China's Sinopec Takes A Close Look at Mexico's Oil Patch

MEXICO CITY (Dow Jones Newswires), Feb. 5, 2009

China's Sinopec Group is the first integrated oil company to test the waters in Mexico after Congress passed an energy reform last fall.

Sinopec is competing for two large drilling contracts in Mexico's Chicontepec oil basin, according to documents on Compranet, Mexico's government procurement Web site.

The other Chicontepec bidders are all foreign or local oil service companies, including industry giants Schlumberger Ltd. and Halliburton Co. These companies provide equipment and oil field expertise but do not buy or sell oil.

Even if Sinopec loses the upcoming tenders, the Chinese heavyweight appears to be taking a long-term approach in Mexico. Next week, Sinopec executives will give a presentation to state-run Petroleos Mexicanos on the company's land and offshore drilling equipment, said an industry executive familiar with the meeting.

Sinopec has expanded internationally in recent years, buying oil assets in places like Africa, South America and Russia to lock in oil supplies for its massive Chinese refining network.

In Mexico, China's second largest oil company is hunting for cash, not crude. By law, Petroleos Mexicanos has a monopoly on Mexican oil sales, and can only hire oil companies to work as service contractors.

The reform gives Pemex new freedoms, such as offering incentives to contractors who finish work ahead of time, but does not allow Pemex to sell equity stakes in oil projects.

Sinopec has attended meetings and gone on sight visits for the two Chicontepec contracts. Each one calls for 500 wells over the next three years at a challenging oil zone.

Mexico first discovered Chicontepec in 1926 but overlooked it 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. The company plans to invest $11.3 billion in Chicontepec over the next four years to lift production to 356,000 barrels a day, up from a trickle at present.

Oil service companies have identified Mexico as a sweet spot in the worst market seen in years. Pemex is bucking the global trend among oil companies to cut costs following the oil price collapse. Pemex is boosting 2009 investments to $19.4 billion in its struggle to add oil rigs and reverse four years of declining output.

Pemex did not draft the two Chicontepec contracts under the new legal guidelines, but Pemex CEO Jesus Reyes Heroles said the company can revise them later on.

"The contracts Pemex currently has with diverse oil service companies can be migrated and revised so that Pemex can benefit from the flexibility included in the reform," he told reporters earlier this week.

Sinopec officials did not reply to emails requesting information on the company's plans in Mexico.

Sinopec Group, China's second-largest oil producer by output and its largest refiner by capacity, is the parent company of the Shanghai- and Hong Kong-listed China Petroleum & Chemical Corp.  

Copyright (c) 2009 Dow Jones & Company, Inc.