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Mexico Left to Play Catch-Up as Oil Majors Drill Deep in Gulf

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MEXICO CITY (Dow Jones), Apr. 22, 2010

Officials at state oil monopoly Petroleos Mexicanos, or Pemex, can do little more than watch from the sidelines as oil majors break deep-drilling records on the U.S. side of the Gulf of Mexico.

The recent startup of the massive Perdido offshore drilling hub -- a joint-venture of Royal Dutch Shell Plc (RDSB), Chevron Corp. (CVX), and BP Plc (BP) -- even has some Mexicans fearful that oil from the Mexican side could seep over and get sucked up in what has been dubbed locally as "the drinking straw effect."

Perdido is a floating complex 200 miles from the Texas coast that can be fed with oil and gas from nearby deposits. The first ones -- Great White, Silvertip, and Tobago -- are expected to reach average daily output of 100,000 or more barrels of oil equivalent.

As Pemex doesn't have the technology to drill anywhere near the depth of the deep-water experts, and under Mexican law can't share risk with them, government officials found themselves on the defensive as Perdido went on stream.

Energy Minister Georgina Kessel and Foreign Minister Patricia Espinosa said in a joint statement there was no clear information that cross-border deposits exist that would cause the "drinking straw effect."

"The Foreign Ministry and Energy Ministry wish to stress that they are taking all the necessary measures to protect the sovereign rights of Mexico concerning natural resources in the Gulf of Mexico," the statement said.

While a binational moratorium on drilling beyond the 200-mile territorial waters in the Gulf expired recently, the statement said, Mexico was seeking an extension.

Global oil giants have been learning the Gulf game drilling in U.S. blocks unaffected by the moratorium, and Pemex has just slipped further behind, said George Baker, head of the Houston-based consulting firm Energia.com.

Pemex "has no plan, no technology, no anything to show for the last 10 years," he said.

At a conference last week on Mexico's 2008 energy reforms, Pemex officials said they do have a Gulf strategy and have begun exploration.

Using contracted equipment, Pemex has drilled 10 deep-water exploratory wells since 2004, but so far hasn't developed any.

Currently, Mexico has one deep-water platform in the Gulf, said Jose Antonio Escalera, deputy director for technical exploration at Pemex. In 2012, he said, Pemex expects to have four as it intensifies deep-water activity.

Pemex hit a crude production peak in 2004 at 3.4 million barrels a day before its biggest offshore complex, Cantarell, began a steady decline. The company expects to produce 2.5 million barrels a day this year.

In a January strategy report, Pemex identified nine areas in the Gulf for exploration, including the Mexican side of the area known as Perdido, which in Spanish means "lost." Production from deep water deposits is a key part of Mexico's strategic long-term energy plans.

Deep-water exploration and production requires drilling down to levels of a mile or more. The Perdido hub is moored at 8,000 feet. Traditionally, Pemex's wells have measured in hundreds -- and not thousands -- of feet.

Pemex hopes to use new contracts to draw deep-water drillers into the Mexican side of the Gulf. Any company doing so can't share any oil that's found, nor be paid in oil, but could receive performance bonuses from Pemex.

Gulf experts speaking at the conference expressed caution on whether Pemex would generate much interest from deep-water experts such as Brazil's Petrobras (PBR), which wanted to work with Pemex in the past but was turned down because of Mexican energy laws.

Oil exploration and production companies -- like gamblers looking for the big win -- usually want oil in return for risking billions of dollars on deep waters.

"Everywhere else, if I have success, I know I have barrels of oil to sell," said Michelle Michot Foss, head of the Center For Energy Economics at the University of Texas--a conference sponsor. "You don't get that in Mexico."

Still, Foss said Pemex had a chance with its new contracts. "You have to get the bids out there transparently, and let people give it a crack to see if deals can be put together."

President Felipe Calderon said recently the first incentive-based contracts would be for squeezing more oil and gas out of mature fields, and that a deep-water round of the contracts would come later.

Copyright (c) 2010 Dow Jones & Company, Inc.

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