Mexico Delays Latest Chicontepec Oil Drilling Contract

MEXICO CITY (Dow Jones Newswires), May 13, 2009

Mexico's Chicontepec oil project suffered a setback this week when the state oil company delayed a 170-well tender for technical reasons.

Pemex said bidders failed to meet technical requirements and it will roll out the tender again at an unspecified date. One industry executive involved in the tender said it could take up to six months to repeat the process.

The incident underscores how Mexico's oil industry is grappling with more than just a price slump. Excessive bureaucracy often delays contract timelines, making it difficult for state monopoly Petroleos Mexicanos to spend it's entire investment budget each year.

Pemex suffered similar contract delays at Chicontepec in 2008, putting the project behind schedule despite having the cash on hand.

Veteran players in Mexico's oil services industry such as Halliburton (HAL), Baker Hughes (BHI), and Servicios Integrales GSM, a company owned by Mexican tycoon Carlos Slim, were vying for the work. Other companies looking for a foothold in Mexico, such as China's Sinopec, also participated in project meetings.

Pemex considers the area a promising oil zone that will help compensate for plummeting output at the giant fields Pemex found, developed and partially exhausted over the past 30 years.

Cantarell, Pemex's historic cash cow that at its peak provided 60% of Mexican crude, is heading into retirement and has dragged down the country's overall oil production by a fifth since 2004.

Bidding will likely remain competitive when Pemex relaunches the tender. Pemex plans to invest $11 billion over the next four years at Chicontepec, making it an attractive target for drillers struggling with a global industry down cycle.

During recent conference calls both Halliburton and Baker Hughes said Mexico, along with Brazil, will help compensate for declining activity in other oil regions around the globe. Mexico, which risks becoming an oil importer by 2015 at current rates of decline, has doubled its investment budget over the past seven years to try and reverse the trend.

Pemex has still accelerated activity at Chicontepec even with the startup delays in 2008 - the project drove a 55% increase in overall drilling in the first quarter.

The problem is each well only pumps around 100 barrels a day, compared with 10,000 a day at Pemex's best fields. The company is experimenting with techniques such as injecting chemicals into the reservoir to loosen the oil from the source rock and improve extraction rates.  

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