Mexico's Pemex leaving 'money on table' by rushing to production too early

Mexico's Pemex has been moving to early production in every new discovery it has made in recent years. Although this has allowed the state oil and gas company to minimize its output decline, observers and experts worry its strategy is not only a bad practice, it also damages reservoirs and leaves "money on the table."

Early production

Pemex has been moving into early production at fields where a discovery is made using a legal figure provided in the Mexican law called "transition period." A transition period allows companies to have early production after making a discovery without presenting a formal, thorough development plan, which includes studies and implies obligations. According to experts, the way Pemex is using this provision is not what was intended for.

The concept of early production was meant for gas fields where wells are hard to close after a discovery, one person familiar with the situation who held a high-level position inside the National Hydrocarbons Commission, CNH, said. Wells must be closed after discoveries in order to assess their size and plan their exploitation, the source said. This is done through an evaluation period.

A few years ago, Pemex asked to be allowed to continue production in gas fields where a discovery was made as it argued it would be almost impossible to close wells and put them back into operation later. Pemex added it would do it for very little money as it had plenty of infrastructure in the area, the source said.

Common practice

"However, what was meant to be an exception became regular practice," the source said, adding that Pemex began moving to early production after discovery at crude fields as well. The company also began extending the transition periods from the original 12 months, the person said noting that it did not translate into lower costs.

On Oct. 15, the CNH authorized Pemex to move into a development plan at a project called Pokché, where the company had been getting early production for four years. The company has spent almost $500 million at the project, more than twice as much its original estimate, CNH data shows.

"What is worse, Pemex moves to production but does not complete the evaluation processes," a second person who spent time inside the CNH and is familiar with the situation said.

"Their goal was to get crude quickly, not understanding the reservoir for its optimal development," the person said.

Harmful

This lack of evaluation has led to two main problems: an overestimation and an underestimation of resources, Gonzalo Monroy, CEO of consultancy GMEC in Mexico City, said.

Pemex has devoted huge resources to fields that hugely disappoint afterwards, and underestimate the potential of fields where production is so large it becomes hard to handle, Monroy said. Both problems are equally harmful, Monroy said, adding that Quesqui, one of the most successful discoveries in the recent years, is a good example of this.

At Quesqui, the company did not foresee the volumes of gas it was to encounter, as Pemex was mainly looking for crude, the CNH experts said. This led Pemex to vent or burn enormous amounts of the gas, the experts said, at some point wasting more gas than the amount of gas being imported from the US.

This is the result of the policies of the current government which cares about producing now at whatever the cost, Monroy said.

"You get the fruit that is hanging low, but you leave most of it on the tree," Monroy said, noting that one of the goals of the CNH is to maximize the value of the nation's resources for the benefit of its people.

"This is where we can see how the regulator has been captured," he said.

CNH declined to comment.

Money on the table

Pedro Martinez, senior analyst of above-ground risk at S&P Global Commodity Insights, agreed with Monroy that the hurry to produce quickly results in lower recovery in the long term, and added that many of the fields where Pemex has had transition plans are already showing signs of early decline, like Pokché and Quesqui.

"We have seen that the way some fields have been developed is not optimal," Martinez said, adding that by working under pressure, the company may be getting pennies, not dollars.

"A lot of money has been left on the table," a third expert with experience inside CNH said.

Pemex has lost money not just by skipping processes, but also by its lack of exploration, both in deepwaters and in unconventional deposits, the expert said.

"The time to act to get some of those resources was probably ten years ago. It is probable that those resources will be left buried in the ground forever," the source added.

Pemex did not respond to a request for comment by the time of publication.