Seeking to Halt Output Decline, Pemex Increases Budget, Rigs



MEXICO CITY (Dow Jones Newswires), August 6, 2008

Faced with declining production, Mexico has increased both the number of oil rigs in operation and its investment budget, benefitting firms that supply equipment to Petroleos Mexicanos, or Pemex, as the state oil firm struggles to make up for lost time.

A shortfall in exploration and production spending over the past decade has caught up with Pemex. Output is down 20% from peak production of 3.4 million barrels a day in 2004.

The production shock sent Pemex into action, benefitting oil services firms such as Halliburton (HAL) and Baker Hughes (BHI), which provide Pemex with equipment, services and know-how. Pemex has boosted its yearly investment budget and is marching into more high-cost production zones that it overlooked for the past 70 years.

Pemex, legally barred from sharing oil production and reserves with outside oil firms, has relied heavily on service firms, which are now well positioned for the rise in spending.

Oil accounts for a third of Mexico's government revenue. With output in decline, Mexico is more exposed to a drop in oil prices than other producers such as Petroleo Brasileiro (PBR), or Petrobras, which ramped up output during the recent price boom.

Pemex has repeatedly downgraded its output target for 2008. Last year it anticipated an average 3.1 million barrels a day, but Pemex now hopes to pump just 2.85 million barrels a day.

Last month, an Energy Ministry director said Mexico won't get back to producing 3 million barrels a day until 2020, even with the increased spending.

That's because it takes years to get new oil projects up to peak production. More than 80% of Mexico's active oil fields are already past peak output, and the country has failed to replace the lost barrels with output from new fields.

It will take years for Mexico to reverse current production trends. But oil services firms which get paid to drill wells instead of selling oil are heading into Mexico's golden years. President Felipe Calderon is pushing an energy reform through Congress that would allow Pemex to offer these firms incentive-based contracts and streamline the contracting process.

Pemex's investment budget has doubled since 2002 to $21 billion this year. During the second quarter Pemex drilled 176 exploration and development wells, up 4.1% from the year-ago period.

The number of oil and natural gas rigs increased by 120% to 241 in the second quarter, Pemex said in an earnings statement. Pemex owns 123 rigs and it leases the remaining 118 from independent contractors.

Baker Hughes, an oil services firm that tallies the number of drilling rigs around the globe, put Pemex at 80 oil rigs in June, up 16 on year and the most since it began collecting data in 1995. Baker Hughes excludes smaller maintenance and workover rigs from its survey, accounting for the large difference between its numbers and those provided by state-run oil firms.

During recent conference calls, oil service executives said Mexico activity is busy.

Ensco International (ESV) said it placed the lowest bids for two recent Pemex rig tenders, and expects Pemex to finalize approval of the deal by Aug. 12.

Hercules Offshore (HERO) expects Pemex to put out tenders for another four to six new jackup rigs before the year's end. Jackup rigs are suitable for the shallow waters of the Gulf of Mexico, where Pemex produces most of its oil.

During the second quarter, Baker Hughes said it won a $460 million, 15-well marine drilling contract that will start up in the third and fourth quarters of this year.

Halliburton said Latin America revenue rose 27% in the second quarter, driven by higher Mexico activity after taking on the large Alliance project in southern Mexico. Halliburton operates four Pemex-owned rigs in the area and expects to have six more by the end of the third quarter.

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


RELATED COMPANIES
Company: ENSCO International Incorporated more info
Manages 64 Offshore Rigs
 - Ensco Acquires Atwood Oceanics, Lays Off Staff (Oct 10)
 - Lamprell to Compensate Ensco for Delay in Delivery of ENSCO 140 (Aug 29)
 - Lamprell Delays Delivery of Jackup to Mid-August Due to Technical Issue (Jul 27)
Company: Halliburton Company more info
 - Halliburton Posts International Revenue Growth, Unlike Schlumberger (Oct 23)
 - Halliburton CEO Defends Fracking Business as Margins Disappoint (Oct 23)
 - Venezuela's IOUs Pile Up, Keeping US Oil Servicers in Tow (Aug 23)
Company: Petrobras more info
Operates 34 Offshore Rigs
Manages 10 Offshore Rigs
 - Exxon, Petrobras Form Alliance To Develop Oil, Gas Projects (Dec 14)
 - Natural Gas In Petrobras Pipelines Up About 23% In 2017 (Dec 05)
 - Petrobras CEO Says To Discuss Refining Partnership With CNPC CEO (Nov 15)
Company: Baker Hughes more info
 - Baker Hughes: Oil Drillers In Canada Boost Rigs To 10-Month High (Jan 12)
 - Baker Hughes: US Oil Rig Count Ends 2017 40% Above Year-Ago Levels (Dec 29)
 - Baker Hughes: US Drillers Add The Most Oil Rigs In A Week Since June (Nov 10)
Company: Hercules Offshore more info
 - C&J Energy Files for Bankruptcy to Cut $1.4B in Debt (Jul 20)
 - Hercules Offshore Sells Jackup at 94% Loss (Jul 12)
 - Hercules Offshore Lays Off 60 at Houston Headquarters (Jun 13)
Company: Pemex more info
Operates 45 Offshore Rigs
 - Mexico Says Deepwater Oil Tender Doomed By Brazil Competition (Dec 08)
 - Sources: Mexico's Pemex Declares Force Majeure On Isthmus Crude Oil (Nov 29)
 - Mexico's Pemex Makes Biggest Onshore Oil Find in 15 Years - President (Nov 03)