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Politics press as Pemex eyes deep-water partnership

Monday, 2 Dec 2013 | 11:25 AM ET
PEMEX seeks growth in deep water
Monday, 2 Dec 2013 | 10:00 AM ET
Production at PEMEX, the Mexican oil company, has declined steadily over the last few years. The company says it must move into deep-water drilling to grow, but that will likely require foreign investment. CNBC's Michelle Caruso-Cabrera reports.

In the U.S.-controlled area of the Gulf of Mexico, oil companies extract more than 300,000 barrels of crude per day from deep-water wells. In Mexico's area: zero.

That statistic is just one of several pushing the Mexican government to embark on an ambitious (not to mention politically treacherous) change to its constitution, which would allow foreign investment in Mexico's oil industry for the first time in 75 years.

"We have to evolve," said Carlos Morales, head of the exploration and production for Pemex, short for Petroleos Mexicanos, the country's government-controlled oil monopoly.

Workers clean mud from the bit of the Centenario platform in the Mexico-controlled area of the Gulf. Centenario is a deep-water exploration rig that drills down more than 8,000 feet.
Michelle Caruso-Cabrera | CNBC
Workers clean mud from the bit of the Centenario platform in the Mexico-controlled area of the Gulf. Centenario is a deep-water exploration rig that drills down more than 8,000 feet.

Morales faces a major problem: Mexico's production is in sharp decline, down from nearly 3.5 million barrels per day in 2005 to only 2.5 million barrels per day in 2012.

That last statistic is what frightens Mexican politicians: Their ability to spend money is drying up before their eyes. Oil has been the government's gravy train for decades, with taxes on Mexican oil providing one-third of the federal budget.

Energy expert Dan Yergin, winner of the Pulitzer Prize and author of the recent oil epic "The Quest," told CNBC "the reality is the existing policies are really hurting Mexico."

(Read more: Op-Ed: Will Mexico open its oil industry to the world?)

The problems isn't a lack of oil; it's a lack of money.

Pemex executives say there are potentially 50 billion barrels of oil in the deep water of their area of the Gulf. Speaking last week to reporters ahead of the politically charged debate, Morales said: "The investment required for discovering and extracting those resources is huge." He thinks Pemex should be spending $60 billion a year on exploration and production, but currently spends just $25 billion. Executives of the company believe the only way to bridge that enormous gap is foreign investment.

Pemex oil platform.
Katie Slaman | CNBC
Pemex oil platform.

Foreign investment has been prohibited since 1938, when Mexico kicked out all foreign oil companies and nationalized the industry. It's an enormous point of pride for the population that the oil in Mexico "belongs to all Mexicans."

But pride is running into hard economic facts. Deep-water drilling, defined as depths of greater than 1,000 feet, is expensive. Drilling that far below sea level requires the most advanced technology and is extremely expensive. Just renting a deep-water rig costs more than $500,000 per day. (It can also be dangerous, as the world learned in 2010 from the Deepwater Horizon disaster.)

(Read more: BP expects surge in Deepwater payments)

Pemex Supervisor Ricardo Fernandez tells CNBC Chief International Correspondent Michelle Caruso-Cabrera he's looking forward to when there is more investment in Mexico's oil.
Alex Herrera | CNBC
Pemex Supervisor Ricardo Fernandez tells CNBC Chief International Correspondent Michelle Caruso-Cabrera he's looking forward to when there is more investment in Mexico's oil.

Mexico is the world's largest driller of offshore oil—more than 2 million barrels per day, but it's all in shallow water. As one Mexican oil executive put it, drilling for oil in Mexico used to be as easy as "putting a straw in the ocean and sucking up the oil." But not anymore. The easy oil is drying up.

But the political process is already challenging. Protests against the possibility of reform, spearheaded by leftist leader Andres Manuel Lopez Obrador, began on Sunday, when thousands took to the main plaza in Mexico City.

Still, many agree some kind of reform will happen—the only question being, will it go far enough? For the changes in the constitution to be meaningful and to truly bring the necessary investment, Yergin says international oil companies must be able to "book reserves," because that's what helps drive their stock valuations.

Profit sharing contracts won't be enough, says Yergin. Production sharing agreements must be allowed as well. "In profit sharing agreements you only get the money. In production sharing agreements you can book reserves."

PEMEX: Drilling for investors
Mexican oil company PEMEX does have a deep water exploration drill going on right now, but really needs a deep water production drill that will cost upwards of $60 million and likely require foreign investments. CNBC's Michelle Caruso-Cabrera reports.

Until now, foreign companies have only been allowed service contracts in Mexico. That means Pemex foots the entire bill when drilling wells, and also bears all the risk if the well comes up empty. In modern times, with costs so high, and drilling so risky (to wit, Eike Batista's OGX in Brazil which just declared bankruptcy,) very few companies go it alone when it comes to deep-water drilling.

Ultimately, said Yergin, "symbolism and emotion versus practical self interest is what's at the heart of this."

—By CNBC's Michelle Caruso-Cabrera. Follow her on Twitter @MCaruso_Cabrera.

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