RPT-UPDATE 2-Mexico regulator slams Pemex Chicontepec plans

Mon Apr 12, 2010 10:36am EDT

Related Topics

* Regulator says Pemex needs to slow Chicontepec work

* Current development scheme unlikely to be profitable

* Schlumberger, Haliburton, Weatherford are contractors (Repeats late Friday story with no change to text)

By Robert Campbell

MEXICO CITY, April 9 (Reuters) - Mexico's newly-created oil and gas regulator issued a report that was highly critical of the country's flagship oil project on Friday, calling the Chicontepec development rushed and decades away from profitability.

State oil monopoly Pemex [PEMX.UL] has poured more than $4.5 billion into Chicontepec in a bid to make the unconventional field a major oil producer. It also aims to offset the decline of Mexico's main oil fields in the shallow waters of the Gulf of Mexico that threatens to turn the country from one of the United States' main crude suppliers into a net oil importer before 2020.

However, production levels at Chicontepec have fallen far short of targets despite Pemex drilling hundreds of wells in the area in recent years.

"It is necessary that efforts are concentrated in completing the learning phase before implementing a large scale drilling program," the National Hydrocarbons Commission, known by its Spanish acronym CNH, said in its report.

Chicontepec pumped just over 29,000 barrels per day of oil at the end of 2009, less than half of what Pemex had said it would yield. The company scaled back its goal for the project to producing an average of 48,000 bpd this year, down from its previous target of 176,000 bpd.

The CNH blamed Pemex's practice of trying to rapidly increase production at Chicontepec to help stave off falling national oil production as a key factor behind the repeated failure of the project to yield the desired results.

The report calculated the Chicontepec project was unlikely to become cash-flow positive until at 2015 and that Pemex would not recover its capital outlays until 2030 without a change in the way Pemex was spending its money at the field.

HOW MUCH OIL?

The poor results at Chicontepec led to an unusual disagreement between Pemex and the companies that certify its oil and gas reserves, Pemex said in March, after the certification firms questioned Pemex's assumptions behind its determination of how much oil was recoverable from the fields.

Chicontepec is believed to contain tens of billions of barrels of oil but the crude is trapped in pockets within rock that do not easily allow the crude to flow to the surface.

The more than two dozen oil fields in the Luxembourg-sized area along the eastern shore of the Gulf of Mexico have been known about for years but have been ignored in the past in favor of easier pickings in the Gulf itself, home to the bulk of Mexican oil output.

The CNH said Pemex needed to cut between $2 and $7 a barrel from its costs at the various fields in Chicontepec to bolster the possibility of its investments being profitable and urged Pemex to take advantage of the new-style service contracts it was allowed to offer under legal changes enacted in late 2008.

"The existing contracts, signed more than a year ago, are rigid and not focused on creating value due to the legislation in place at the time ... the renegotiation of the contracts with existing suppliers to adapt them to the new legal regime and to orient them towards integrated development should be considered," the CNH wrote in its report.

Among the major contractors at Chicontepec are Schlumberger Inc, (SLB.N) Weatherford International Ltd, (WFT.N) Haliburton Corp (HAL.N) and Baker Hughes Inc (BHI.N).

Pemex recently offered its contractors at the fields new deals asking them to study production techniques and to find ways to improve the performance of the wells at Chicontepec, which tend to dry up quickly after being drilled.

However the CNH criticized Pemex's decision to prioritize production goals rather than the improvement of its overall understanding of Chicontepec's geology under its current management of the so-called field laboratory contracts.

The CNH was created as part of a package of reforms to Mexican energy legislation enacted in late 2008. Although it does not have the power to make binding rulings the energy ministry is required to take its decisions into account. (Reporting by Robert Campbell)

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