The Deal is closed! | 342 (July-August 2018)

LUKOIL and ENI sign a contract to jointly develop Block 28 offshore Mexico’s Salinas Sureste shallow-water basin just ahead of the country’s presidential elections. Oil Journal explores how the new administration’s policies may affect these plans.

2018-07-16 23:21 Views 1040

In less than five years, LUKOIL has grown into a leading player in Mexico’s oil market as the country has become one of the company’s key areas of international expansion.

LUKOIL in Mexico

LUKOIL in Mexico

LUKOIL is continuing work in Veracruz on the Amatitlan block, as well as bidding in new licensing rounds for offshore assets in the southern part of the Gulf of Mexico.

While LUKOIL hasn’t won any deepwater bids in Mexico yet, the company has obtained licenses for the shallow-water Blocks 12 and 28. The contract for the former was signed in September 2017 and the first exploration well is expected to be drilled in 2019.

Meanwhile, LUKOIL and ENI won the rights to Block 28 in licensing round 3.1 on March 28 of this year. While five different bids had been under consideration, the main competitors were joint bids by LUKOIL/ENI and DEA/Premier. Mexico’s National Hydrocarbons Commission assesses bids based on several criteria, including the state’s share in a consortium, commitments to drilling exploratino wells and bonus payments.

Both consortia offered Mexico’s government a 65% share in profits and promised to drill two wells each. The deciding factor was the bonus payment (LUKOIL/ENI offered a more generous option), which finalized the deal.

Licensing terms and results

Acreage type Contract type Close date Blocks offered Blocks awarded Term Extension (yr)
1.1 Shallow-water exploration PSC 15-Jul-15 14 2 30 5
1.2 Shallow-water DRO PSC 30-Sep-15 5 3 25 5
1.3 Onshore conventional Licence 15-Dec-15 25 25 25 5
1.4 Deepwater exploration Licence 5-Dec-16
11 9 35 10, then 5
2.1 Shallow water exploration and DRO PSC 21-Jun-17 15 10 30 5
2.2 Onshore gas Licence 14-Jul-17 10 7 30 5
2.3 Onshore exploration and DRO Licence 14-Jul-17 14 14 30 5
2.4 Deepwater exploration and DRO Licence 2-Feb-18 25 19 35 10, then 5
3.1 Shallow water exploration and DRO PSC 2-Apr-18 35 16 30 5
3.2 Onshore exploration and DRO Licence 27-Jul-18 37 N/A 30 5

Source: Wood Mackenzie

A Strong Start

The Salinas Sureste Basin is one of Mexico’s historical centers of oil production. As such, it’s already well explored: over 70% of the offshore blocks offered to investors have already been scrutinized by geologists via 3D seismic tests. Pemex had already discovered several large shallow-water deposits in the basin’s south, but lacked the resources to develop them independently.

The Salinas Sureste Basin

Following a major energy reform announced in December 2013, Mexico’s government offered these deposits to private companies for commercial development. ENI drilled two successful exploratory wells at one of the deposits, Amoca-Mizton-Tecoalli, in 2017, thereby raising its estimated reserves to 900 million barrels.

That same year, US-based Talos Energy discovered the Zama reservoir at Salinas Sureste with estimated reserves at 1.4-2 billion barrels of oil, marking one of the biggest offshore discoveries worldwide over the last 20 years.

Developing offshore will allow Mexico to reverse negative production dynamics in its oil sector. Since 2004, the country’s oil output has fallen by 1.5 million barrels per day. Experts predict that production will stabilize in the early 2020s and eventually begin to increase thanks to new deepwater offshore projects coming online (source: Wood Mackenzie).

Mexico’s Oil Production, 2004-2017, millions of barrels/day

Mexico’s Oil Production, 2004-2017, millions of barrels/day

New Administration

According to current plans, Mexico’s National Hydrocarbons Commission will hold four licensing rounds during 2015-19; most of the work has already been completed. Despite the oil price drop of 2014-15, Mexico was able to attract investors to over 100 onshore and offshore developments. The potential investments under existing contracts could total over $7 billion over the coming four years.

The future of the industry, and, specifically, the ongoing energy reform, will nonetheless depend largely on the new administration (due to be formed in December 2018). On July 1, Andrés Manuel López Obrador was elected Mexico’s next president. One of his promises during the campaign was to check existing rounds and licenses for any signs of corruption.

Andrés Manuel López Obrador

Most experts believe it’s unlikely any current contracts will be canceled, but new licensing rounds may be delayed due to check-ups. Hence Obrador’s otherwise ambitious plans to increase oil output may have to be corrected. Regardless, LUKOIL remains eager to help the nation of Mexico profit from its vast reserves of black gold.

Andrés Manuel López Obrador (born 1953) is a Mexican politician and head of the National Regeneration Movement (MORENA). He was elected the country’s next president on July 1, 2018, after running unsuccessfully in 2006 and 2012. During 2000-05, he served as Head of Government of Mexico City. His 2018 platform included increasing social welfare payments, fighting corruption and developing domestic industry.

Obrador’s Energy Policies

  • Increase oil production to 2 million barrels daily by 2024 and to 2.5 million by 2035
  • Check existing contracts for signs of corruption
  • Stop the process of extending and reassigning Pemex’s existing contracts
  • Increase state funding for Pemex
  • Construct and expand new and existing oil refineries, respectively
  • Increase gas tax
  • Increase utilization of oilwell gas
  • Increase society’s role in regulating the energy sector
  • Increase hydro power output
  • Increase lifespan of existing thermal power plants via partial transition to gas
  • Increase usage of renewable sources of energy

* from his electoral manifesto “Proyecto de Nacion 2018-2024”

Lukoil #342 (July-August 2018)

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