Mexico's offshore oil production peaked in 2004 at about 3 million barrels of oil per day (MMb/d) with much of the oil coming from the Cantarell field. With that field in steep decline, Petroleos Mexicanos (Pemex) began seeking new offshore prospects, especially in the deepwater Gulf of Mexico.

Following recent announcements, Pemex will begin to offer deepwater drilling contracts to foreign partners by early 2012, although the eagerness of foreign participation has yet to be determined, said Lucy Miller, analyst, Douglas-Westwood.

Pemex planned to announce in August a second round of performance-based contracts that may include offshore fields for the first time. Recently, the company said it expects to have a first round of tenders on some deepwater areas by late this year or early in 2012.

In 2009, Pemex estimated the prospective resources in the deepwater Gulf at 29.5 billion barrels of oil equivalent, about 56.7% of the country's total prospective resources.

However, the lack of foreign investment and expertise has limited the company’s deepwater efforts, stated Miller. Only a limited number of deepwater wells have been drilled to date.

As of early June, Pemex said it had drilled 15 deepwater wells since 2005. The national oil company (NOC) planned to drill five wells in 2011 and another eight to 10 wells in 2012.

The first deepwater test was in 1999 with the Chuktah-201 in 513 m of water, which was a dry hole, followed by the Nab-1 in 2000 in 681-m water depths, which had non-commercial shows of oil, Miller said.

The first commercial deepwater discovery was the Lakach-1 well in 2006 in 988 m of water. The field, with 1.4 trillion cubic feet (Tcf) of reserves, is currently under development and is expected to begin production in 2014.

"The field is likely to be developed in conjunction with satellite fields, including Ahawbil, Labay, Piklis and Kuyah," she explained.

In April 2010, the NOC announced the Labay discovery with 2.4 Tcf of reserves. Pemex estimated gas reserves in the area of five to 15 Tcf.

The Piklis-1 well in the southern Gulf of Mexico was announced as a gas and condensate discovery in late May 2011. A preliminary estimate put reserves at 14 to 21 Tcf of gas and condensate. The well is also the deepest well ever drilled in Mexico at 17,922 ft (5,431 m) total depth and at the greatest water depth at 6,362 ft (1,928 m), according to Pemex. The well is located about 86 miles off the coast of Veracruz.

The company said further exploration in the Piklis area will test Oligocene and Miocene formations that are productive in the Lakach field. As mentioned earlier, the new discovery could be tied back to production facilities at the Lakach field.

"Another possible deepwater development is the Lalail prospect, which is in 792 m of water," Miller said. "Lalail is expected to come onstream in 2015 and may be tied back to a floating production vessel."

However, Pemex needs to boost its oil production, not its gas production. With plentiful supplies in the United States and low prices, natural gas is less attractive than oil. After all, Mexico depends on oil export revenues for about one-third of its federal budget. The country has lost nearly 25% of its crude oil production since 2004.

The company wants to drill in the same area as Shell's Perdido field. The Maximino-1 well would break the water-depth record for Mexico, setting the record at 8,530 feet (2,600 m). Since the Perdido field has production capacity over 100,000 b/d, Pemex is hoping for an extension of those formations into Mexican waters. The well was delayed following the Macando oil spill in the U.S. Gulf in order to test equipment that would be used to drill the well.

Pemex has three deepwater semi-submersible rigs under contract. During 2011, the company expects the Bicentario rig to be drilling in water depths between 940 and 2,933 m. The semi-submersible is managed by Industrial Perforadora de Campeche and is under contract to 2016 at $530,000 per day, Miller explained.

The company also signed an agreement with Seadrill, through its affiliate Sea Dragon de Mexico, for the West Pegasus semi-submersible. The five-year contract has a fixed operating day rate for the first two years. The day rate will be adjusted annually for the last three years based on market conditions. Estimated contract value is about $850 million (assuming a constant day rate) over the five years. The rig is scheduled to begin drilling operations in the third quarter.

"In the wake of the Macondo incident, the National Hydrocarbons Commission has unveiled new safety procedures for deepwater areas that follow guidelines similar to those established by the U.S. government," Miller said. "Pemex must prove that it has adequate insurance to cover any loss or compensation from a deepwater accident. While such incidents are rare, the variance in deepwater drilling expertise between Pemex and companies such as BP is considerable. If Pemex wants to avoid such a disaster, technical expertise from more experienced foreign players would prove valuable," she emphasized.

Miller pointed out that Pemex is likely to follow Petrobras' trend of using floating, production, storage and offloading (FPSO) vessels as early production systems and long-term, deepwater infrastructure. However, Mexico -- unlike Brazil -- does not have shipyards that can build FPSOs. Such vessels would need to be sourced from foreign shipyards, she noted.

"Pemex is investing heavily in exploration and development of its shallow-water fields in spite of significant production declines from many of its mature fields. It is the company's assets in the deepwater Gulf of Mexico that hold the key to increasing future output.

"Given the company's relative inexperience in the sector, considerable foreign expertise will likely be needed, especially in key areas such as deepwater drilling, subsea hardware and floating production systems," Miller concluded.