Oil Service Firms Prepare Bids for Mexico Chicontepec Work

MEXICO CITY (Dow Jones Newswires), Feb. 18, 2009

Oil services companies are homing in this week on a massive drilling contract in Mexico, one of the few countries to boost oil investment this year despite the price collapse.

With drilling activity plummeting in traditional markets such as the U.S. and Canada, industry giants such as Schlumberger, Halliburton and Baker Hughes are looking to expand in Mexico.

State oil monopoly Petroleos Mexicanos is spending heavily to halt a collapse in production that threatens to erase the country's exports in less than seven years.

It will take Pemex around a month to pick a winner for the three-year contract to drill 500 wells in the geologically difficult Chicontepec basin. The deadline for bids is Thursday.

The losers will have other opportunities. Pemex also has a Feb. 26 bidding deadline for another 500-well contract in the same area. Pemex officials have said this year the company will roll out contracts for an additional 1,500 wells at Chicontepec.

Weatherford International Ltd. won the two most recent Chicontepec contracts in mid-2008 by bidding $870 million for a total of 600 wells, and is competing for the new work. Industry executives said the Weatherford bids came in around 25% below those of its competitors, adding an element of uncertainty as bids come in this week.

Some potential bidders have said they won't offer Pemex bargain rates.

"The two other Chicontepec tenders are coming up soon," said Baker Hughes CEO Chad Deaton in a recent conference call. "We don't want them for what they [cost] last time. If we can get them and make money on them then yes, we'll tender them," he said.

Weatherford has run into complications at Chicontepec, with Pemex saying it will fine the company for falling behind on the 2008 drilling schedule.

An executive at a local company that plans to submit a bid said he expects Weatherford to ask for more money this time to guarantee a decent profit margin. Weatherford brushed off such criticism in a recent conference call, saying the project will be profitable and Mexico is one of its three best markets, along with the Middle East and North Africa. "In general I think the project is going well," said Weatherford CEO Bernard Duroc-Danner, adding that "the amount of attention on it is being driven by competitive fury."

Mark Brown, an analyst with energy-focused investment bank Prichard Capital Partners, said there is less pressure for Weatherford and other companies to slash prices because there is so much Chicontepec work on offer this year.

"I don't expect Weatherford to come in with a lowball bid," he said.

Chicontepec is a main pillar in Pemex's strategy to get oil production back above 3 million barrels a day by 2015. Pemex only expects to be producing 72,000 barrels a day at the basin this year despite two years of aggressive drilling. But by 2015 Pemex says it will be producing 511,000 barrels a day, or a sixth of total output.

Observers see that target as hard to meet. A well at Chicontepec only pumps a few hundred barrels a day, compared with a few thousand barrels at Mexico's prolific oil fields in the Gulf of Mexico.

But these traditional fields are in steep decline and Pemex has few other options where it can make up for lost ground. The company is just beginning to explore in deep waters of the Gulf, for example, where it takes around a decade to get a project running.  

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