Commodities 2023: Mexican oil and gas upstream sector to remain active, but not without hurdles

The Mexican oil and gas upstream sector is expected to remain active in 2023, with private companies ramping up exploration and production.

But there will be challenges, including rig availabilities.

Based on the exploration and production plans approved by the National Hydrocarbons Commission, or CNH, drilling by the private operators and the state oil company Pemex will increase, at least in the first half of the year, as companies rush to complete their commitments, given that many of the development plans from companies end in 2023.

Out of the over 100 contracts that stemmed from the 2014 liberalization process in Mexico, only a fraction of them are for production, and the companies who own them have been busy.

Italy’s Eni, for instance, will continue its drilling at Area 1, a production block in the shallow-water Gulf of Mexico where the company is currently producing 25,200 b/d, the largest output by a private company in Mexico.

Eni will drill eight new wells in 2023 at Area 1, which is made up of three fields: Amoca, Mizton and Tecoalli. The company recently incorporated a floating production storage and offloading unit, or FPSO, at Area 1 in order to optimize its operations.

Eni will soon begin injecting water to increase pressure, which will increase output to almost 90,000 b/d by 2024, according to CNH data.

Mexico is one of the few countries in the world where the company expects to have “high impact” drilling in 2023, Eni said in its Q3 earnings call. The company will spend Euro 630 million in exploration activities in 2023, management said. Eni expects to recover 300 million barrels of crude and 185 Bcf of gas at Area 1.

Key exploration

The results of the wells drilled in the coming months will determine whether operators decide to continue their exploration activities. Companies like TotalEnergies and Winthershall DEA will drill to determine whether to hold onto their blocks, for instance.

Private companies have started carefully picking the best opportunities from their portfolios. In 2022, over 20 companies relinquished complete blocks or a part of them to the Mexican government as companies recalibrated their strategies. According to the CNH, the relinquishments did not mean there were no resources, but that the companies had decided to focus on other, more promising options.

Repsol relinquished five of the blocks it obtained to concentrate in deepwaters, where it has already discovered abundant resources. In 2020 Repsol announced two major discoveries named Polok and Chinwol, with its partner Petronas, at one of its six blocks, called Area 29.

The company expected to find roughly190 million boe at Polok and 120 million boe at Chinwol.

Lukoil will increase its activity at Area 12, where the company recently struck oil. According to preliminary estimates, there could be 250 million barrels of crude at the site.

Eni will remain active at Area 10, where it recently struck oil with two deepwater wells: Saaskem and Sayulita. Saaskem is already being appraised. The company is set to drill a couple more wells for Sayulita.

By Dec. 15, the CNH had authorized the drilling of six exploration wells in deepwaters in 2023 for Eni, Shell, Petronas and Murphy.

State-owned Pemex will also remain active. For 2023, the Mexican treasury assigned Pemex Peso 404 billion ($20.2 billion) to spend in exploration and production, higher than the Peso 360 billion it got in 2022.

By Dec. 15, CNH had authorized Pemex the drilling of over 20 exploration wells for 2023.

Facing challenges

However, upstream companies are facing challenges. For instance, rig availability is tight.

In the last 12 months, nine rigs left Mexico and only one has arrived so far, according to S&P Global data.

“Middle East clients are increasing drilling activity, and according to market participants they are willing to pay attractive fees to rig owners, outbidding others,” said Aparicio Romero, an analyst at S&P Global Commodity Insights.

Most of Mexico’s rigs were contracted by Pemex, according to S&P Global.

The rig scarcity also impacts private companies. As fewer rigs are available, companies are forced to use the same equipment for completely different wells or even share rigs with others, which makes logistics challenging.

Eni and Murphy recently had to modify their drilling plans as the offshore platform they are sharing, Valaris DPS 5, was delayed. The Valaris would be used to drill Tulum, a deepwater well from Murphy in the Cuenca Salina Basin. Then it would move to the Sureste Basin to drill Yatzil, a shallow-water well from Eni. Finally, it would travel to the Salina del Istmo Basin to drill another deepwater well, also from Eni, called Nabte.

As the rig was delayed, all those plans had to be modified.

Shell is another operator which has faced logistic challenges as it moves rigs from one basin to another to drill wells with different characteristics. The major is planning to use the Maersk Voyager to drill two wells almost 400 miles apart. In January and February, Shell is looking to drill Jokol, a deepwater well in the Salina del Istmo Basin, off the coast of Veracruz. Then, it plans to drill Luwa, off the coast of Tamaulipas, in the Salina del Bravo region, beside the Perdido Fold Belt from April to June.

“Companies are evidencing that there are problems to find equipment,” said CNH commissioner Nestor Martinez Romero, during the meeting the Eni and Murphy modifications were approved.

Pemex under pressure

Pemex, the most indebted exploration and production company in the world, faces challenges of its own, beginning with $8 billion in interest payments in 2023, and the same amount for 2024.

The company will be under pressure to meet its production target for 2023, which stands at 1.9 million b/d. Although the goal was unchanged from 2022, it is still below the 1.75 million b/d the company reported in October.

Pemex will rely on new fields the company has identified as “priority” to meet its goals. According to the company, the 36 new fields the company has put into operation in the last years is now contributing roughly 400,000 b/d.

It will be hard to reach its production goals, said Adrian Duhalt, a research scholar at Columbia University’s Center on Global Energy Policy in New York.

“Pemex and the president are likely to underdeliver on that promise, although it is important to recognize the company did manage to stop the decline that happened in previous administrations,” Duhalt told S&P Global, adding that if Pemex keeps focusing on onshore and shallow-water fields, instead of diversifying its portfolio, growing its output will be hard to achieve.