State-Run Oil Company PEMEX, Hydrocarbons Regulator Disagree on Deepwater Drilling

By Navarro, Carlos | SourceMex Economic News & Analysis on Mexico, May 16, 2012 | Go to article overview

State-Run Oil Company PEMEX, Hydrocarbons Regulator Disagree on Deepwater Drilling


Navarro, Carlos, SourceMex Economic News & Analysis on Mexico


The state-run oil company PEMEX and the Comision Nacional de Hidrocarburos (CNH), the autonomous government agency that regulates oil policies in Mexico, are at odds on whether it is wise for Mexico to proceed with plans to access oil reserves in the deep waters of the Gulf of Mexico.

In early May, the CNH issued a report critical of the high cost and high risk of deepwater drilling.

The report, which examined the profitability and risk factor of 383 exploration and extraction projects, found the least financial risk in ventures that took place in shallow waters. In contrast, the CNH raised strong concerns about the financial and safety risks of deepwater projects, including the potential for disaster.

PEMEX--which for decades made decisions without input from anyone but the president, the energy secretary, and key legislators--recently had to surrender some of those policymaking faculties to the CNH. President Felipe Calderon's administration created the CNH in 2009 to allow more technical and independent oversight of the industry.

Exploratory wells planned near maritime border with US

The recent CNH report could not have come at a worse time for PEMEX, which had announced plans to begin two major exploration activities in the deep waters of the Gulf of Mexico sometime in May. The company had started to make preparations to deploy two state-of-the-art drilling platforms to an area just south of the maritime boundary with the US to drill a couple of exploratory wells sometime during the month. The semi-submersible platform West Pegasus, owned by Norwegian company Seadrill, was to be deployed to the area just over a seabed formation known as the Perdido Fold Belt to drill an exploratory well known as Supremus-1.

A second well was to be drilled in the vicinity of the Bicentenario platform, which is owned by Mexican company Grupo R. The well, known as Trion-1, will be a little west of Supremus-1.

The two exploratory wells represent PEMEX's latest efforts to expand its deep-sea drilling operations, which were begun in 2004. The company has drilled 16 wells in the past eight years at increasing depths. Two of those wells, Caxa-1 and Kunah-1, are in waters considered "ultra-deep." But the well depths of 8,316 feet for Trion-1 and 9,514 feet for Supremus-1 far surpass the depth of 6,500 feet for Kunah-1, which is in the Catemaco Fold Belt.

There is a difference of opinion between the CNH and PEMEX on whether the oil company is sufficiently prepared for the challenges of drilling deepwater wells. The CNH contends that PEMEX is moving forward without the adequate expertise and experience in developing wells that are deeper than 6,000 feet.

Part of the problem, some experts note, is that the Mexican Constitution prohibits PEMEX from entering into joint ventures with companies that are already experienced in deepwater drilling. Instead, PEMEX has moved to hire global-oil-services companies to perform the exploratory activities while remaining in charge of the operations. Even this type of arrangement was not possible until the Mexican Congress approved a major reform of PEMEX, allowing the use of private contractors to perform specific tasks (SourceMex, Oct. 29, 2008, and Dec. 15, 2010).

Still, some experts believe that PEMEX is over its head with the deepwater-drilling projects. "This requires managerial expertise that PEMEX lacks," said Miriam Grunstein Dickter, who follows oil-industry policy at the Centro de Investigacion y Docencia Economicas (CIDE) in Mexico City. "When you contract a service company, it performs the work that you command it to perform. Here, Pemex does not know how to command the service company."

Regulator concerned about safety

But the CNH is also concerned about safety and the possibility that PEMEX might not be able to respond to a disaster similar to the one that occurred at British Petroleum's Deepwater Horizon drilling rig in April 2010, which resulted in a massive oil spill off the coast of Louisiana (SourceMex, May 12, 2010).

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