Mexico's basins could provide niches for various sized firms

George Baker
International consultant
Houston

James Lee Wilson
International consultant
New Braunfels, Tex.

The announcement of the Baha well (OGJ, Feb. 26, 1996, p. 73) reminded Mexicans that the U.S. Senate has not yet ratified the draft treaty to define territorial and resource boundaries. News of the well was portrayed in Mexico as poaching and old-fashioned American imperialism.

Although subsequent reports confirmed that the well is unequivocally in U.S. waters, the initial confusion added to a growing dilemma in professional geological circles and with a few federal, state, and local officials. On June 11, the senior author asked a question at a meeting of retired Pemex E&P managers in Mexico City: "What if in drilling the Baha well it was discovered that a field existed that was equally shared on both sides of the border? How would you propose that its development be handled?"

"We would have to jointly develop it," the senior production manager replied. "Otherwise, the reservoir would be damaged, and it would lead to uneconomic resource recovery if it were only developed on one or the other side of the border."

That this production engineer's first impression, based on an experienced eye for production economics and reservoir development, should be at odds with the present regulatory framework of Mexico illustrates the dilemma that is quietly taking form in Mexico.

Given a long tradition of a state monopoly in E&P, one reinforced by nationalistic peer pressure and a bloc-vote political culture, how can Mexican professionals even speak about options in upstream energy policy? That is, how can they do so without risk of criticism from populists eager to exploit national sensitivities? Until the innovative, if still largely undefined, policy framework announced for petrochemicals (OGJ, Oct. 21, 1996, p. 19), Energy Minister Jesus Reyes Heroles and President Ernesto Zedillo were criticized for not listening to the demands of Mexican civil society in the matter of the government's privatization policies.

The controversy of the Baha well, therefore, indirectly but clearly points to a common dilemma within Mexico's political culture: industrial logic points in one direction, while tradition, vested interests, and populism point in another.

In this discussion, which is part of a larger study, we wish to clarify some of the issues in the upstream policy debate in Mexico. We will do this by visualizing a counterfactual condition: that worldwide E&P patterns and norms exist in Mexico. Our discussion will not treat the implementation of such patterns or norms (e.g., by reference to the Venezuelan or Argentine models). For this discussion we assume simply that worldwide production practices and agreements exist in Mexico. Just as important, we assume that industrial efficiencies, by producer type, are the principal drivers of the allocation of E&P resources in Mexico.

Producer types

The industrial logic suggested by the Baha well is one that applies not only to petroleum resources in 7,000 ft of water but to resources that are difficult to obtain anywhere in Mexico.

In each present, past, or future area of production there will be economic reasons why one or another category of producer, either alone or as in the case of the Baha well jointly, should develop a reservoir.

We consider four producer categories:

• Pemex (as a state oil company),

• International majors,

• Large independents, and

• Smaller independents.¹

We want to cross-tabulate what is common knowledge about the economics and economies of scale of each type of producer against what is generally known geologically about the distinct production provinces in Mexico. In this way, we will set forth a preliminary frame of reference in relation to which we can invite criticism and suggestions for refinement (Fig. 1 [21607 bytes]).

Geology considerations

We can discuss the illustrative areas and fields of hydrocarbon production, actual and potential, from the perspective of the advantages and limitations associated with the various categories of explorationists and producers (Table 1 [56063 bytes]).

Offshore

Campeche shelf

Cantarell Complex. This area is the largest accumulation in Mexico. It is the amalgamation of three salt domes and is cut by northwest-directed faulting (Fig. 2 [37407 bytes]). It is located on the Campeche shelf of the Gulf of Mexico, mainly in water less than 100 m deep. Regionally, wells on the shelf are located on a prolongation of the onshore Villahermosa horst of Chiapas and Tabasco states.

As many as 60 possibly productive structures have been identified on the Campeche offshore, and at least 11 (perhaps 15) giant fields are known.

The offshore Cantarell Complex, discovered in 1976, produced an average 961,000 b/d of oil in 1995. The Abkatun Complex southeast of Cantarell produces one third as much. Many more isolated productive salt domes such as Balam and Bacab exist in the Campeche offshore province.

