Pemex deepwater gas project draws condemnation from Mexican regulators

Mexico’s oil regulator and state-owned company Pemex are at odds over how to develop deepwater natural gas projects, eight people close to the matter say, threatening to stall the $1.5 billion energy venture .

Officials from the National Hydrocarbons Commission (CNH), the regulator, have raised questions about whether Petroleos Mexico can afford the large-scale project, the people said.

The Lakatti oil field has reserves of up to 937 billion cubic feet, but rising costs are hampering development. Now in question is his Pemex proposal to revive development with US liquefied gas company New Fortress Energy. The fate of the project could hinge on his successor to CNH chief Rogelio Hernandez, who resigned last week, the people said.

Mexican law stipulates that regulatory approval is required to ensure that the project is both technically and economically viable. The conflict between CNH and Pemex over Lacachi exposes the challenges of Mexico’s efforts to self-develop its reserves.

President Andrés Manuel López Obrador has tried to defend state-owned enterprises and sideline private investors, but this is complicated by Pemex’s undercapitalization and huge debt.

Pemex proposed to develop Lakach at New Fortress Energy using a service contract. This is the scheme used before the opening of the country’s energy sector in 2013-2014. Under the service contract, Pemex retains full ownership but bears the risk of price declines.

Historically, service contracts worked for Pemex when prices were high, according to government sources. And they are faster to execute than farmouts that share ownership, Pemex sources added.

But if prices fall and mandatory fees exceed oil and gas production, it could pose financial risks to Pemex, experts say.

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

CNH argues that Lakach will only become economically viable if Pemex obtains a formal partner through an auction farm-out. But Lopez Obrador ruled out the auction.

Woodside Energy, co-owner with Pemex of the Trion offshore oil project approved before Lopez Obrador took office, delays final investment decision for venture created more than five years ago until mid-2023 Did.

scarce option
Since López Obrador took office in 2019, the government has frozen openly competitive bidding rounds that had secured foreign investment to sustain projected growth in oil and gas production. This forced Pemex to rely on service contracts to establish partnerships and finance development.

In July, Pemex and New Fortress announced a “long-term strategic partnership” for Lakach. It supplies gas for domestic use and produces liquefied natural gas for export.

The two companies have not provided details on how they will split the costs of drilling, infrastructure and development. Pemex has already put $768 million into exploration, and Mexico expects New Fortress to fund the project.

New Fortress Energy said it was “working on the terms”.

Pemex is proposing to pay through commissions on donations to New Fortress, people familiar with the matter said.

Lakachi, a gas field in the Gulf of Mexico with the potential to deliver up to 1.8 billion cubic feet of gas per day, will become the country’s first commercial deepwater gas project, a major boost to a country that imports more than 80% of its fuel can result in

higher risk
Pemex had planned to sign at least 30 service contracts under López Obrador, which would not have to go through an auction like Farmout. But none have moved forward given the potential risks implied by some partners and CNH’s reluctance to approve them.

The Lakachi development plan drafted by Pemex failed to pass economic criteria in the latest review by the regulator, two sources said, adding that drilling costs were too high and production was overestimated. .

“After adding in investments and expenses, the project will never turn a profit,” said a regulatory source. “But if the project reduces Pemex’s losses, why not approve it?” Is it?”

(Reuters – Reporting by Stephanie Eschenbacher, Adriana Barrera, Ana Isabel Martinez and Dave Graham; Editing by Marianna Paraga and David Gregorio)