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2014-05-07 18:15:00

MEXICO: KEY TO GAINS

MEXICO: KEY TO GAINS

Mexico expects an increase in crude-oil production in the next few years to come primarily from the reactivation of mature oil fields, which would be included along with other types of deposits in the first rounds of bidding involving private companies.

"Additional production will come for example from mature oil fields…fields that were producing in the 1930s and that could be exploited with new technology to increase production quickly," Lourdes Melgar, deputy minister for hydrocarbons at the Energy Ministry, said Tuesday at a meeting with reporters.

The attraction of new, latest-generation technology is one of the central goals behind a historic energy overhaul promoted by President Enrique Peña Nieto that opens the oil and gas industry to competition, ending the monopoly of state company Petróleos Mexicanos, or Pemex, and allowing private firms to exploit the country's resources for the first time in 76 years.

Last week, Mr. Peña Nieto unveiled a raft of bills that will guide the implementation of last year's constitutional changes to open the energy industry. The bills were welcomed as market-friendly proposals that capture the best international standards.

"The government is very aware that they need technology, human resources and money that Pemex currently doesn't have if they want to lift a declining oil production," said Carlos Solé, co-chair in Latin America at law firm Baker Botts. "They're taking the right steps to reach those goals." Mr. Solé said Mexico's proposed model is very similar to those of Colombia and Peru, among the Latin American countries.

Mexico's oil production has declined 40% in the past 10 years and stagnated at around 2.5 million barrels day. Mr. Peña Nieto's proposal estimates that crude-oil output will rise to three million barrels a day in 2018, and to 3.5 million in 2025.

Pemex is expected to maintain its current production level, and the increase would come from private producers who are expected to be producing half a million barrels a day, alone or with Pemex, by 2018, said Ms. Melgar.

Since ultra-deep-water projects can take from eight to 10 years to start producing commercially, the increased output between now and 2018 would likely come by applying new technologies at mature oil fields. Other deposits that could see production in the near-term are shale oil, which would take two to three years, and shallow-water deposits.

The first tenders for joint-venture projects at fields already being exploited by Pemex are expected by late this year, Ms. Melgar said. Bidding rounds in new areas not currently under production will come by June next year.

The energy overhaul ends Pemex's legal monopoly in oil and gas exploration and production in an attempt to lure back major private companies to Mexican oil fields for the first time since former President Lázaro Cárdenas nationalized the industry in 1938.

Under the new energy model, private firms will be able to share profits and risks with the Mexican government under several types of contracts, including production-sharing deals and licenses. Pemex will be able to use the new contracts in the fields that it is awarded.

The government's total take will be determined on a contract-by-contract basis, said Miguel Messmacher, deputy finance minister for revenues, at the briefing. He said the government's average take for contracts is expected to be around 75% of profits, similar to that of Colombia. In some shale gas fields, where profit margins are very thin, the government could just charge the 30% corporate tax, he said.

Mexico's government has already hired several law firms and energy consultancy firms to start designing the new contracts to be offered to private firms, both national and foreign, according to several people with knowledge of the situation. In the coming months, the government is expected to hire a group of financial advisers to start designing the financial terms of the contracts.

Pemex is seeking to keep 83% of the country's proven and probable reserves in a so-called round zero that gives the state company first choice of projects it wishes to keep. But 69% of prospective hydrocarbon resources, such as massive undiscovered offshore oil and onshore shale gas deposits, will be available to entice private companies.

The Energy Ministry, in consultation with the National Hydrocarbons Commission, has until Sept. 17 to decide which projects will be directly awarded to Pemex.

wsj.com

Tags: MEXICO, OIL