Pemex CEO Begins Chevron-to-BP Talks as Production Slumps

For Petroleos Mexicanos Chief Executive Officer Emilio Lozoya, the arrival of foreign oil producers after a 76-year hiatus can’t come soon enough.

Facing deteriorating output and a lack of resources to develop new finds, the 39-year-old former World Economic Forum executive said he’s in talks with all major producers as Mexico accelerates the opening of its oil industry. At the same time, he’s considering revising production estimates as water content rises at aging fields such as Cantarell, once the world’s third-largest deposit.

Lozoya is charged with transforming the state monopoly into a competitive enterprise under new rules allowing greater private investment. He’s seeking to reverse a decade-long production decline by establishing 10 joint ventures in mature, onshore and offshore areas by December 2015.

“The majors are interested mostly in investing in the deep waters in the Gulf of Mexico,” Lozoya said yesterday in an interview in Mexico City. “We do not necessarily have the expertise to develop those projects and bring them into production in a relatively quick period of time.”

After legislation passed in December to allow private investment in the oil industry, the government this week awarded Pemex rights to all the proved and probable oil reserves it sought for development as a part of Round Zero, as the non-competitive awarding of fields was known. Pemex retained fields holding an estimated 20.6 billion barrels, enough for the company to maintain production levels of at least 2.5 million barrels a day for the next 20 years, according to Energy Minister Joaquin Coldwell.

Seeking Partnerships

Under the new rules, Pemex will hold rights to the Cantarell and Ku Maloob Zaap fields, as well as the Lakach deepwater gas field and areas of the Perdido deepwater field where it has explored. It will seek two joint ventures in the Perdido area, as well as partnerships in Lakach and extra-heavy oil fields and mature fields.

Lozoya said Pemex has held discussions with “dozens, if not hundreds of companies” in the last year interested in potential investments in Mexico’s energy. It has been in talks with all the major international oil companies, including Chevron Corp., BP Plc and Exxon Mobil Corp., Lozoya said.

BP declined to comment on potential ventures with Pemex and Exxon didn’t immediately respond to an e-mailed request for comment. Chevron referred to statements from Ali Moshiri, its president of Latin America and Africa, who in May said the company is in talks with Pemex about exploration opportunities.

Bond Rally

Pemex’s $2.1 billion of bonds due 2023 rose for a fifth day, pushing down the yield to 3.86 percent at 4:28 p.m. in New York.

Last month, the state company cut its 2014 output forecast to 2.44 million barrels a day from 2.5 million barrels at the start of the year. Output is headed for a 10th annual decline.

The company is debating reducing figures for the past three years or more, said a Pemex official this week, who asked not to be named. A record gap this year between reported output and what the company processes is partly explained by measuring systems at older fields that are unable to differentiate water-heavy oil from actual crude, the official said.

“We are working on finalizing our estimates on particular fields,” Lozoya said yesterday in an interview in Mexico City. “We are working with the regulator and fine tuning the production figures. These are some marginal adjustments.”

Distribution Gap

Pemex produced 2.48 million barrels a day through June, while its distribution system processed 2.32 million barrels a day, according to the National Hydrocarbons Commission.

Increased water production is occurring in as many as two mature fields, CEO Lozoya said yesterday, without saying if that’s behind the output-processing gap. Oil output is about 2.45 million barrels a day in August, he said.

In an e-mail this week, Pemex attributed the difference to evaporation, statistical variations and storage, without commenting on water. Theft is another reason.

Some wells at the Cantarell field are producing as much as 25 percent water, Gustavo Hernandez, Pemex Exploration and Production Director said Aug. 13.

Pemex’s advantage versus incoming competition is that the company’s cost of exploration and extraction is around $20 a barrel, Lozoya said. The average price a barrel this year is $95, based on prices for the Mexican mix of crude for export.

Investment Surge

The state company is planning an additional 22 joint ventures from migrating existing service contracts into profit or production sharing agreements during the next 12 months, Lozoya said. The conversion of the service contracts will bring in an additional $44 billion in 20 years, he said.

Mexico’s energy investment will rise to as much as $55 billion a year from the current $27 billion as companies explore and produce the country’s 115 billion barrels of crude equivalent of prospective resources, he said.

“The challenge is to make this happen in an efficient and quick manner,” Lozoya said of the energy overhaul. “The new laws give much more flexibility to Pemex than in the past.”

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