Mexico Launches Drilling Tenders for Challenging Oil Basin

MEXICO CITY, April 18, 2008 (Dow Jones Newswires)

Mexico's state oil firm hopes to turn a long-ignored oil basin into a major producer as the country's traditional fields run dry.

This month Petroleos Mexicanos, or Pemex, is collecting bids for two drilling tenders for the Chicontepec basin, according to Compranet, the government's procurement Web site.

Experts say it will be a difficult task for Pemex to reach its production target of 100,000 barrels a day by the end of this year at the geologically challenging area.

Pemex's newfound interest in Chicontepec underscores how the company needs to spend more money just to halt a steady decline in oil output that started in 2004. If Pemex fails to tap new fields, the country's oil exports will dry up over the next decade, putting Mexico at risk of a fiscal crisis and leaving the U.S. increasingly dependent on oil imports from the Middle East.

Last week President Felipe Calderon delivered an energy reform bill to Congress that looks to boost oil investment and make it easier for Pemex to hire outside contractors by streamlining the bidding process and offering performance bonuses.

Each Chicontepec bid is for 300 wells, and a decision is expected by the end of the month, said an oil executive participating in the tender. Pemex hopes to have the drilling rigs in place by the end of July.

This comes on top of a $1.4 billion tender last year for 500 wells and related infrastructure won by oil services firm Schlumberger Ltd. (SLB) and ICA Fluor, a joint-venture of Mexico's Empresas ICA (ICA) and Fluor Corp. (FLR).

Considering rampant inflation in oil industry costs, such as materials and equipment, the new tenders should cost Pemex almost as much as last year's 500-well program, said the executive.

Oil service heavyweights Schlumberger and Halliburton (HAL) have purchased bidding details, as well as a handful of smaller Mexican and foreign service firms.

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.

Pemex expects output to top 500,000 barrels a day by 2017 at the basin, a main pillar in the company's strategy to replace traditional oil fields where output has already peaked. Production costs will be "significantly higher" than average, said the Energy Ministry in a recent outlook on the oil industry.

Pemex, which for years has focused on its prolific oil fields in the shallow waters of the Gulf of Mexico and on land in southern states, also faces potential social conflicts as the project gathers speed.

Chicontepec spans three states populated by farmers and ranchers, and the political cost of relocating the locals to build new roads, pipelines and other infrastructure leaves the project vulnerable to delays.

"You have a serious problem above the surface," said Gonzalo Monroy, a Mexico City-based analyst at IPD Latin America.

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.

The project will also test Pemex's project management skills. It involves technology that the state firm is not familiar with, such as multidirectional wells.

Pemex is already behind schedule in laying pipelines to collect oil from recently drilled wells, delaying production, said a source involved in the drilling program.

Chicontepec has 1.1 billion barrels of proven reserves, or 7.5% of Mexico's total. Pemex expects this figure to increase as the company moves possible reserves into the proven category as it builds infrastructure and develops new areas of the giant basin.

MEXICO CITY, April 18, 2008 (Dow Jones Newswires)