As Deepwater Drilling Booms, Mexico's Oil Could Leak to U.S.

MEXICO CITY Sep 7, 2007 (Dow Jones Newswires)

Just eight miles north of the Mexican border Royal Dutch Shell (RDSA) is busy developing Great White, a massive oil project sitting on 8,700 feet of water.

Experts say Great White and other deepwater finds in the U.S. Gulf of Mexico could drain Mexican oil. Reservoir pressure on Mexico's undeveloped side could push oil and natural gas into Shell's wells.

Great White and two other Shell projects nearby - Silvertip and Tobago - are set to begin production in 2010, long before Mexico could get a project started on its own. France's Total (TOT) also plans to start pumping oil at Gotcha Deep in 2010, a field in the same area.

If drainage happens, it will be the first time foreigners tap Mexican oil since 1938, when President Lazaro Cardenas ousted Shell and over a dozen other foreign companies in a celebrated nationalization.

"We will not be able to say that the U.S. stole our oil. We haven't done the work," Mexico City-based oil consultant Lourdes Melgar told an energy forum earlier this week.

Mexican state oil monopoly Petroleos Mexicanos has drilled six deepwater exploration wells, the deepest at 3,000 feet, a third the depth of Great White. Pemex, as it's known, has found oil and gas, but it will take years to get it to the surface even if Congress gives Pemex enough money to build offshore platforms and contract specialized rigs.

Oil and natural gas reservoirs overlap maritime borders from Iran to Trinidad, forcing these countries to develop the reserves in tandem with their neighbors to prevent drainage.

Shell says the projects don't threaten Mexico.

"None of these reservoirs extend beyond the U.S.-Mexican international boundary; all are completely within U.S. waters. So, there is no chance for cross-border drainage of oil," said Shell spokeswoman Destin Singleton.

Houston-based industry consultant George Baker, who has done extensive research on Mexico's cross-border fields, says there is no way Shell can be sure the reservoirs are neatly contained in U.S. waters.

"They don't know what's on the other side of the border because the Mexicans haven't drilled," he said.

Mexican officials from the previous Vicente Fox administration warned of drainage.

In 2006, then Pemex CEO Luis Ramirez Corzo called for a constitutional change allowing for shared equity companies to develop border reserves.

"The porosity and permeability of these structures makes it possible for the oil to flow to the (U.S.) side, and we will be left with no chance of recovering those hydrocarbons," he said.

Strapped for cash and lacking deepwater infrastructure, Mexico is turning to diplomacy. The Energy Ministry is setting up a task force to strike an agreement with the U.S. to identify trans-border fields.

"Once the agreement is signed, it could set the conditions for unitization agreements to carry out an optimum development of the resources," said Pemex in an e-mailed reply to inquiries about Shell's operations along the border.

Unitization is when two countries agree to set extraction rates in line with the amount of reserves each country holds. Venezuela and Trinidad recently inked such a deal to develop gas fields in the Atlantic.

The difference is that both those countries have deepwater platforms in place.

Baker says Pemex must piggyback on U.S. infrastructure at areas like Great White to avoid giving oil to the U.S.

Shell plans to build the world's deepest processing hub to draw oil from all three projects, with the capacity to collect oil within a 30 mile radius. It will be anchored just seven miles from the border.

"The key to making this successful (for Mexico) is to have U.S. infrastructure assume the cost of drilling on the Mexican side," said Baker.

Oil Nationalism At Large

This advice collides with Mexico's nationalist oil tradition. In 1938, Cardenas created Pemex to manage the expropriated fields, and to this day the firm holds a monopoly on the domestic oil industry from the oil wells to the refineries.

Shell's main partner in the three projects, Chevron Corp. (CVX), also had assets expropriated in 1938, when it was Standard Oil Co. of California.

Mexicans view the event as one of the country's main victories over imperial powers. Local pride makes it difficult to unwind Pemex's monopoly.

Former President Vicente Fox promised to team up with outsiders to develop the Gulf of Mexico "before the Cubans and Americans take our oil."

Communist Cuba has given concessions to firms like Spanish-Argentine Repsol YPF (REP) to explore its corner of the Gulf of Mexico.

Despite Fox's warnings, Congress has been unwilling to undo Cardenas' patriotic legacy.

With a heavy tax burden and a ban on foreign partnerships, Pemex has neglected the deep areas of the Gulf of Mexico compared with 15 years of experience in the U.S.

Instead, Mexico focuses on cheaper-to-produce fields in shallow waters and on land. Mexico has never drilled exploration wells in waters over 3,000 feet and doesn't produce oil in waters deeper than 300 feet.

Meanwhile, the U.S. has come out with a flurry of new deepwater exploration and production tenders north of the border.

"If I were Mexico, I'd be watching what's going on in the U.S. and say 'hey, we could get drained here,'" said Bob Tippee, the editor of industry publication The Oil & Gas Journal.

In August, the U.S. Mineral Management Service, or MMS, offered 282 new tracts in the western Gulf in a tender where industry heavyweights Statoil (STO), BP Plc (BP) and Petrobras (PBR) participated. One of the blocks runs flush with Mexico's border, to the southwest of Great White.

The MMS says it has shared data with Mexico in the past, and plans to continue doing so. "In considering what options are available to Mexico, the Mexican government would be in the best position to discuss their program," said a MMS spokeswoman.

While the U.S. moves toward a new era of high-tech oil production in harder-to-reach areas, Mexican production continues to slide and hidden oil treasures remain untapped.

Pemex claims to have potential reserves of 30 billion barrels of oil and natural gas in the deep areas of the Gulf, or 55% of its total potential reserves.

President Felipe Calderon recognizes the problem. The 2007-2012 development plan says Pemex "lacks the technology to develop resources in ultra-deep waters and faces restrictions to exploit border fields."

Until now, Mexico's deep waters are virgin territory for oil and gas. On a map from the MMS, the U.S. side of the Gulf is a patchwork quilt of development blocks stretching from the shores of Texas to western Florida.

South of the border the map goes blank. With no exploration wells to date, Mexico can only guess how much oil lies in the region where Shell discovered Great White, Tobago and Silvertip. Coincidentally, the stretch of terrain is known as the "Perdido," or "Lost" belt.

Pemex Must Act Fast To Find Reserves

The Lost belt underscores how Mexico's combination of prohibitively high oil taxes and resource nationalism undermines energy security. Mexico only has nine years left of proven oil reserves at existing extraction rates.

In both Mexico and the U.S., oil production in shallow waters of the Gulf has waned as the fields run dry. But in the U.S. deepwater output has more than compensated for the lost production.

The MMS expects total Gulf of Mexico output to rise 75% to 2.1 million barrels a day by 2016, including yet-to-be-discovered fields in deep waters.

But exploration on the other side of Great White will not start until 2010 at the earliest, when three deepwater drillships Pemex recently ordered will be ready.

By that time, production at offshore Cantarell, the country's largest field, will have dropped by 60% to 943,000 barrels a day. Unlike in the U.S., Pemex has no current deepwater projects to compensate for this loss.

While Calderon recognizes the risk of leaving deepwater fields dormant, Congress is unwilling to face the political punishment involved in legalizing foreign partnerships.

Current border treaties for the Perdido area don't include any possible moratoriums on U.S. oil production in the area, which lies around 200 miles east of the Texas shore, according to Baker.

This leaves Mexican oil vulnerable to a second phase of foreign extraction starting 72 years after Cardenas ended the first.

>Copyright (c) 2007 Dow Jones & Company, Inc.

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