Pemex deepwater gas project gets snub from Mexican regulator

FILE PHOTO: The logo of Mexican state oil company Pemex is pictured at its headquarters in Mexico City

Officials at the National Hydrocarbons Commission (CNH), the regulator, have raised questions about Petroleos Mexicanos’ ability to take on the massive project, the people said.

The Lakach field has reserves of 937 billion cubic feet, but rising costs are holding back its development. Now a plan is in the works to begin development with US liquefied gas company New Fortress Energy from Pemex. According to interviewees, the project’s fate may hinge on the replacement of CNH president Rogelio Hernandez, who resigned last week.

Mexican laws state that regulatory approval projects must be technically and economically feasible. The impasse between CNH and Pemex over Lakach highlights the challenges of Mexico’s efforts to develop its own reserves.

President Andrés Manuel López Obrador has sought to protect state-owned enterprises and sideline private investors, an agenda complicated by a lack of capital and Pemex’s huge debt burden.

Pemex proposed to develop Lakach with new fortress power using a service contract, a formula used before the opening of the country’s energy sector in 2013-14. Under a service contract, Pemex retains full ownership but bears the risk if prices fall.

Historically, service contracts have worked for Pemex when prices were high, a government source said. The Pemex source added that they would be faster than shared ownership closures.

But experts say falling prices and forced payments could pose financial risks to Pemex if they exceed the value of oil and gas production.

Pemex and Hernandez did not respond to requests for comment. CNH declined to comment.

CNH argued that Lakach would only be economically viable if Pemex formally acquired a shareholder through a farm-out via auction. But López Obrador rejected the bid.

Pemex’s co-owner of the Trian offshore oil project, which López Obrador approved before he came to power, Woodside Energy, five years ago postponed the final investment decision of the company to mid-2023.

Rare options

López Obrador took office in 2019 and the government has since frozen open competitive bidding, which has attracted foreign investment to support planned growth in oil and gas production. This has forced Pemex to use service contracts to establish partnerships and bring in growth capital.

In July, Pemex and New Fortress announced a “long-term strategic partnership” for Lakach, which will supply gas for domestic use and produce liquefied natural gas for export.

The companies did not detail how they would split the costs of drilling, infrastructure and development. Pemex has already injected $768 million into exploration and expects Mexico to provide capital for the new Fort project.

New Fortress Energy said it was “continuing to work on the situation.”

Pemex is paying for the new fortress through payments for its contributions, the people said.

Capable of delivering 1.8 billion cubic feet of gas per day, Lakach in the Gulf of Mexico will become the country’s first commercial deepwater gas project and will provide a major boost to a country that imports more than 80% of its gas. Fuel.

High risks

Pemex had planned to sign at least 30 service contracts under Lopez Obrador, which would not require going through a form-out-like auction. But because of the risks they may pose to some partners and CNH’s reluctance to acknowledge them, none have been implemented.

Lakach’s development plan, drawn up by Pemex, failed to meet economic criteria when it was last reviewed by the regulator, two sources said, saying drilling costs were too high and production was overstated.

“After adding investments and costs, the project will never be profitable,” a source in the regulator said. “But if this plan reduces Pemex’s losses, why not approve it?”

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