Pemex prepares to expand oil production after decade of decline

Oil production at Pemex has touched bottom after a decade of decline, according to the head of exploration and production at Mexico's state-controlled energy group, and a new era of deals with private companies should fuel its recovery.

"Things are looking good," Gustavo Hernandez told the Financial Times in an interview, just weeks before the first contracts with private operators are due to be unveiled on May 13.

The statement may sound rash - output at what has been Mexico's sole hydrocarbons producer for nearly 80 years has been sinking inexorably since 2004, when the giant shallow-water Cantarell field was at its height, and the company has already cut its 2015 production forecast once this year.

Furthermore, Pemex, the main contributor to the federal budget, is shouldering the brunt of public sector cuts in a government austerity drive as it seeks savings of some $4bn this year.

The latest official production goal is 2.29m barrels of crude oil per day, down from the hoped for 2.4m bpd this year and a far cry from the peak of more than 3.38m bpd in 2004. Average production, which Mr Hernandez said was 2.33m bpd this month, also remains below last April's output of 2.48m.

Yet Mr Hernandez said he believed production has touched bottom: "We are in the process of reversing a trend . . . to stop falling and start growing."

Current production remains slightly above the annual target. This is despite an explosion on a platform on April 1, cold weather conditions in January, which reduced output, and a switch to daylight saving time that means only 23 hours a day of production are counted, he said. "I can feel confident that we'll meet the forecast."

The government has set a goal of increasing Mexican oil output by 500,000 barrels per day by the end of President Enrique Pena Nieto's term in 2018. Just over half of that is expected to come from shallow-water and extra-heavy oilfields being tendered this year, officials said.

The decade of declining production and Pemex's inability to invest more to increase it - because the company hands most of its revenue to the state in tax - are the driving forces behind a historic Mexican energy reform that is flinging open the sector to private investment in exploration and production.

Companies had been limited to service contracts with Pemex, but that will change on July 15 as Mexico awards the first of the fields and blocks that it is tendering in a bidding round this year. That will mean Pemex will have to compete with rival operators for the first time since its creation in 1938 after international oil companies were ejected and their assets expropriated.

But Pemex's first tie-ups with private companies will come next month. It is already "migrating" an initial 11 of its 22 service contracts into new-style deals - complete with tax incentives to boost production, Mr Hernandez said, which in some cases will mean new operators coming in.

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"We will have the first migration on May 13, and then the others will cascade from there," he said, declining to name the field or investors involved. "In some cases, [current] service contractors don't want to take on the risk and will leave," he added.

Pemex is also seeking partners for 14 fields that it retains in its portfolio - a practice known as "farm-outs". Those partnerships will be approved in tandem with the tender rounds this year and Mr Hernandez said the collapse in oil prices had not prompted the company to increase its farm-out plans because "if we put more fields in, we won't meet the timetable".

Farm-out partners will be chosen by the regulator, after comment from Pemex.

The company, meanwhile, is trying to weather the low-price environment by seeking the same 15 to 30 per cent reduction in day rate costs from its contractors as international oil companies are squeezing from theirs, Mr Hernandez said.

Pemex is in the throes of revamping its corporate structure to become more efficient and focused, and is betting that its deep knowledge, both of Mexico's hydrocarbons prospects, and its business environment, will give it the edge in what looks set to be a fiercely competitive new landscape.

"We are preparing to compete and to win," Mr Hernandez said. "We'll see who knows their stuff. We're excited."

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