UPDATE 2-Mexico regulator slams Pemex Chicontepec plans

* Regulator says Pemex needs to slow Chicontepec work

* Current development scheme unlikely to be profitable

* Schlumberger, Haliburton, Weatherford are contractors
(Adds detail on contracts, costs)

By Robert Campbell

MEXICO CITY, April 9 (BestGrowthStock) – Mexico’s newly-created oil
and gas regulator issued a report that was highly critical of
the country’s flagship oil project on Friday, calling the
Chicontepec development rushed and decades away from
profitability.

State oil monopoly Pemex [PEMX.UL] has poured more than
$4.5 billion into Chicontepec in a bid to make the
unconventional field a major oil producer. It also aims to
offset the decline of Mexico’s main oil fields in the shallow
waters of the Gulf of Mexico that threatens to turn the country
from one of the United States’ main crude suppliers into a net
oil importer before 2020.

However, production levels at Chicontepec have fallen far
short of targets despite Pemex drilling hundreds of wells in
the area in recent years.

“It is necessary that efforts are concentrated in
completing the learning phase before implementing a large scale
drilling program,” the National Hydrocarbons Commission, known
by its Spanish acronym CNH, said in its report.

Chicontepec pumped just over 29,000 barrels per day of oil
at the end of 2009, less than half of what Pemex had said it
would yield. The company scaled back its goal for the project
to producing an average of 48,000 bpd this year, down from its
previous target of 176,000 bpd.

The CNH blamed Pemex’s practice of trying to rapidly
increase production at Chicontepec to help stave off falling
national oil production as a key factor behind the repeated
failure of the project to yield the desired results.

The report calculated the Chicontepec project was unlikely
to become cash-flow positive until at 2015 and that Pemex would
not recover its capital outlays until 2030 without a change in
the way Pemex was spending its money at the field.

HOW MUCH OIL?

The poor results at Chicontepec led to an unusual
disagreement between Pemex and the companies that certify its
oil and gas reserves, Pemex said in March, after the
certification firms questioned Pemex’s assumptions behind its
determination of how much oil was recoverable from the fields.

Chicontepec is believed to contain tens of billions of
barrels of oil but the crude is trapped in pockets within rock
that do not easily allow the crude to flow to the surface.

The more than two dozen oil fields in the Luxembourg-sized
area along the eastern shore of the Gulf of Mexico have been
known about for years but have been ignored in the past in
favor of easier pickings in the Gulf itself, home to the bulk
of Mexican oil output.

The CNH said Pemex needed to cut between $2 and $7 a barrel
from its costs at the various fields in Chicontepec to bolster
the possibility of its investments being profitable and urged
Pemex to take advantage of the new-style service contracts it
was allowed to offer under legal changes enacted in late 2008.

“The existing contracts, signed more than a year ago, are
rigid and not focused on creating value due to the legislation
in place at the time … the renegotiation of the contracts
with existing suppliers to adapt them to the new legal regime
and to orient them towards integrated development should be
considered,” the CNH wrote in its report.

Among the major contractors at Chicontepec are Schlumberger
Inc, (SLB.N: ) Weatherford International Ltd, (WFT.N: ) Haliburton
Corp (HAL.N: ) and Baker Hughes Inc (BHI.N: ).

Pemex recently offered its contractors at the fields new
deals asking them to study production techniques and to find
ways to improve the performance of the wells at Chicontepec,
which tend to dry up quickly after being drilled.

However the CNH criticized Pemex’s decision to prioritize
production goals rather than the improvement of its overall
understanding of Chicontepec’s geology under its current
management of the so-called field laboratory contracts.

The CNH was created as part of a package of reforms to
Mexican energy legislation enacted in late 2008. Although it
does not have the power to make binding rulings the energy
ministry is required to take its decisions into account.

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(Reporting by Robert Campbell)

UPDATE 2-Mexico regulator slams Pemex Chicontepec plans