Mexico's declining oil production is turning into a boom for drillers.
For decades state-run Petroleos Mexicanos has milked the giant, easy-to-develop oil fields in the shallow waters of the Gulf of Mexico. But with many of these fields already past peak production, Pemex, as the company is known, must now move into more geologically challenging areas where each individual well produces less oil.
This means Pemex needs to expand its rig fleet just to try and halt the steady decline in output that began in 2004. Pemex is now hiring drillers to develop areas of the country it ignored for decades, such as the Chicontepec basin in the north and new fields in the south of the country.
The largest prize in Mexico's oil patch, the offshore Cantarell oil field, has seen output slide by nearly half to 1.2 million barrels a day at present. Many observers doubt Pemex can reverse waning output without selling exploration blocks to outside firms - a prospect currently illegal - but oil field service companies will see increased demand for their equipment and know-how regardless of the country's overall production.
"Basically you're substituting a very high yielding field, which is Cantarell, with other types of (less productive) fields," said Tenaris SA (TS) board member Guillermo Vogel during a recent conference call. "The drilling intensity, in order to compensate one with the other, we think is going to increase."
Vogel said he sees Tenaris' Mexico activity picking up in the fourth quarter and throughout 2009. The company is the world's largest maker of seamless steel tubes and welded pipes for oil exploration and production.
Other oil services firms are already expanding in Mexico.
Nabors Industries Ltd. (NBR) expects its Mexico rigs to rise by three this year to 19, with the new rigs moving to the underdeveloped southern region, said a Mexico-based executive at the firm.
Schlumberger (SLB) moved seven new rigs into the south during the first quarter, an area with deeper reservoirs and heavier start-up costs than most existing operations.
The Nabors executive said the company could add even more rigs this year if it wins an upcoming tender for work at Chicontepec. Pemex is collecting offers for two separate 300-well programs, as well as a few smaller contracts in the area.
Chicontepec, first discovered in 1926, was overlooked for 75 years due to the difficult nature of the formations. It holds a multitude of small pockets of oil with low pressure and low permeability, making it difficult and expensive to get the oil out of the ground.
Chicontepec calls for an average of 1,000 wells a year over the next 15 years, more than Mexico drills each year in the entire country at present. Pemex expects output to top 500,000 barrels a day by 2017 at the basin, a main pillar in the company's strategy to keep output stable at more than 3 million barrels a day.
"Pemex has a plan right now, particularly with the falloff of the Cantarell field, to replace a lot of that lost oil production with the land work on Chicontepec," said David Crowley, chief operating officer at Grey Wolf Exploration Inc. (GWE.T) during a recent conference call.
Crowley said the two Chicontepec programs, where Grey Wolf is involved in the bidding process, will call for eight to 12 new rigs.
Other drillers are less bullish. Pride International Inc. (PDE), which has around a dozen rigs in Mexico, said Pemex got off to a slow start this year in setting up its drilling program. Industry observers have said Pemex was hoping day rates for oil and natural gas rigs would ease up toward the middle of the year, and chose to wait for better deals on contract renewals.
Kevin Robert, a vice president of business development at Pride, said he expects demand for jack-up rigs to remain stable or increase this year, but noted that Pride will be moving two rigs out of the country for repairs.
"But we believe Pemex needs the rigs back in Mexico at some point in the future," he said in a conference call following second quarter financial results.
Mexican President Felipe Calderon hopes to expand the role of private oil companies in Mexico by offering incentive-based service contracts. Opposition parties object to this plan, but agree with Calderon that Pemex needs more money to resolve the ongoing production crunch. The proposed reform would give Pemex a greater share of windfall oil revenues and ease tax rates at Chicontepec and deepwater drilling, where Pemex is just starting to drill wildcat wells.
"What we see coming out of these reforms - and it's something we sense coming from every (political) party - is there's going to be more money allocated to Pemex for increased drilling activity in Mexico," said Tenaris' Vogel.
Copyright (c) 2008 Dow Jones & Company, Inc.
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