Heading to offshore Mexico

 By Peter Ward

The Gulf of Mexico is one of the biggest sources of offshore oil in the world. But for decades international oil companies have been restricted to the American part of the Gulf. Now major oil companies are heading south of the border to take advantage of recovering oil prices, easing of regulations and a wealth of resources…

Prior to 2013, Mexico’s oil sector was walled off. The state-owned company Petroleos Mexicanos, or Pemex, had a monopoly on the energy business, and all foreign exploration and production was forbidden. But in 2013 and 2014 energy reform legislation was passed that saw an end to the 75-year monopoly, and allowed foreign investment. Mexico saw the reform as the only way to end a years-long decline in oil production. It was felt at this time that Pemex lacked the financial resources or the technical skill to get the most out of the deepwater resources off the coast of Mexico without help from outside of the country.

Petroleos Mexicanos had a monopoly on the energy business in Mexico (Matthew Rutledge)

In December, the global oil industry struck deals worth billions of dollars to the Mexican government for rights to drill in the country’s part of the Gulf of Mexico. The agreements were a significant milestone for Mexico, and confirmation that the decision to open up its oil to the rest of the world would pay off. “This is a vote of confidence that the energy reform is moving forward and for the geological potential of the Mexican Gulf deep waters,” said Jorge R. Piñon, former president of Amoco Oil Latin America and now an analyst at the University of Texas at Austin told the New York Times. “Everybody paid a premium and that premium indicates the potential of the blocks”.

Among the companies that made deals with the Mexican government were American and French firms that already had a presence in the Gulf of Mexico and would be able to use crews and equipment already in the region. The China National Offshore Oil Corporation won two blocks at the auction, signifying the global appeal of the region’s offshore oil.

Pemex tower (Eneas, Wikimedia)

Mexico has also auctioned off exploration and development blocks in shallow waters in the Gulf of Mexico, as well as onshore areas. New auctions will be held in June. Eni is another company heavily involved in Mexican offshore oil and gas. In March this year, the Italian giant was the first international company to drill a well in Mexico since the reforms around four years ago. Eni successfully drilled the Amoca-2 well in shallow waters of Campeche Bay, and struck oil in multiple reservoirs.

Eni was able to confirm the presence of light oil in the shallower formations, while the deeper sandstones contained high quality light oil. The first well indicated that there reserves were higher than what was originally estimated. “This important discovery comes in a country where Eni has not yet operated and confirms our exploration capabilities, building upon our strong exploration track record, and is another confirmation of the validity of our ‘Dual Exploration Model’ approach. Focusing on conventional exploration with high initial stakes and operatorship, we manage to fast-track exploration activities, monetize exploration successes early and receive competitive development opportunities, therefore maximizing value generation for our shareholders,” Eni CEO Claudio Descalzi said.

Campeche Bay

Eni’s drilling campaign in Mexico will continue with a new well in the Amoca area, followed by delineation wells to be drilled later in 2017 to appraise existing discoveries and look for undrilled pools. Mexican officials said in May that it would be happy to receive suggestions for offshore blocks to be included in the next bidding round of its part of the Gulf of Mexico in December. The country’s deputy energy minister said oil companies can nominate blocks they’d like to bid for. The upturn in Mexico’s oil and gas industry is welcome at a time when the country is facing uncertainty in other areas of its economy. Donald Trump’s anti-Mexico sentiments and suggestions he will renegotiate the North American Free Trade Agreement have negatively affected the country’s currency, the peso.

The entire Gulf of Mexico’s deepwater reserves have made something of a comeback of late. An auction of offshore oil and gas parcels this year received nearly $275 million in high bids, an increase of 76 percent from the year before. Last year saw top bids of $156.4 million but major companies have returned with larger bids, amid hopes regulations will ease in the area and oil prices will rise. These huge bids are an indicator that the major oil companies foresee higher oil prices and better business conditions in the near future. Just over two years oil prices soared at more than $100 a barrel. Now prices hover above $50, but the eagerness to enter Mexico’s waters proves that the industry is upbeat about the years to come.

SEE MORE: The Gulf of miracles by David Bartlett

about the author
Peter Ward
Business and technology reporter based in New York. MA in Business Journalism at Columbia University Journalism School 2013. Five years experience reporting in the U.S., the U.K., and the Middle East.