Budget cuts to limit Pemex deepwater participation

OREANDA-NEWS. February 15, 2016. Deeper cuts in the 2016 budget of Mexico's state-owned Pemex are likely to circumscribe the oil company?s participation in a pivotal deepwater tender later this year.

The tender for Gulf of Mexico deepwater acreage, some of which lies close to prolific developments on the US side of the maritime border, will culminate Mexico?s inaugural licensing round that has been conducted in a staggered series of tenders that kicked off in December 2014. The round is a cornerstone of Mexico's 2014 energy reform that ended Pemex's monopoly over the strategic oil industry.

Pemex, which has already weathered a 62bn peso (\\$3.3bn) budget cut this year, faces more belt-tightening as part of the government?s broader response to tumbling oil prices.

Pemex's current 2016 budget is 478.3bn pesos, off 11.4pc from 540.6bn pesos in 2015. Mexico's finance secretary Luis Videgaray confirmed this week a new round of government budget cuts, "starting with Pemex."

The deepwater tender includes four Perdido Fold Belt blocks, holding combined prospective resources of 3.6bn bl of oil equivalent (boe), and six blocks in the southern swath of the Gulf of Mexico, with total prospective resources of nearly 7bn boe.

Access to geological data begins this week and runs through 15 April, and bidder pre-qualification will take place on 14 June-1 July. The actual tender date will be determined in the third quarter.

As of 8 February, 19 companies have shown interest in the tender and 11 have requested access to geological data, of which six have already succeeded, including Chevron, Total, Shell, Norway?s Statoil and US independents Hess and Noble Energy.

Even when oil prices were in the triple digits, Pemex was known to lack the hefty required capital and technological know-how to develop deepwater areas on its own, despite a handful of discoveries.

But up to now, the company has stayed on the sidelines of the upstream tenders, on the understanding that it would focus on its own core shallow-water operations and partner up with major oil companies to tap the high-profile deepwater.

The tenders have so far covered lower-risk shallow-water and onshore blocks mainly appealing to local and foreign independents.

Yet Pemex is undoubtedly seen as a valuable local partner for the deepwater. "More than a money issue, I think it?s a strategic one. Pemex has less experience in deepwater, but it knows well the Perdido Fold Belt," Banamex economic research director Sergio Luna told Argus.

At the same time, a Pemex deepwater presence could be a political imperative, especially at a time of layoffs and restructuring.

The extent to which the fresh budget cuts limit Pemex?s flexibility to participate with foreign oil companies in deepwater projects will be determined by the company?s new chief executive, Jos? Antonio Gonz?lez Anaya, a financially oriented industry outsider appointed this week.

As a top priority, Gonzalez is expected to leverage his pensions and retirement expertise to cushion the blow of shrinking Pemex?s 150,000-strong workforce, part of a wider corporate transition into a competitive landscape. Some 16,000 layoffs were in the offing even before Gonzalez was named to replace Emilio Lozoya.

Under its previous management, Pemex prioritized production when it faced a similar 60bn peso budget cut in 2015, suspending major refinery upgrades and new exploration projects in favor of trying to stem a decade-long decline in output. It is not clear if Gonzalez will maintain that course.

Mexico's finance ministry, where Gonzalez served as chief of staff and undersecretary of income in 2002-12, is expected to tighten oversight of Pemex.

"It is very likely that now, with a director closer to the ministry, Pemex will stay on the margins of the deepwater tender," says attorney and former senior Pemex financial advisor Luis Miguel Labardini, adding that Pemex will focus on developing shallow-water fields and farm-outs of its own acreage, including the Perdido Fold Belt deepwater fields of Trion and Exploratus.

The farm-out process, which has seen little progress so far, would allow Pemex to develop the fields in association with other companies.