PEMEX's head of E&P has plan for increasing production capacity

EDITOR'S NOTE: Carlos Morales Gil is head of exploration and production at PEMEX. This interview was conducted by Focus Reports exclusively for Oil & Gas Financial Journal.

OIL & GAS FINANCIAL JOURNAL: In May PEMEX announced a new deepwater natural gas discovery. How important is this discovery for the company? Could this be the beginning of a new era for PEMEX, signaling a shift from petroleum to natural gas and the true start of deepwater exploration and production for Mexico?

CARLOS MORALES GIL: This is a very important discovery for two main reasons. First, it confirms the existence of a gas province in the deep waters of the Gulf of Mexico with significant production potential. Two years ago we discovered Lakach, and now Piklis, which together form part of the same sub-basin in the Gulf's deep waters.

Second, the discovery also means that PEMEX has entered into a challenging area of deepwater operations. At 1,900 meters (6,000 feet) this is the deepest well that we have drilled. It leads us to work in a way that we foresaw several years ago when first projecting deepwater activities. As we developed our capacities, we started shooting seismic, commenced drilling, and prepared our people to take on this challenge. We are now ready for development. Our first asset to be developed in deep waters is Lakach which, together with Piklis, has the potential to produce about 800 bcf, which equates to 80% of the country's current gas imports. This is very significant.

Additionally, we are working to include new capacities in our drilling fleet. We will have three rigs in deep waters this year, which we contracted in 2007. We have an assessment of about 28 billion barrels of oil equivalent of prospective resources, and we are going to speed up the exploration process in deep waters to hopefully deliver expected results.

OGFJ: You recently returned from the United States, Canada, and Argentina where you launched new incentive contracts. Why did you choose these countries and what was your message to investors there?

CMG: Our E&P strategy is focused on reducing current production gaps – increasing production in order to replace the reserves that we are extracting. Part of this strategy includes the reactivation of mature fields. After discovering the Mesozoic basins in the south and the Gulf of Campeche in the early 1970s, we essentially abandoned mature fields without enough activity to extract the reserves that were still in place. We have only extracted 17% of their volume, so there is still great potential in those fields. We have the potential to extract at least twice as much. Increasing the production capacity of mature fields is one of our objectives for the short term.

This means that we need to bring additional capacities to the country to complement the capacities that PEMEX currently has. Most of our human and financial resources are concentrated in our highly productive large fields in the south and the Gulf of Campeche. We need to look at additional capacity for those mature fields which is why we are trying to bring in people through new contracts. The bidding has been going on for a little over two months and so far we have had very good responses from the interested parties. We have 45 bases and 22 companies for sale, and overall we believe we have very strong offers on the table that are attractive to the industry.

OGFJ: Last year PEMEX announced a massive $267 billion plan to increase output. Can you explain to our readers how important this plan is for PEMEX and how the money will be divided? Will it be dedicated more to enhancing existing fields or new exploration efforts?

CMG: The key word that best describes our strategy is diversification. We are increasing our level of investment in exploration. About 14% of our $22 billion annual budget is dedicated to exploration activity.

A big part of the budget, of course, goes to development and production in the high productivity areas in the southwest and offshore shallow waters – 8% is dedicated to Chicontepec because we see it as a strategic resource. The remaining 78% to 80% goes to the big production areas – the development of onshore fields in the south and the new fields that we discovered in the last two years. Part of the budget also goes toward Burgos as part of PEMEX's gas strategy. The multiple areas of investment indeed reflect our strategy to diversify.

OGFJ: Over the past 30 years, the Cantarell field alone has generated over half a trillion dollars in revenue since it began production in 1979. The Chicontepec field, which was deemed the possible successor of Cantarell, has proven to be far more challenging due to geological aspects. As a result, not only have production results been far below expectations, but more worryingly, production costs have now doubled and are on par with bitumen oil sands in Canada at $17/barrel. Obviously this is far from being enough to replace Cantarell or KMZ. Is there still hope that Chicontepec will play a central role future production?

CMG: I do indeed believe that Chicontepec will play a big strategic role in the future of the Mexican oil industry. Given the fact that there are about 100 billion barrels of oil equivalent down there in the ground, we cannot just let the field pass undeveloped like we did for the first 80 years since its discovery in 1926. We have the obligation to the country to develop the field. Everybody in the country, particularly those involved in developing policies, should be very interested in Chicontepec. It is a strategic issue and a resource that we have not dedicated enough human and financial capacities to properly develop and extract. This is not the same as exploration. The difference between exploration and Chicontepec is that with exploration we are still searching for oil. In this case, we know where the oil is but we have to find better ways to extract it.

OGFJ: Chicontepec production for 2011 is forecast at 70,000 barrels per day. Can you confirm that figure and what do you hope to produce from Chicontepec in the coming years?

"The key word that best describes our strategy is diversification. We are increasing our level of investment in exploration. about 14% of our $22 billion annual budget is dedicated to exploration activity." — Carlos Morales Gil