About 96% of Mexico's oil now comes from this area. Together with the onshore Reforma fields, that equals total production of about 2.67 million b/d. Future production history of this area should be carefully observed when predicting Mexico's hydrocarbon reserves. Pemex has already an established infrastructure for shallow offshore drilling and production.

Arenque field: This field is located on a shallow bank, a structural high on the upthrown side of a major down-to-the-gulf fault. It is about 35 km off Tampico, Tamaulipas. The field is well-developed (since the late 1960s) and has produced 100 million bbl of oil. Significant production has been noted recently in adjacent wells both onshore and offshore, indicating that other nearby areas could be exploited.

The grainy, oolitic, and reefal lithology is identical to the age equivalent Jurassic Smackover-Haynesville of the Arklatex area in the U.S. inner gulf coastal plain. In the Arenque area, water depth is shallow and drilling depth to production moderate (about 10,000 ft).

Fairly large budgets are required for offshore development by any company indicating possible roles by Pemex, major international, or large independent companies.

Deep

The Perdido folds (U.S.-Mexican waters) and the Mexican ridges (Mexican waters) of the Gulf of Mexico still remain somewhat of a mystery. They have been considered the result of Miocene compressive folding or slump-wrinkles of younger Tertiary sliding. At present, the internal lithology of these structures is unknown. Exploratory drilling is needed to determine the nature of these structures.

Recent drilling in 7,000 ft of water emphasizes the role of major companies in searching for and producing such elusive hydrocarbon traps. Very large budgets are required for both exploration technology and production as well as offshore seismic. Optimal E&P economy could be sustained by the majors. This precludes essentially all independents and even some major oil companies, unless joint ventures are undertaken.

Onshore

Reforma-Chiapas-Tabasco

This area of numerous faulted salt domes was the first major new commercial oil discovered by Pemex, 1 Cactus, 1972. The domes lie in moderately rough terrain along and over a gentle horst block, the Villahermosa uplift, trending approximately north-south.

The source beds are the underlying late Jurassic black shales. The reservoir strata are middle and late Cretaceous reefy platform margin limestone, dolomite, and breccia along a shelf edge. The structure has two directions of faulting: regional northwest and radial faulting over salt domes.

This area is within the realm of Pemex, which has almost 25 years experience in these complex fields and possesses an infrastructure for satisfactory production. It is an area of major production although now overshadowed by Campeche offshore.

Recent data indicate that a rapid decline in production has occurred in the Reforma area. However, numerous structures remain untested, and new production discovered on the edge of the adjacent Peten basin along the Mexico-Guatemala border lends encouragement to this enterprise (Nazareth and Lancantun wells).

The Peten basin, lying east and south of the Villahermosa arch, and the Chiapas fold belt, between the Chiapas massif and Yucatan block, may form a future extension of production in southeastern Mexico. Presence or absence of hydrocarbons will be constrained by the presence of the Late Jurassic black shale source beds. Difficult terrain is indicative of the need for large development budgets. Political unrest overshadows any geological factors that might indicate suitable roles for private developers.

Misantla-Tampico

The great line of productive knobs, at shallow depths, constituting the old Golden Lane fields were discovered and developed about the time of World War I and are now almost abandoned.

The remaining offshore and southern onshore Golden Lane knobs circumscribe the atoll forming the Tuxpan platform. Hydrocarbon production is slight. The Golden Lane atoll on the Tuzpan platform remains unique along the Gulf Coast despite much search on both sides of the Rio Bravo.

The great Poza Rica debris-flow field produces from platform-derived sediment 3,200 ft structurally lower than the Tuxpan platform. Discovered in the 1930s, it has produced about 1.3 billion bbl. It is now declining rapidly.

