Oil production in the Gulf of Mexico

CGES | JUNE 2009 | SOURCE: Global Oil Insight

Oil production from the Gulf of Mexico (GoM) promises to be an increasingly important source of non-OPEC output in the coming years. However, while several large projects have come on stream in the US’ deepwater section over the last twelve months, Mexico has failed to staunch rapidly declining production rates from its offshore or realise its deepwater potential.

The contrast between how successfully these two countries have managed their offshore industries is stark and is principally the result of Mexico’s reluctance to open up its energy sector to foreign investment.

Oil production in the Gulf of Mexico

Bright US prospects

Over the past 12 months, US firms and their overseas partners have commissioned several large deepwater projects, taking advantage of the country’s competitive investment terms and the fact that the area is on the doorstep of the world’s largest oil consumer.

The US government’s increasing concern about the country’s dependence on foreign oil imports is also likely to ensure that Washington continues to encourage exploration and production in GoM. Just last week the Senate Energy and Natural Resources Committee voted to open up the Eastern GoM to oil and gas exploration.

Producing deepwater oil reserves from the region is still a major challenge, though. Along with high development costs, the hurricane season is the overwhelming consideration when firms are considering whether to invest in the area. Damage can take months to repair and 5% of GoM’s oil production is still shut in due to last year’s storms

The perception that the hurricane seasons are growing increasingly ferocious, and the inherent unpredictability, has also meant that many oil companies are finding it tough to insure their assets. Furthermore, US lawmakers have been eyeing higher royalty rates.

A study published by the Government Accountability Office in 2007 found that Washington receives some of the lowest takings in the world from the oil and gas sector and the new US administration is hungry for new sources of revenue.

Mexico hobbled

Nonetheless, the US’ achievements still stand in stark contrast to Mexico’s, where offshore oil production is in steep decline. The main issue is recovery rates from the Cantarell oil field; output peaked at 2.2 mbpd in 2003 but is now below 700,000 bpd. Pemex, the country’s parastatal, expects production to fall at 5% per year although, judging by its previous assessments, this could well be the best case scenario.

Some offshore fields, such as Ixtal and Ku Maloob Zaap, have fared better over the past few years, but they are also close to peaking. Cantarell’s production could also perhaps be partially replaced by the technically challenging Chicontepec Basin, which holds 40% of the country’s oil reserves, but there are doubts about Pemex’s ability to manage this onshore project alone. Even if its output reaches 700,000 bpd by around 2014, as tentatively scheduled, Pemex will probably still need to turn to deepwater fields to maintain its production rates

However, the firm has minimal deepwater experience and and is prohibited under Mexican law from forming joint ventures with foreign firms by the country’s hydrocarbons law. The law is very popular – protests were held against the proposed limited privatisation of Pemex in February 2008 – but even former Pemex CEO Luis Ramirez Corzo has conceded that under the status quo the country will be unable to produce the billions of barrels of oil lying beneath the deep waters of GoM.

The prospects for substantial change are not good, despite the governing National Action Party’s (PAN) commitment to reform. The main opposition comes from the Democratic Revolutionary Party (PRD), led by Andres Manuel Lopez Obrador, who unsuccessfully ran against presidential incumbent Felipe Calderon in Mexico’s 2006 election.

Obrador espouses the view that any joint ventures with overseas firms would be unconstitutional and last year held an unofficial referendum on the future of the Mexican energy sector in a bid to scupper Calderon’s plans. Crucially, concerns over the merits of reform extend to the Institutional Revolutionary Party (PRI), whose members question the logic of moving into the deep waters of GoM. PAN needs PRI’s support to win the necessary votes in the upper and lower houses, but to date this has been conditional at best.

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