Operators eye clusters and unconventionals as Pemex reforms reshape Mexico’s upstream

A degree of confidence is returning to the Mexican upstream as the Claudia Sheinbaum administration cleans up the finances of national oil company Pemex and opens the way to new partnerships with the private sector.

After years of declining oil and gas production, a new chapter is opening, focused on developing offshore hubs and exploring Mexico’s untapped unconventional resources.

BNamericas spoke to Andrés Brugmann about the renewed prospects for exploration and production in Mexico. A former president of operator association Amexhi, Brugmann held leadership roles at Pan American Energy and Fieldwood, and is currently managing partner at SL Intelligence and leader of the firm’s energy practice.

(The original version of this content was written in English)

BNamericas: What is the feeling like in Mexico’s oil and gas industry following the latest reforms and the recapitalization of Pemex?

Brugmann: For the service companies in particular, I think the worst is over. In recent years, Mexican service providers have faced a significant challenge because of the lack of liquidity they have been experiencing. Some of the smaller companies still face the risk of bankruptcy. That created huge disruptions in the supply chain. However, the outlook for these companies has improved because of the creation of the trust with [the development bank] Banobras, which will expedite payments for 2025 and going forward.

As for the operators, there are two different trends. The majors are not interested in the new mixed development contracts from Pemex. They are not as attractive for them as the previous license agreements and production-sharing agreements were. The mixed contracts do not allow them to book reserves. In the past two years, some of the majors have started to leave Mexico.

For the smaller, independent operators, it is a different story. They are showing interest not only in the mixed development contracts but also in purchasing the interests of those companies that are leaving the country. In the past two or three months, we have seen that market beginning to develop. Private and independent operators are looking into these opportunities as other companies exit Mexico.

BNamericas: Why are these independent operators becoming more positive?

Brugmann: In the past, delays from Pemex in paying operators for the oil and gas they produced created a significant bottleneck to investment. Many operators had plans for drilling or for carrying out interventions on wells but suspended the work when they didn’t receive payments from Pemex. That made it hard to ramp up production. If the liquidity problem at Pemex is overcome, that changes things.

We are already seeing a revival of interest from these companies in increasing their exposure, using both the traditional E&P contracts that were awarded in the previous bidding rounds and also the new mixed development contracts. My understanding is that Pemex is very close to signing the first mixed contracts.

There could be a lot of synergies between the existing E&P contracts and surrounding fields where Pemex may be willing to partner with a third party.

BNamericas: Are we talking about tiebacks and clusters?

Brugmann: Yes, there could be a very attractive combination of having an exploration and production contract that is already operational and tying back to that field one or two assets using mixed development contracts.

Even some large companies that already have a foothold in Mexico or a project in the country are analyzing this possibility. It makes a lot of sense to develop clusters using existing infrastructure. Little by little, appetite is increasing.

BNamericas: Are you also seeing a renewed focus on Mexico’s unconventional oil and gas resources?

Brugmann: The government seems to be interested in developing low permeability reservoirs. There are formations in Mexico that have been proven to hold unconventional resources. The geological potential is there. It is just a question of expediting the permitting so that operators can work with Pemex and use technologies that have matured in other basins to develop these reserves.

I think we are going to see interest in these contracts, particularly as some US shale operators are now completing their Tier 1 prospects and are moving to areas with higher development costs. They might not be able to develop all of them, depending on the oil price. These companies could have excess equipment, and looking at Mexico would make a lot of sense. In the US, shale operators have been producing for over 10 years, and they are facing decreased marginal returns.

BNamericas: Is fracking not de facto banned in Mexico?

Brugmann: It is a controversial topic. Fracking has not been banned by law, but the government has said it won’t be fracking. However, the Pemex strategic plan contains clear goals for unconventional production. Of course, the regulators are concerned by water use, but that is something that the shale operators have solved around the world. In Mexico, I think most of the water will come from aquifers that are not suitable for drinking or for agricultural use.

BNamericas: What are the other challenges to developing these unconventional reservoirs?

Brugmann: Operators will have to find the right projects that can pay for the infrastructure required to gather the oil and gas and get them to market. Some of these reservoirs in Mexico are remote and there aren’t as many roads as the Eagle Ford had at the start of the shale revolution. On the other hand, the areas are not heavily populated and are not so prone to community conflict as the traditional oil producing states.

We still need to do a lot of exploration and appraisal. We don’t understand the full dimensions and locations of these fields. But there has already been enough work done to prove that these are very interesting plays.

The main challenge will be the gathering infrastructure and the rights of way. Some of these reservoirs are relatively close to Pemex’s existing facilities, but most of them are not.

BNamericas: To summarize, the main opportunities in Mexican oil and gas now are in unconventionals and in cluster developments?

Brugmann: Yes, I believe those are the key areas where we are going to see development in the next two to four years.

Companies that are in Mexico are already analyzing the opportunities for tiebacks to existing infrastructure such as ENI’s FPSO [floating production and storage offloading unit].

A positive thing about the latest reform is that the government now has multiple tools available. They have the new mixed development contracts, the traditional service contracts, and the exploration and production contracts. The focus today is on the mixed development contracts, but the other contracts continue to be valid. In fact, most of the production increases in the next three years are going to come from the existing exploration and production contracts.

(The original version of this content was written in English)