The group of fields in the Poza Rica trend and the Golden Lane, including the still older discoveries on the Tamaulipas arch (Panuco-Ebano), must have produced at least 5 billion bbl. This oil and almost all the deeper oil of the prolific Southeast Mexican area are believed to be sourced by the late Jurassic Pimienta black shales. Indications are that this prolific oil producing system remains prospective, perhaps at deeper levels or at other more subtle structures. Is there another Poza Rica on the seaward side of the Tuxpan platform?

Renewed Ebano field

Optimistically, the old Ebano field along the fractured axis of the Tamaulipas arch could be renewed using horizontal drilling and modern techniques of determining fracture patterns. The very dense Cretaceous limestone constituting Ebano reservoir rock must produce from extensive fractures.

Larger independents in the U.S. and Canada could efficiently assist in renewal of Ebano and perhaps assist in enhanced recovery in Poza Rica. This is a matter of new technological methods and experience. The techniques are particularly well understood by many U.S. independents. The EOR experience to date of Pemex engineers is mainly limited to water injection.

Chicontepec area

This area of largely Paleocene channelized flysch is geologically discouraging because of its relatively impermeable fine sandstone-siltstone lithology. However, the 9,000 ft thick formation in the Misantla-Tampico basin has several productive fields (President Aleman, Tajin, and Agua Fria) and oil shows throughout its expanse of subsurface and outcrop exposures.

The oil is considered to be derived from the Late Jurassic source beds. Although frequently counted as an additional 11 billion bbl of oil reserves, such a large number of wells would be needed to produce this amount of heavy oil from impermeable rock that it is generally considered economically unfeasible for Pemex or any major to produce.

On the other hand, independents might be able to explore sufficiently to ascertain whether full development of this petroleum system is industrially reasonable. Low permeability and small production (less than 150 b/d) might suit the budgets of small independents.

Veracruz basin

This basin lies along the shore of the gulf, mainly south of the city of Veracruz. Its western side is composed of imbricate thrust sheets of the eastern Sierra Madre, composed of middle Cretaceous carbonates of the Cordoba platform margin now buried beneath 3,000-10,000 ft of middle Eocene through Miocene clastic sediments.

The deeper part of the basin lies along the coast and has perhaps 25,000 ft of Tertiary clastics. From 1953-96, about 72 million bbl of oil have been produced from Cretaceous carbonates in the basin.

Future exploration of the deeply buried Cretaceous carbonates seems logical. More than a dozen wells have reached these rocks. The reefy edge of the Cordoba platform should be highly prospective. Further, this might offer a situation favorable for outside technology furnished by majors and large independents to assist in development of a whole new play in the older strata of the basin. It is conceivable that drilling depth would preclude operations by small independents.

The post-Cretaceous unconformity is important in providing erosional breccias and karstic reservoirs. Future exploration seems logical unless the burial of the imbricate thrust plates is too great. The broken, eroded thrust and telescoped eastern edge of the Cordoba platform would be highly prospective based on experience with this porous platform margin facies farther north, as well as in Southeast Mexico. Further, this might offer a situation favorable for outside technology to assist in development of a whole new play in the older strata of the basin. It is conceivable that the great drilling depth would preclude operations by small independents.

Coastal basins

The coastal isthmus saline Comalcalco and Macuspana basins are Tertiary downwarps filled with clastic argillaceous and sandy sediments totaling 25,000 to 35,000 ft.

The Comalcalco and Macuspana basins impinge on the western and eastern sides of the Villahermosa horst, respectively. Earliest Tertiary contains some carbonate rocks, but most of the sediment is nearshore deltaic, grading to offshore shales and turbidites.

Hydrocarbons were discovered in the 1960s in these areas, and at present 80 fields are known within the three basins. Fifty of these produce gas only, mostly in the Macuspana basin. These coastal basins can be considered a mature province, suggesting that their final development can be carried out by Pemex, with possible involvement of large and small independents.

Northern gas fields

In northern and northeastern Mexico, the Chihuahua trough, Sabinas, and Burgos basins have all had shows of gas or have some quantity of it but few liquid hydrocarbons.

Proximity to Laramide folding and thrusting, associated Miocene extensional faulting, and heating by numerous igneous intrusions of middle Tertiary age are presumed reasons for the gas-prone condition.

