Pemex Struggles to Keep Output as Mexico Debates Energy Laws

May 15, 2014 1:46 pm ET

(Updates with minister comments in 11th and 14th paragraphs.)

May 15 (Bloomberg) -- Petroleos Mexicanos will probably struggle to maintain current oil production as the country’s Congress debates additional legislation to a landmark energy bill passed last year.

Pemex, as the state-owned oil producer is known, is experiencing output declines at its two largest offshore fields and will be challenged to maintain current production levels, Lourdes Melgar, Mexico’s deputy energy minister, said yesterday in an interview at her Mexico City office. Chicontepec, the onshore field northeast of Mexico City, is producing 50,000 barrels a day, 8 percent of Pemex’s original forecast of 600,000 barrels for the field by 2014, she said.

“Many fields are arriving at a point of maturation and declines,” Melgar said. “Not only Cantarell is declining, but also Ku-Maloob-Zaap reached its peak and is falling. The numbers we are currently seeing in production and reserves are proving the urgent need that Mexico has to carry out an energy reform.”

Pemex’s output fell 2.1 percent in the first quarter from a year ago, reaching its lowest monthly production levels in more than 18 years in March. The world’s ninth-largest crude producer is banking that the new energy law, which allows for private investment in Mexico’s oil industry for the first time since 1938, will boost output to 3 million barrels a day by 2018 and end nine years of declines.

Pemex Production

After missing a mid-April deadline to implement the secondary legislation, Mexico’s Congress is racing to push through the rules needed to offer companies production-sharing and license contracts by early next year. Secondary legislation to the law proposed to Congress on April 30 may be approved by June, according to legislators from President Enrique Pena Nieto’s Institutional Revolutionary Party, or PRI.

Pemex produced 2.48 million barrels a day in April, below the company’s 2.5 million barrels forecast for this year.

Oil production might fall after the entrance of foreign producers, according to Victor Rodriguez, adviser to Pemex board member Fluvio Ruiz. Pemex’s ability to maintain current output and the capacity of incoming companies to produce quickly presents a “double challenge” for Mexico, he said.

“There’s a risk that production, instead of rising, will fall during the first few years,” Rodriguez said in an interview in Cartagena, Colombia. “If Pemex doesn’t have enough money, its production is going to fall while the private sector increases little by little.”

Repsol Stake

Spanish newspaper El Confidencial reported May 5 that Pemex hired Credit Agricole SA to broker the sale of it’s 9.3 percent stake in oil company Repsol SA. The decision to sell the stake in Repsol “wouldn’t be a bad idea” for Pemex and would free up capital for the company to invest in Mexican projects, Finance Minister Luis Videgaray said last week in an interview with Radio Formula.

Board member Ruiz supports the sale of Pemex’s stake in Repsol, Rodriguez said. Ruiz said last year that Pemex should question the decision to maintain a relationship with Repsol as it failed to provide a satisfactory return on the stake.

The possible sale of Repsol’s stake is yet to be discussed by Pemex’s board of directors, said Melgar, who sits on the company’s board. Pemex’s administration would make the final decision on the sale and wouldn’t require approval by the board of directors, she said.

“The President of Mexico, finance minister, energy minister and Pemex CEO are the ones that will make the decision on Repsol,” Rodriguez said. “The board just signs. No more.”

National Content

The secondary legislation proposed by the government on April 30 established at least a 25 percent national content average by 2025 for private companies operating in Mexico. There “could be changes” to the minimum national content requirements prior to the approval of the legislation, Melgar said.

“In the conversations that we have had with legislators, it’s very clear that some think the amount should be higher,” Melgar said. National content consists of the goods and services provided by the Mexican government or entities on new energy projects, such as technology, engineering assistance, pipelines, or supplies, she said.

National content requirements may vary according to project type, Melgar said. Ultra deep water or shale developments, where Mexico has limited or no experience, may have a lower minimum national content requirement, while shallow waters or onshore projects may request a higher take.

Mexico should consider higher minimum content requirements similar to those in Brazil, where requirements vary from contract to contract, Rodriguez said. At Libra, the most recent field awarded by Brazil’s oil regulator, Petroleo Brasileiro SA and its partners need to use a minimum 37 percent local content during exploration and 55 percent during development.

“Petrobras is around 60 percent,” Rodriguez said. “The idea is to be similar to Petrobras. Little by little over 20 years. Without deadlines. I think 25 percent isn’t enough.”

--With assistance from Nacha Cattan in Mexico City and Peter Millard in Rio de Janeiro.