Private Ownership Key to Birth, Investment in Mexico's O&G Industry

Financing, Technology and Talent Needed in Mexican Energy Sector

Mexico will need investment, technology and talent to access its remaining oil and gas resources, including shale gas and complex oil basins such as Chicontepec, said Carlos Morales Gil, chief executive of PEMEX E&P, at a breakfast presentation at the Offshore Technology Conference (OTC) in Houston earlier this month. Exploration and production efforts by state energy company PEMEX have primarily been focused on the country's southeastern basins, said Morales.

Baker argued that talent, technology and financing are needed, but economic incentive is necessary for encouraging greater investment in Mexico, noting that private ownerships is what has helped spur technological innovation that has fueled the U.S. shale boom.

The company is actively recruiting for new workers at Mexican universities, Morales told OTC attendees. However, PEMEX's current policy of hiring only Mexican nationals, who are educated abroad for masters and doctoral programs through government-funded scholarships, could also be stifling innovation, Baker suggested, quoting the adage that "the diversity of ideas finds oil".

The Mexican Petroleum Institute was established in 1965 to conduct research at home, but the agencies Department of Exploration and Production's research has resulted in few innovations, none of which has led to global adoption, Baker noted in an April 16 market note.

Chicontepec contributes 1 to 2 percent of PEMEX's production, but has received an outsized share of PEMEX's capital expenditures budget in recent years, according to a May 22 research note from Barclays Capital. Out of 180 rigs running in Mexico last year, PEMEX ran an estimated 40 to 50 rigs at Chicontepec and Burgos in northern Mexico.

The company has a significant tendering process underway for incentivized integrated project management contracts to begin in 2014. PEMEX has decided to stop exploration and development work at its onshore fields in northern Mexico, including field labs in and around Chicontepec, and will not likely restart this activity prior to 2014.

"It is worth noting that activity in Mexico was also slow to develop in 2012, and PEMEX eventually overspent its 2012 budget in 2H12," West noted. "We believe there remains scope for PEMEX to reinstate some form of bridge activity until the 2014 contracts begin."


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