Although the Chihuahua trough was written off by Pemex after 10 years of futile exploration, only about 15 wildcat wells have been drilled within the vast area of the state. Late Jurassic source bed black shales occur at the base of the section, but good reservoir rocks seem rare. A tremendously thick Cretaceous carbonate section (12,000 ft) seems to lack hydrocarbons, but the Permian shelf dolomites may be productive. High costs owing to difficult terrain and remote locations on both sides of the border suggest that only majors or large independents would be interested.

Regarding the Parras basin south of the Coahuila block, current information about the great pile of foredeep sediments is mixed. A U.S. Geological Survey report by Peterson in 1985 stated that the basin could contain large gas resources (as much as 40 tcf); other accounts indicate that the gas may have been lost from heating.

The Sabinas basin north of Monterrey has four anticlines producing commercial natural gas. At least 10 folds are known in the productive area, and there are many more across the whole basin. The structures are elongate and relatively easy to recognize. The stratigraphic section is highly variable and includes shales, sandstone, source bed black shale, carbonates, and evaporites within the Jurassic and Cretaceous.

The basin offers opportunities for stratigraphic as well as structural traps. Terrain is mixed with intervening mountains and bolsones. It would seem economically feasible for independents to explore and develop this gas basin.

The Burgos basin is an old (1930s) gas producing province with the same sandstone-shale coastal deltaic stratigraphy and extensional faulting, down-to-gulf slumping growth faults as in the South Texas basin area. It is the western part of this coastal embayment and delta. More than 700 wells have been drilled in the basin, and 100 fields have been delineated.

Both the Sabinas and Burgos basins appear favorable for independent companies to explore and to attempt enhanced recovery. A number of majors, Conoco Inc., among others, regard the Burgos basin as suitable for further development.

We may cite Totonaca field on the U.S.-Mexico border at Nuevo Laredo as an example of one suitable for development by independents. It tested sulfurous gas and oil from near-reef sediments in the Cupido (Sligo) formation at about 10,000 ft but was not developed. Similar anticlinal structures along the reef trend, though much deeper, might be traced into the Texas coastal plain.

Extensive knowledge of Sligo strata and reef trend in Texas deep exploration could easily be transferred to the Mexican side and most assuredly vice-versa. Bob West field in the Wilcox trend that apparently extends under the Falcon reservoir on the border is another candidate for development by independents.

Policy issues

This discussion suggests that there are important opportunity costs (which we have not tried to quantify) associated with foregoing the efficiencies of different types of private-sector producers. At present, Pemex's efficiencies as a producer are being spread out over distinct production market niches, with a loss of economic efficiency to the Mexican economy in areas where other types of producers are more competitive.

If, for example, in Dist. 4 in South Texas about 3.3 bcfd of natural gas is being produced, the same petroleum geology south of Laredo should produce more than 250 MMcfd.

In our view it does not make economic sense for Pemex, as the equivalent of an international major, to have small, northern gas fields even appear on its list of E&P priorities. Nor, however, does it seem right to let the potential for incremental gas production upwards of 1 bcfd be left in the ground at a time when the Mexican government has mandated tough, clean air standards to take force Jan. 1, 1998.

In earlier discussions2-3 we have explored options and caveats associated with a change in upstream public policy in Mexico. In Venezuela, the state is capturing as much as 95% of the economic rent of private production, leaving producers with sources of feedstock for their refineries but little, if any, upstream profit. While such a strategy may work for the majors, it is unsatisfactory to the smaller independents that depend upon upstream rewards for their invested capital and human resources. A bidding system devised on any other country's experience would probably not be appropriate for Mexico.

As was emphasized by a former head of E&P in Pemex, there would have to be joint development of some fields, else reservoir pressure and ultimate recovery would be put at risk. An "area of mutual interest" can have as many controls and checkpoints as the Mexican state might believe would be prudent, that is, consistent with the objective of capturing the raw comparative advantages of distinct classes of producers.

