EconomyFinancialPemex: why its strategy to increase oil production fails

Pemex: why its strategy to increase oil production fails

The promise was very great: raising oil production levels to levels not seen for more than 10 years, accompanied by improving the finances of the state-owned Pemex and turning the country into a self-sufficient nation in terms of energy resources.

The goals have become shorter and shorter and, after three years, the strategy has not been enough. The decline in national oil production ended in 2021 with data that indicates that it has managed to maintain itself –supported by private activity– after a downward trend that began in 2004. But Pemex’s history is different and its production continues to decline, despite the will and the presidential speech.

Within days of taking control of Deer Park, the reality of its most profitable business, oil production, dawned. The National Hydrocarbons Commission, the sector’s regulator, announced that the company averaged a production of 1.6 billion barrels last year, down from 1.609 a year earlier, which had already set a historical record.

The numbers were once again short of the 1.7 million promised by Octavio Romero Oropeza, the company’s CEO. A figure that was wanted to be reached since the first year of the six-year term, but that was only achieved during a few months prior to the start of the Covid-19 pandemic, which reduced investments and dropped prices.

The failures began before this administration began. Since past six-year terms, exploration has been neglected and the search for new deposits that at some point should supply the large fields that still maintain most of the oil company’s production was left aside.

Ku, which for years remained among the assets that added the most crude oil to the state-owned company, left its place since August of last year among the five fields that add the most production to Pemex. That date coincides with the two major accidents that the company recorded last year and which coincidentally occurred in this field: the fire at the KU-C satellite platform and the explosion at the E-Ku-A2 facility.

But this only added problems to the field, which is already more than 10 years old with constantly declining figures. Ku averaged a production of 57,000 barrels per day of oil during 2021, a drop of 22% compared to the previous year, when it reported 73,000 barrels per day of production, according to the CNH.

Some fields such as Ayatsil have increased their production in the last two years, but their performance is not enough to cover the decline that others are already experiencing. And the “error of neglecting the exploration” of new fields continued this six-year term, says a high-ranking official connected with the company’s production and exploration activities.

Now what Pemex has done, he mentions, is to concentrate on exploring contiguously, which is basically trying to find more oil in areas that were previously explored and were productive. The strategy is faster and less expensive, if you are lucky. But the latter has not been on Pemex’s side.

“You’re not going to find a big deposit that way. They do incorporate [production], but they are not very representative incorporations or as they would like,” he says on condition of anonymity. “They are demanding faster results. They explore, they discover [a field] and immediately they want to start producing. They don’t give themselves the time that operators other than Pemex are giving themselves to evaluate the deposit, see if it really is commercial and how much they can invest. The demands are a little more political.”

And with the demand for quick results, the margin of error increases and production has continued without increasing. That happened with the priority fields strategy. “They were announced without really being evaluated,” he says.

Just a few months into the six-year term, the company announced that it would base its plan on 20 priority fields and that it would add 20 more each year, until it reached more than 100. But, with some exceptions, the fields did not comply with the plans presented to the regulator. and with it the expectations that Pemex had about them and the rest of the new fields did not arrive. “They had bet too much on fields that were going to be incorporated. They wanted to cover the decline with this part of the priority fields, but in reality they have not been totally successful”, he comments.

Ixachi, for example, the great promise of this six-year term, has significantly increased its production of condensates, which, although they cannot be counted as liquids, are also of great value to the company. The field more than doubled its production in the last year. In 2020 it averaged almost 11,000 barrels of condensate per day and in 2021 this figure was 26,000 barrels. Something similar happened with the extraction of non-associated gas, which grew by 145% during the period. Racemosa, Tlamatini and Quesqui have also had good results, but they have also been insufficient.

The state company has also fallen short in Ixachi. Of the 47 wells planned for the field, only seven have been completed.

And in general the company has reduced the drilling of wells. At the beginning of the six-year term, Pemex’s trend of lowering the number of wells that are started for the extraction of crude oil was reversed. In 2019, it drilled 224, from 166 a year earlier.

But the pandemic arrived, revenues were reduced due to the international drop in the price of oil and the historical decrease in demand and the company also slowed its pace. In 2020, the number of wells decreased again to 167, according to public information from Pemex, and towards last year the trend was similar. Until November, the most recent data, the figure was 154.

Despite the speech, exploration has been left aside, according to the figures. Since 2018 investment in these activities has steadily decreased. In 2021, the national oil company registered its lowest level of investment in terms of exploration activities at least since 2015, the oldest year for which the CNH has a record. Last year Pemex carried out 830 million dollars in this type of work, a year earlier, in 2020 – the year marked by the pandemic – this figure was 1,166 million dollars.

Instead, it has allocated more money to extraction activities, although these have not had the expected effects on the production figures of the state company, which this Wednesday will announce its total production for last year. The investment made in extraction was 8,157 million dollars, more than in 2020, when it was 7,340 million dollars.

The response to the drop in investment in exploration –which finally translates into production in the last phase of the chain–, say the specialists, can be attributed to the drop in income resulting from the pandemic. In 2020, oil prices hit negative prices and that interrupted the rising streak that Pemex had achieved. At the same time, although it remained a priority activity, oil activities slowed down.

The state company saw a sharp drop in the number of personnel, due to the disabilities of those who were considered a population at risk. And just a few months after the pandemic began, it had already become the oil company with the highest number of deaths among its employees, according to Bloomberg. Until yesterday, Pemex reported 652 deaths among its active personnel.

But since before the pandemic appeared and completely changed the dynamics of companies in the oil sector, the consultants already foresaw that Pemex would not meet their expectations.

The numbers of some consultants such as Welligence, IHS Markit or IPD Latin America None believed that the state company would fulfill the production promise of 2.6 million barrels per day, which in recent months has been reduced to just 2 million.

But now some of them believe that this expectation is already positive, says the founder of one of these consultancies, and they are making calculations again, surely to adjust their forecast downwards.

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