Oil Drillers Eye Mexico Expansion Despite Contract Delays

MEXICO CITY (Dow Jones Newswires), November 11, 2008

In October, Petroleos Mexicanos said it would rent five large offshore rigs, grabbing the attention of local and foreign rig suppliers.

A week later, Pemex withdrew the rate tenders to make revisions, underscoring the rewards and difficulties of working for Mexico's state-run oil monopoly. Pemex is spending more on oil equipment and services to revive the struggling industry. This creates new opportunities for oil services firms, but bureaucratic hurdles can also delay project startups for months.

"They're going to roll it out again, but we don't know when," said a Mexico-based executive at a foreign firm that plans to compete for the upcoming contracts.

Rig suppliers such as Schlumberger Ltd., Noble Corp. and Diamond Offshore Drilling expect to see the tenders reemerge before the end of the year, and are generally upbeat on the outlook for Mexico.

Mexican oil production is in steep decline as the country's most accessible oil formations run dry. This means the country must drill a larger number of wells at less-prolific oil fields just to stabilize output.

Pemex plans to double exploration spending over the next three years, expanding the opportunities for oil service firms that have worked in Mexico for decades.

"As far as we can tell it is still full steam ahead, so you've got to love Pemex," said Noble Corp. CEO David Williams in a recent conference call. "They need the hydrocarbons, so you don't expect to see a lot of pullback there."

Noble plans to compete for the five rigs when Pemex publishes the new terms.

Contract Delays Hurt Production

Pemex regularly delays bidding on service contracts, complicating the company's efforts to tap new oil fields fast.

Pemex delayed a contract for 600 wells in the Chicontepec basin by around five months until May 2008, when it was awarded to Weatherford International Ltd. Pemex CEO Jesus Reyes Heroles recently said the delay contributed to the company's failure to meet production targets for this year. Output has fallen 10% to under 2.8 million barrels a day.

Bronco Drilling has described similar delays at a smaller project where it has three rigs under an 18-month contract.

"We have faced numerous delays in commencing operations, but we do believe that all three rigs will begin work during the fourth quarter," Bronco Drilling CEO Frank Harrison said in a recent conference call.

Pemex has already made some progress. During the first nine months of this year it expanded its rig fleet 8.5% to 242, more than half of which are owned by independent contractors. Pemex also increased the number of offshore platforms 5.1% to 226, including those that house workers and provide telecommunications services.

More Spending to Come; Energy Reform to Help

Reyes Heroles says Pemex will double its exploration budget over the next three years. Pemex's total investment budget has doubled since 2004 to around $20 billion a year at present.

This spending has helped service providers, but Pemex is only just starting to make up for lost ground. For decades it relied on one field, Cantarell, for the bulk of total output, and the company spent little exploring for and developing new oil deposits.

With the Cantarell pumping less than half of peak production as it enters old age, Pemex is scrambling to make up for lost time. Some officials expect it to take a decade to restore overall production to 2007 levels of 3 million barrels a day. Energy Minister Georgina Kessel said Monday that the government will be happy just to halt the decline for now.

An energy reform passed last month will help. It will streamline contracting procedures on the hopes of preventing delays such as the recent rig tender withdrawal.

Pemex also hopes to draw new players into the oil industry with performance-based service contracts allowed under the reform. Pemex needs help from international oil firms with experience in the deep waters of the Gulf of Mexico. Pemex says around half of Mexico's undiscovered oil lies in its underexplored section of the Gulf.

Despite the hassles, Bronco Drilling expects to expand in Mexico.

"We continue to believe that Mexico could provide opportunities for additional rigs in the future," said CEO Harrison. 

Copyright (c) 2008 Dow Jones & Company, Inc.

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