Pemex deepwater gas project draws rebuke from Mexico’s regulator

(In paragraph 12, corrects that Lopez Obrador took workplace in 2018, not 2019)

By Stefanie Eschenbacher, Adriana Barrera and Ana Isabel Martinez

MEXICO CITY (Reuters) – Mexico’s oil regulator and state firm Pemex are at odds over the way to develop a deepwater pure fuel undertaking, eight individuals near the matter mentioned, threatening to stall a $1.5 billion power enterprise.

Officers at regulator Nationwide Hydrocarbons Fee (CNH) have raised questions on whether or not Petroleos Mexicanos can shoulder the huge undertaking, the individuals mentioned.

The Lakach area holds as much as 937 billion cubic ft of reserves however rising prices have hindered growth. Now, a Pemex proposal to revive growth with U.S. liquefied fuel firm New Fortress Power is at situation. The undertaking’s destiny may depend upon the alternative for CNH chief Rogelio Hernandez, who resigned final week, the individuals mentioned.

Mexican legal guidelines stipulate regulatory approval requires tasks be each technically and economically viable. The standoff between CNH and Pemex over Lakach lays naked the challenges of Mexico’s effort to self-develop its reserves.

President Andres Manuel Lopez Obrador has sought to champion state firms and preserve personal buyers on the sidelines, an agenda difficult by Pemex’s lack of capital and large money owed.

Pemex has proposed to develop Lakach with New Fortress Power utilizing a service contract, a system used previous to the nation’s power sector opening in 2013-14. Underneath a service contract, Pemex would retain full possession however bear the chance if costs fall.

Traditionally, service contracts have labored for Pemex when costs are excessive, a authorities supply mentioned. And they’re quicker to execute than ownership-sharing farm-outs, Pemex supply added.

However they may pose monetary dangers to Pemex if costs fall and necessary charges surpass the worth of oil and fuel manufacturing, specialists mentioned.

Pemex and Hernandez didn’t reply to requests for remark. The CNH declined to remark.

The CNH has argued that Lakach would solely be economically viable if Pemex have been to formally tackle a accomplice by means of a farm-out by way of public sale. However Lopez Obrador has dominated out auctions.

Woodside Power, joint proprietor with Pemex of the Trion offshore oil undertaking, authorised earlier than Lopez Obrador took workplace, has pushed again till mid-2023 the ultimate funding resolution of the enterprise, created greater than 5 years in the past.

SCARCE OPTIONS

Lopez Obrador took workplace in 2018, and since 2019 his authorities has frozen open-competition bidding rounds that had secured overseas funding for sustaining projected oil and fuel output progress. This has compelled Pemex to resort to service contracts to ascertain partnerships and herald growth capital.

In July, Pemex and New Fortress introduced a “long-term strategic partnership” for Lakach that may provide fuel for home use and produce liquefied pure fuel for exports.

The businesses didn’t element how they might break up drilling, infrastructure and growth prices. Pemex has already injected $768 million in exploration and Mexico expects New Fortress to deliver capital for the undertaking.

New Fortress Power mentioned that it continues “engaged on the phrases.”

Pemex has proposed paying New Fortress by means of charges for its contributions, the individuals mentioned.

Lakach, a Gulf of Mexico area with the potential to produce as much as 1.8 billion cubic ft of fuel per day, may turn out to be the nation’s first industrial deepwater fuel undertaking and supply an enormous enhance for a rustic importing over 80% of the gasoline.

HIGHER RISKS

Pemex had deliberate to signal no less than 30 service contracts beneath Lopez Obrador, which don’t must go by means of an public sale like a farm-out. However given the dangers they may suggest for some companions and CNH’s reluctance to approve them, none have gone forward.

The event plan for Lakach, drafted by Pemex, didn’t go the financial standards within the newest overview by the regulator, two of the sources mentioned, including that drilling prices have been too excessive and output was overestimated.

“After including funding and bills, the undertaking won’t ever be worthwhile,” mentioned a supply on the regulator. “But when that undertaking reduces losses for Pemex, why not approve it?”

(Reporting by Stefanie Eschenbacher, Adriana Barrera, Ana Isabel Martinez and Dave Graham in Mexico Metropolis. Enhancing by Marianna Parraga and David Gregorio)