerisble rigs, with a peak of 11 semis contracted during the first half of 2004. Meanwhile, the number of jackups employed by Pemex has ranged between 20 and 30 rigs over those same 3 years.

Investments Needed
Pemex has announced that it will spend US$37.5 billion over the next 20 years to develop the 18 billion barrel Chicontepec reservoir in southern Veracruz. The field currently produces only 26,000 bpd. but Pemex hopes to raise that to 1 million bpd within 8 to 10 years. This increase in production will serve to offset declines in the Cantarell production.

In addition to the investments planned for Chicontepec, Pemex CEO Luis Ramirez Corzo stated that the company needs to invest US$20 billion annually for the next 20 years in order to increase production and reduce dependence on imported natural gas. Over the last 5 years of President Fox's administration, Pemex has invested an average of about US$9.5 billion per year. So, the required investment levels represent more than a 100% increase over recent levels.

Thanks to changes in its tax regime, Pemex may be able to retain some of its earnings for further investment. Over the last 5 years, Pemex has carried a tax burden of 110% of its operating profits. As in 2005, when the company paid almost US$65 billion in taxes on US$50 billion in profits. Recent tax changes will keep Pemex from sinking under its own weight of debt, but more changes will almost certainly need to be made.

One area that has received some attention is allowing foreign oil companies to participate in deepwater oil projects. Considering the expense of the projects and Pemex's lack of experience in these depths, some view foreign involvement as essential in order to make projects like Deep Coatzacoalcos viable. In particular, the Center for Economic Studies of the Private Sector (CEESP) has voiced its opinion that Pemex will need to form JVs with foreign oil companies to take advantage of its deepwater discoveries. Even Pemex CEO Luis Ramirez Corzo has voiced concern about the company's inability to exploit these opportunities without outside investment and expertise.

Decline of Cantarell
In another recent announcement, Pemex expects that production from the Cantarell oilfield will decline by about 350,000 bpd during 2006. The field is currently producing between 1.9 and 2 million bpd, down from a high of over 2.2 million bpd in 2001. Since its start in 1979, the Cantarell field has produced about 11.5 billion barrels of its approximately 18 billion barrels of recoverable reserves.

Effects for the Offshore Rig Fleet
The addition of the deepwater prospects and the decline of shallow water fields will likely lead to a change in the composition of the Mexican offshore rig fleet over the next several years.

Currently, Pemex employs 7 semisubs with rated water depths ranging from 1,000 to 3,500 feet, along with a fleet of 27 jackups rigs. The semisubs in this market earn the lowest average day rates for rigs of their capacity of any region of the world, pulling in only about $53,000 per day versus an average of $128,000 around the globe. As Pemex's demand for these rigs increases with its deepwater exploration, day rates for these rigs are likely to increase, just as day rates for jackups in Mexican waters have increased over the last year from $40,000 a year ago to $54,000 today.

Pemex's semisub demand will likely grow over the next 2 years as it drills delineation wells in the Deep Coatzacoalcos field and tries to make further discoveries of deepwater fields, particularly in its northern GOM waters along the nautical border with the United States where potential for large discoveries still remains. These deepwater plays are of strategic importance to Pemex in the medium and long term, as they are the company's and country's best bets for maintaining and increasing production.

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