The disbandment of the big oil companies blurs Peña Nieto’s reform

High risks, unprofitable prices and geological complexities have played against the development of private oil fields in Mexico. The companies Shell and Qatar Energy are the latest oil companies to make official before the National Hydrocarbons Commission (CNH) the abandonment of exploration projects that they had won in the Gulf of Mexico in the first oil rounds of the last six-year term of President Enrique Peña Nieto. Last week, the regulatory body authorized Shell and its partner Qatar Energy to give up early on four contractual areas that were awarded to it in deep waters in the State of Tamaulipas.

The oil blocks covered an area of ​​2,000 square kilometers each and are in the exploration stage. Shell stated that after drilling a well and carrying out both geological and geophysical studies, it found limited prospective resources, with low thickness and poor quality of the reservoirs. “It is a complicated area geologically,” she asserted. CNH will conduct additional technical analyzes to evaluate future opportunities in these areas and determine whether other companies might be interested in their development.

Marco Oliver De la Cruz, member of the legal unit of the CNH, indicated that in two areas compliance with work commitments has already been accredited, so a conventional penalty will not be established. In the two remaining blocks, the accreditation of work units is being carried out, so follow-up will be carried out to determine if it will be necessary to impose a subsequent sanction. According to the regulatory body, the effective date of these contracts is May 7, 2018, all under the license modality valid for 35 years, and the return of the fields will become effective on January 25, 2024. Furthermore, just a week ago the British oil company handed over operational control of a deepwater contract also in Tamaulipas to the parastatal, Petróleos Mexicanos (Pemex). Thus, the state oil company will retain 100% of the stake.

It is not the first time that projects have been abandoned, last May Shell abandoned two oil contracts early, also in deep waters, off the coasts of Tabasco and Campeche. For this resignation, the oil company received a conventional penalty of $732,000 after the CNH ruled that the company failed to comply with the minimum work program in this oil block. The Anglo-British company justified this abandonment by not finding commercial resources in the area.

The year of the rout

This year is one of the year in which the most abandonments and resignations from private oil fields have taken place, with around twenty procedures, according to CNH data. Among the companies that have given up all of their contractual areas are Equinor, Premier Oil, Chevron, China Offshore Oil, Repsol and BP Exploration. The oil companies, which landed in the country in 2014 with the promise of energy opening by the PRI government of Enrique Peña Nieto, are now reconsidering their bet.

Employees during the inauguration of the first Shell gasoline station in Mexico City, in 2017.
Employees during the inauguration of the first Shell gasoline station in Mexico City, in 2017.Alejandro Cegarra (Bloomberg)

To date, in Mexico there are 412 Pemex Exploration and Production Assignments and 108 contracts in which national and international contracting companies participate, including Pemex, according to figures from the Ministry of Energy and the CNH. Mexico has 462 exploration and development plans for extraction approved and in operation, which accumulate an authorized investment of 318,000 million dollars with validity until 2054.

Susana Moline, an associate at the energy consulting firm Marcos y Asociados, explains that the oil contracts in Mexico that are currently in production are areas with previously discovered fields or mature fields that were already in production. The deepwater contracts, which are currently in the exploration stage, require approximately eight years in the event of geological success to reach the production stage.

The specialist says that the private industry has mostly complied with the commitments established in the tenders. So far, there are 12 blocks in the process of early termination, either partially or totally, and additionally, 10 blocks have completed this process and are awaiting the signing of the corresponding modifying agreement. “These resignations are an intrinsic part of the exploration process and align with oil market trends. Among the reasons that lead oil companies to return blocks are the discrepancies between initial production expectations and actual results, as well as the limited success in explorations,” he says.

Moline specifies that getting rid of these blocks does not necessarily imply that companies are abandoning operations, it only means that the blocks do not have commercially viable volumes for their business. The expert warns that, although the abandonment of some oil blocks is common in the sector, it is urgent that the Government reactivate the oil rounds to assign new fields to private companies in Mexico. “This market offers significant opportunities due to its geological potential. However, Pemex lacks the financial and technical resources necessary to take advantage of all prospective resources in national territory,” she says.

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