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Mexico Sees Its First International Offshore Drilling Success

Nick Cunningham

Italian oil company Eni drilled the first well by an international oil company in Mexican waters, and on March 23 they said the well indicated a “meaningful” volume of oil.

The discovery was not entirely a surprise, given that state-owned Mexican oil company Pemex had already explored the area in the past. For more than seven decades, Pemex was the sole owner and operator of Mexico’s energy assets, but that all changed in 2013 with a monumental liberalization by the Mexican government. The energy reform package ended Pemex’s monopoly and the privatization effort was intended to attract international companies that could bring in capital and drilling expertise.

Eni’s latest announcement will provide a boost to supporters of the liberalization. Eni says that the results from the Amoca-2 well indicate that there is more oil than Pemex originally estimated.

The result will also surely spark more interest in Mexico’s oil reserves, perhaps attracting more companies to bid in the upcoming June auction for offshore acreage. Eni drilled in the Campeche Bay, where some of Mexico’s most prolific oil fields are located. In particular, two offshore fields – Ku-Maloob-Zaap (KMZ) and Cantarell – produce nearly half of Mexico’s oil. Cantarell used to be one of the largest oil fields in the world, peaking at 2.1 million barrels per day in 2004. But falling reservoir pressure forced the field into rapid decline, with output from the field now standing at roughly 200,000 bpd.

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But that does not mean that Mexico’s offshore is played out. Eni’s discovery, Mexico’s government hopes, is the first of many more. Eni’s well was drilled in just 25 meters of water, but the upward revision on the reserve estimates will grab the attention of the industry. “[The discovery] is 7-8km from the shore and 20-30km from Pemex [infrastructure] facilities so if we need to accelerate [development], I think it can be done very quickly,” Eni’s CEO Claudio Descalzi told the FT. “We want to go fast . . . it’s reasonable to think that in a couple of years, three years, we could start production.” There is a lot more acreage in deeper waters that have not been explored yet, which will put a lot of attention on the June auction.

However, just as Mexico’s energy reform appears to be bearing fruit, there are some clouds of uncertainty starting to form around the investment climate. President Trump might imperil energy investments in Mexico’s offshore sector – ironic for the unabashedly pro-oil president. That is because Trump’s anti-Mexico rhetoric – calls for a crackdown on immigration and the construction of a border wall – is sparking anti-Trump sentiment south of the border. Trump’s call for Mexico to pay for the wall is a humiliating demand that could never be agreed to by any leader, and it has Mexican President Enrique Pena Nieto plunging in the polls, posting a shocking 12 percent approval rating.

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Consequently, a rival politician, Andres Manuel Lopez Obrador, a brash leftist who closely lost the 2006 presidential election, is surging in the polls on his anti-Trump rhetoric. He is the leading candidate right now for the 2018 election.

Crucial for the oil and gas industry is Obrador’s pledge to hold a public referendum on the 2013 energy reform laws, which is what has allowed companies like Eni and other oil majors to gain access to Mexico’s reserves in the first place. Obrador says he would not nationalize the assets, but would allow the people to vote on the issue in a national referendum. If the public votes against the energy reform, he would turn to international courts and other legal means to roll back the privatization effort. If the people support the energy reform, on the other hand, Obrador pledged to accept the result and work to attract international investment.

Obrador’s election, then, wouldn’t present a mortal threat to oil and gas investments. With falling production – down to 2.5 million barrels per day currently from a peak of 3.85 mb/d in 2004 – Obrador seems to recognize that international companies will be needed to reverse the decline. “You can’t move Mexico forward only with public investment,” he told Bloomberg in mid-March. “You need to crank up the three motors of the economy: public sector, private sector, social sector.” He did not specify what that arrangement might look like.

But a shift from the current government to one more confrontational with the U.S. and towards Mexico’s own energy reforms would certainly complicate the calculation for companies considering spending hundreds of millions of dollars.

For now, however, Eni’s latest discovery will likely lead to more interest in Mexico’s June auction.

By Nick Cunningham of Oilprice.com

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