In any case, Pemex as the state oil company would be expected to participate as a partner in any successful venture. Meanwhile, Pemex is somewhat protected from exploration and development costs, thereby allowing it to commit scarce resources to its own priority projects.

Pemex's comparative advantage in some basins, especially in Southeast Mexico, should not be underestimated, for at least three reasons:

One, Pemex's basic administrative and production infrastructure is largely a sunk cost.

Pemex has the practical political and operating skills painfully gained from nearly 60 years of operating experience in the region, skills that represent a substantial cost advantage over newcomers.

Pemex generally, but not always (as in the blockades of production wells in Tabasco showed), has public opinion on its side. For these reasons Pemex may have as much as a 20% cost advantage in southeastern production areas.

Offshore, there's an entirely different ballgame that could be played, especially in deeper water depths. Pemex has neither the experience, technology, nor capital to do wildcat drilling in expensive frontier areas. In the north, as elsewhere, Pemex should not be required to allocate scarce E&P resources in areas in which other classes of producers are more efficient.

Conclusions

We have identified, if only in a preliminary way, illustrative cases of comparative producer cost advantages (Fig. 2). Pemex is probably the indicated lowest cost producer in the established Southeast fields, onshore and in shallow water offshore.

The majors are clearly the most competitive producers for deepwater production in the Perdido area and Mexican ridges; in addition, their advanced field workover abilities could be applied to abandoned areas.

Small independents could tackle Chicontepec, and the larger ones could develop fields in intermediate water depths. There also is potential for majors to work in the deepwater portions of Campeche sound.

Both large and small independents could efficiently expand production in the Burgos and nearby northern basins.

The authors make no recommendations about how Mexican leaders might change public opinion in ways that would allow for the efficiencies discussed here to be acquired. Nevertheless, we believe that the discussion itself can be useful, to them as well as to others, in setting forth a frame of reference for considering policy options as well as the opportunity costs associated with the status quo. We welcome comments and criticism from friends in Mexico and abroad.

References

1. Worldwide production in Mexico, OGJ, Dec. 25, 1995.

2. Baker, George, Quantifying Pemex E&P benefits from foreign strategic associations, OGJ, Mar. 1, 1993, pp. 43-51.

3. Baker, George, The concept of virtual economy in Mexico's energy sector: the legal challenge, Nafta: Law and Business Review of the Americas (The Hague), Vol. I, No. 3, Summer 1995, pp. 78-93.

Bibliography

Baker, George, ¿Cuáles son los recursos no descubiertos en México?, Revista Mexicana del Petróleo, (Mexico, D.F.), Nov.-Dic. 1991, pp. 28-30.

Baker, George, El sector energético de México, Petróleo Internacional, Great Neck, N.Y., Mayo 1995, pp. 36-42.

González-García, R., and N. Holguin-Quiñones, Geology of the source rocks of Mexico, proceedings of the World Petroleum Congress in Argentina, Vol. 2, No. 3, 1991, pp. 95-104.

Moran-Zenteno, D., (trans. J.L. Wilson and Luis A. Sánchez-Barreda), Geology of the Mexican Republic, AAPG Studies in Geology 39, 1994, 160 p. (see particularly bibliography of Mexican geology 1983-1993).

Peterson, J.A., Petroleum geology and resources of southeastern Mexico, northern Guatemala, and Belize, U.S. Geological Survey Circ. 760, 1983, 44 p.

Peterson, J.A., Petroleum geology and resources of northeastern Mexico, U.S. Geological Survey Circ. 943, 1985, 30 p.

Wilson, J.L., Basement structural controls on Mesozoic carbonate facies in Northeastern Mexico: A review, International Association of Sedimentologists, Special Pub. No. 9, 1990, pp. 235-250).

Wilson, J.L., Petroleum geology of Mexico, MS in progress.

Wilson, J.L., and Ward, W.C., Early Cretaceous carbonate platforms of northeastern and eastern central Mexico, Cretaceous Carbonate Platforms, AAPG Memoir 56, Tony Simo, ed., 1993, pp. 35-50.

The Authors