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Pemex in joint venture talks to boost crude output, CEO says

Adam Williams and Bradley Olson
(c) 2014, Bloomberg News


MEXICO CITY — Petroleos Mexicanos, the world's fifth-largest oil producer, will begin its first production joint ventures as early as the end of this year, its chief executive officer says.

Mature fields are the "low hanging fruits" where Pemex, as the state-owned oil company is known, can increase production in the short term, CEO Emilio Lozoya said in an interview this week. Through new technology and investment, Pemex expects to increase output in mature fields with proven reserves that currently only yield minimal crude, he said.

"On the exploration and production side, the deals that should close the earliest will likely be in mature fields," Lozoya said by phone. "With enhanced recovery or secondary recovery techniques, we could ramp up the recovery of those mature fields by multiples."

Pemex, the third-largest oil exporter to the U.S., has seen production decline for nine consecutive years, as output fell to 2.52 million barrels per day in 2013 from 3.3 million barrels per day in 2004. Given a new law enacted by President Enrique Pena Nieto on Dec. 20, the company intends to partner with foreign companies for the first time in 76 years to boost production to as much as 4 million barrels per day by 2025.

"We are already having important discussions with players, not only in deep water, but in mature fields and other areas in Mexico," Lozoya said. "We hope to be announcing some deals towards the end of 2014, early 2015."

Pemex reported a find of 150 million to 200 million barrels of oil in a deep-water well in the Perdido area east of the Texas-Mexico border last month. Lozoya said it will be able to partner with private companies to co-develop deep-water fields in the Gulf of Mexico.

North America will become the world's cheapest source of energy if Canada, Mexico and the U.S. pool their resources to reduce costs and generate industrial growth across the continent, Lozoya said. The call for greater collaboration to leverage North America's oil and natural gas boom comes as leaders of the three nations prepare to gather in Toluca, Mexico, for a summit tomorrow.

Mexico, the United States and Canada should work together on matters such as regulation and infrastructure to make the most efficient use of the continent's growing energy production that's reshaping global markets, he said.

"More than a counterbalance" to the market influence of the Organization of Petroleum Exporting Countries, or OPEC, "I see it as our own strength," Lozoya said. "There's not going to be any other region in the foreseeable future that will enjoy cheaper energy than North America."

The combined output of the three countries could exceed 20 million barrels a day within a decade, or about two-thirds of OPEC's current production, according to data and projections from Citigroup Inc., the Canadian Association of Petroleum Producers and the U.S. Energy Information Administration.

Just as the three countries cooperated two decades ago to forge the North American Free Trade Agreement, a similarly collaborative economic structure around oil and gas could be developed to solidify North America as a regional energy superpower, Lozoya said.

As with NAFTA, which went into effect in 1994, the U.S., Mexico and Canada could avoid duplication of spending on infrastructure such as pipelines or processing plants to save money and bring petroleum products to market more quickly, Lozoya said. The quickest path for oil or gas to markets in Asia may be through Mexican ports, and U.S. transportation systems would be a boon to anyone drilling in Mexico's deep-water prospects, he said.

A revolution in drilling techniques and sustained investment due to higher oil prices has pushed the U.S. past Saudi Arabia and Russia as the world's top producer of oil and natural gas, the EIA estimated in October. By 2016, U.S. crude production will expand to 9.5 million barrels a day, the highest since the peak in 1970, according to the agency. Growth in Canada spurred by drilling in Alberta's oil sands may push output to 4.85 million barrels a day by 2020, according to the Canadian producers's association.

In the two months since Mexico's Congress approved a bill to end a 75-year state oil monopoly, the yield on Pemex's bonds due 2023 has fallen to 4.5 percent from 4.7 percent.

The law changes to end the monopoly may allow the country to double production, according to Ed Morse, the New York-based head of commodities research at Citigroup. That would put Mexican output at 5 million barrels a day, an unprecedented level for Pemex, created during nationalization in 1938.

Oil companies will be offered ownership of the pumped oil and authority to book crude reserves for accounting purposes. Pemex plans to continue to offer a market-friendly environment that will also allow companies to tap into Mexico's shale reserves, which have the sixth-largest deposits in the world, Lozoya said.

"In some shale plays, where liquid is involved, will we be present to a lessened degree, with the objective to make some money and learn the technologies," Lozoya said.

The changes could increase foreign investment by as much as $15 billion annually and boost potential economic growth by half a percentage point, JPMorgan Chase said in a Nov. 28 report.

"Another area we believe collaboration is important is in terms of regulation," he said. "If we want to protect the environment, environmental regulation should be similar in the three countries so that you don't have one country offering less rigorous environmental policies."

North American energy collaboration would bolster the manufacturing economies of each country with ample supplies of cheap domestic energy rather than seeking to influence prices by controlling global oil supplies as OPEC does, Lozoya said.

Any price impact from a U.S. decision to allow oil and gas exports would be mitigated by additional supply from Mexico, he said.

"It is very exciting time in Mexico," he said. "We do believe that policy makers realize the huge opportunity that energy offers to North America."

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Olson reported from Houston. Contributors: Rebecca Penty in Calgary and Carlos Manuel Rodriguez in Mexico City.

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