Mexico Pemex Hopes Chicontepec Zone Can Stop Oil Output Fall

Mexico hopes to boost oil production at the under-developed Chicontepec area over the next decade to help offset declining output at the country's largest field, Cantarell.

After the country's oil output peaked at 3.4 million barrels a day in 2004, state-owned oil monopoly Petroleos Mexicanos (PEM.YY) needs to act fast to develop new oil reserves and reverse a steady decline. Oil is one of Mexico's main export products and accounts for nearly 40% of government revenue.

Pemex, as the company is known, hopes to eventually pump more than 1.0 million barrels a day at the basin, up from a trickle at present, according to a company presentation this week. Along with output increases at the giant offshore field Ku-Maloob Zaap, the Mexican state firm hopes to stabilize upstream production and replenish the country's dwindling oil reserves.

Output will come on line faster at Ku-Maloob Zaap, where Pemex expects to reach 800,000 barrels a day by the end of 2009, up from nearly 500,000 barrels a day in March. This year, Pemex will launch a nitrogen injection program at the field, a process that lifts production by increasing reservoir pressure.

"As Cantarell declines Ku-Maloob-Zaap is taking over, later Chicontepec will play a significant role," said Vinicio Suro, head of planning at the company's exploration and production unit.

Current plans include new drilling campaigns and secondary recovery techniques at the Chicontepec basin, which stretches across the states of Veracruz, Puebla and Hidalgo. The basin was discovered 90 years ago, but for decades Pemex has instead focused on easier-to-get oil, such as the Cantarell basin in the shallow waters of the Gulf of Mexico and onshore in the country's southeast region.

The field has small pockets of oil spread out over a wide area, increasing the cost of getting the fuel to market. "Chicontepec requires and demands drilling thousands of new wells," said Suro, speaking at a conference sponsored by Bear Stearns earlier this week.

The company is moving in this direction. It put out a tender offer this spring for drilling and oil field services. Schlumberger has already submitted a bid, said one industry executive. Company spokespeople couldn't be reached for comment.

According to industry publication Upstream, the Chicontepec tender calls for up to 500 new wells over a four years, with drilling starting as early as September.

Due to the difficult geology, Pemex only extracts 6% to 8% of the oil in Chicontepec's subsoil, compared with average extraction rates of around 20% in the oil industry as a whole. Secondary recovery techniques such as natural gas injection could lift this rate to 10%.

"Higher lifting costs are expected because of production from more complex reservoirs, mature fields, and also from the evolution of the services markets," said Suro.

As oil prices have surged in recent years, so have costs of contracting oil rigs. Materials such as steel and cement are also more costly amid growing world demand.

Areas like Chicontepec will force Pemex to boost spending in coming years or watch its oil production continue to slide.

"In recent meetings with Pemex senior officials, they acknowledged that to stabilize Mexico's oil and gas production levels, the company may have to double its capital expenditures," wrote Bear Stearns in a Thursday research note.

Pemex's 2007 investment budget stands at $14 billion. Jesus Reyes Heroles, the company's chief executive officer, has said the company needs annual budgets of $33 billion, two-thirds of which would go to investment, and the balance to cover operations.

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