Mexico's Pemex to Fine Weatherford for Oil Drilling Delays

MEXICO CITY (Dow Jones Newswires), Jan. 16, 2009

Last May Weatherford International Ltd. raised eyebrows when it undercut competitors to the tune of 20% for two massive Mexican oil drilling contracts.

Seven months later Petroleos Mexicanos is preparing to fine Weatherford for missing deadlines on both. Industry executives, who last year feared Weatherford's competitive bids would erode margins for other oil service providers, say the company is in a tough spot because it underestimated the cost and difficulty of the two projects.

Weatherford agreed to drill a total of 249 wells last year in the geologically challenging Chicontepec basin. The state-run oil company says it is 34 wells short and penalties are on the way, according to information Dow Jones Newswires received from the state firm. Pemex did not provide the amount of the penalties.

"There's not enough known about the reservoir. It's a very difficult situation they're in," said a Mexico-based oil executive.

The delays put Weatherford on uneven ground in one of this year's main profit centers for oil service companies. Many oil companies in the U.S. and Canada are slashing drilling programs due to the oil price collapse, leaving companies like Weatherford with less work. Meantime, Pemex plans to drill twice as many wells on year with an ambitious $20 billion budget in an effort to reverse four years of declining oil production.

Weatherford won both contracts in 2008 by bidding $870 million for a total of 600 wells. At the time competitors said it was 20% or more below other bids.

A 2007 drilling contract at the same field underscores Weatherford's ambitious pricing. In 2007, Schlumberger Ltd. and ICA Fluor, a construction joint-venture between Mexico's Empresas ICA and Fluor Corp., won a 500-well Chicontepec contract with a $1.4 billion bid.

Weatherford did not respond to an email requesting information. During a third quarter 2008 conference call CFO Andrew Becnel described the 249-well program at Chicontepec as a "moving target," and said Pemex was behind schedule on delivering drilling sites.

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 has consistently missed its production targets at the basin. A year ago, it expected to be pumping 100,000 barrels a day by now, but Pemex said on Wednesday that average output for 2009 will only be 72,000 barrels a day.

Critics are questioning the logic behind Pemex's decision to drill over 1,200 wells a year there for the next nine years to get production up to 737,000 barrels a day. Until 2008, Pemex never drilled 1,000 wells a year in the entire country.

"We're losing money at Chicontepec," said opposition Senator Graco Ramirez at a Wednesday energy hearing. "We need to review this."

Ramirez suggested Pemex focus on other fields in the shallow waters of the Gulf of Mexico and on land.

Pemex CEO Jesus Reyes Heroles expressed confidence in the company's output projections, but admitted it has been slow going.

"Pemex is at the very initial phase of the learning curve at Chicontepec," he told lawmakers.

Despite its problems, Weatherford is not running away from the challenge. Pemex announced two new 500-well tenders for the basin in December, and Weatherford has already bought the technical information for one of the contracts. Other interested oil service companies include Schlumberger, Baker Hughes, Halliburton and Nabors Industries Ltd.  

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

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