High Oil Prices Push Firms in U.S. Up Against Mexican Waters

MEXICO CITY, March 31, 2008 (Dow Jones Newswires)

Emboldened by record prices, oil firms in the U.S. are moving into deep water blocks running flush against Mexico's undeveloped side of the border.

The fresh activity raises the stakes for state-run Petroleos Mexicanos. Mexican oil could flow out of the country as reservoir pressure pushes it toward the nearest wells, a process called drainage.

This would be the first time outside firms sold Mexican crude since the 1938 nationalization, throwing into question laws that forbid foreigners from developing Mexican reserves.

Royal Dutch Shell PLC is leading the advance into Mexico's backyard. The Anglo-European major is building a 130,000 barrel-a-day production hub just eight miles from Mexico at a project named Great White. The first barrels are expected in 2010.

Great White will open the area to more aggressive exploration by smaller oil companies that can pay Shell to move oil through its infrastructure, which can collect oil over a 30-mile radius.

Houston-based Bois d'Arc Energy Inc. is waiting on Shell's hub to start developing a field which, according to Pemex seismic data, crosses into Mexico. Bois d'Arc said Pemex should get moving if it's concerned about drainage.

"Typically when you have a (shared) field, the parties can develop it on either side," said Roland Burns, Chief Financial Officer of Bois d'Arc Energy.

Burns said the risk of leakage from Mexico is "pretty minimal," even though the company's block touches three miles of the maritime border.

Pemex has identified another cross-border field in the Faja Perdido area, which translates into "the Lost Lane." Apart from Bois d'Arc Energy, Chevron Corp.'s Trident reservoir could also stretch into Mexico.

Chevron hasn't yet drafted a development plan for Trident.

Burns said Pemex should wait for other firms to identify oil deposits close at hand, thereby reducing exploration costs.

"Let somebody else pay the risk dollars, and then go out and drill a well," he told Dow Jones Newswires in an interview.

For Pemex it isn't that simple. The company has only punched wells in up to 3,000 feet of water, and has yet to acquire drill ships that can move deeper into the Gulf. Moreover, the country needs the oil fast. Mexico has only enough proven reserves to last 9.2 years, putting a premium on finding and developing new deposits. Deep water projects can take nearly 10 years to get off the ground.

It will take at least three years before Bois d'Arc starts exploring its border lease, because it needs Shell's hub to load any deep-water production.

"Great White lowers the cost of entry for everything around it," he said. "We would never be the ones building a hub."

Pemex could save billions by sharing U.S. infrastructure and geologic data. But to do this the country would have to upend existing oil legislation, which prohibits Pemex from teaming up with outsiders to share oil production and reserves.

Mexican President Felipe Calderon has lost momentum for energy reform amid opposition protests and a scandal involving his interior minister, who he hoped would lead negotiations with parties in Congress. The government originally hoped to deliver a reform package before the end of March, but has since backed off any specific time frame.

Oil strikes a nationalist chord in Mexico, which still celebrates the 1938 oil expropriation as a major win against the U.S. and Europe. But if the country doesn't act fast at the Lost Lane, foreigners could begin tapping Mexican oil for the first time in more than 70 years.

"Unilateral exploitation of these fields ... involves taking hydrocarbons that, in all fairness, should be divided proportionally between the countries," said the Energy Ministry in a review of the oil industry published this week.

MEXICO CITY, March 31, 2008 (Dow Jones Newswires)