Carola Hoyos PIW: Mexico puts finishing touches on new oil contract rules

Mexico is about to inch back its 1938 oil industry nationalisation that started the ball of nationalisations rolling across the oil-rich world. The finishing touches are being put on new contract rules for the junior partners of Pemex, the country’s national oil company, writes Petroleum Intelligence Weekly, the industry newsletter, in its current edition.

Here are the details that are making the rounds of Mexico City, according to PIW:

Although Pemex has been keeping the contracts under wraps, their outline is basically complete, analysts say. The company will offer its junior partners both a fixed payment, set as a percentage of total production costs, and a separate fee per barrel of production, says Mexico City-based IHS Cera analyst Alejandra Leon. Crucially, the payments to private firms will not depend on international oil prices, since such an arrangement would be tantamount to a risk-sharing contract and therefore unconstitutional, Leon notes.

Political opposition to changing the way Mexico deals with foreign investors in its oil industry has been fierce and even these small changes could yet be watered down. But Pemex hopes to use this new system in its May licensing round for the onshore Chicontepec field. Mexico is keen to boost production at fields such as Chicontepec to offset the decline of Cantarell, once its largest field, which lies off the country’s coast.

But to really make a difference, Mexico will need to drill for oil along its coasts and make bigger concessions to companies wanting to help Pemex in the expensive exercise.

Here, from PIW, are the details of Mexico’s challenge:

Pemex’s production has fallen from a peak of around 3.4 million barrels per day in 2004 to just 2.6 million b/d last year. The huge Cantarell field in the Gulf of Mexico peaked in 2004 and has since been declining steeply. In recent years, rising output from the offshore Ku-Maloob-Zaap (KMZ) field, which has become Mexico’s largest, has picked up some of the slack. But while KMZ was pumping more than 836,700 b/d at the end of last year, it too is expected to start declining within the next couple of years.