Pemex expanding focus to large oil and gas fields amid strategic shift

There are signs of a strategic shift at Mexican oil and gas giant Pemex, which is starting to focus development on large production fields which present some technical challenges.

The federal company is pushing forward the development of two unusual projects, the Lakach deepwater field off the coast of Veracruz state and the Kayab heavy crude field off the coast of Campeche and Tabasco states. In addition, it plans to develop the huge Zama discovery off the coast of Tabasco.

For a long time, the administration of Andrés Manuel López Obrador and the current leadership at Pemex, helmed by CEO Octavio Romero Oropeza, said the company would only focus on its bread and butter: shallow water and onshore light crude and gas fields.

"We do not have deep water in our business plan, as our strategy is to go to shallow water and onshore, given we have this issue of a production decline, which we’re already stabilizing, and we’re seeing a steady production increase and the fastest way to gain production is [to focus] on land and shallow waters," Romero Oropeza said in 2019.

Pemex managed to stop production from declining around that time and pledged to grow output by focusing on 35 "priority" fields comprising shallow water and onshore gas and light crude fields in Veracruz and Tabasco states. 

The strategy was clear: do not put all your eggs in one basket. On the contrary, Pemex tried to diversify output among many smaller fields in areas where it had existing infrastructure and know-how. The huge oilfields of the company's heyday, such as Ku-Maloob-Zaap, seemed a thing of the past.

The production from the new fields has managed to offset the decline of the company's legacy areas, but it only managed to truly grow oil output by including condensate, an extra light crude that is usually counted separately from oil. The company now likes to report them together. Without condensate, Pemex's output has remained flat over the past three years.

Now, the NOC is expanding its focus towards large, ambitious, high investment projects with big risks and big potential payoffs. If successful, Pemex could lift its long-term crude and gas production, and create synergies with its equally ambitious refining strategy. 

A key part of this shift is the development of the Kayab heavy crude field, where Pemex plans to spend US$18.7bn over the next decade to recover 494Mb (million barrels) of crude and 53.2Bf3 (billion cubic feet) of natural gas through the spudding and completion of 35 wells. Its plan was described by hydrocarbons regulator CNH as holding "great opportunities but also great uncertainty" given Pemex is not experienced in the extraction of extra heavy, high viscosity crude. It also decided to tackle the field without a more experienced private partner.

There are big ambitions in this development strategy. At roughly 500Mb, Kayab is comparable in size to Zama, the largest private discovery in Mexico, which is now being operated by Pemex as well and is estimated to contain some 850Mb of light crude.

If successful, the new heavy production could be used at Pemex's refineries to mix with its lighter output. First oil at Kayab is expected in 2025, although technical challenges could delay the development.

LAKACH

The second risky Pemex project is the Lakach deepwater field, where the company expects to invest some US$1.5bn initially to spud six wells and begin production next year. Lakach is 131km northwest of Coatzacoalcos at a depth of 1km and was reportedly at the heart of CNH's recent internal crisis. 

Disagreements over the field's handling likely led to the resignation of the regulator’s head, Rogelio Hernández Cázares. During its first session under new leadership, CNH allowed Pemex to revive activity at the field, which had stopped in 2016.

Pemex's plans for the field involve a partnership with New Fortress Energy. The US-based company will liquefy Lakach's production through a set of floating LNG barges, simplifying the infrastructure needed. If initial results are successful, the NOC is likely to significantly up its investment at Lakach.

ZAMA

The major large field coming into Pemex's pipeline is Zama, where the company has what should be a sure bet: a large shallow water reservoir it can exploit with some existing infrastructure and where it has experienced partners: Talos Energy, Wintershall and Harbour Energy. The energy ministry wrestled operatorship away from the partners arguing Pemex controlled a larger share of the field.

While Talos originally said it would take the case to international arbitration, the partners now seem to be approaching a definitive deal. A development plan is expected before March 2023, and a final investment decision should come place before the end of next year, Talos has said. Pemex wants to develop the field as fast as possible, according to its CEO.