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Interview

with Carlos Morales Gil, General Director of Pemex E&P, PEMEX E&P

01.06.2012 / Energyboardroom

To start this interview, could you please give us an overview of Pemex E&P’s performance in 2011?

2011 was a very good year for Pemex E&P (PEP) due to several achievements. To start with, for the first time in our history we replaced our 1P reserves and for the third consecutive year we were able to replace 3P reserves.

Moreover, for the third consecutive year we managed to keep production levels above 2,550,000 barrels of crude oil. We were also able to launch the incentivized contracts for mature fields for the three blocks in the South Region.

In addition, we have reorganized PEP into several divisions. We created one division for exploration at the national-level, another one for the development of new reserves, and four regional divisions for production. We also created a separate area to manage all the technical resources, both technology and human resources. This new organization will be fully in place this year.

With this new organization we will be concentrating on the extraction of existing reserves, and on the movement of reserves from “possible” to “probable,” and on to the “proven” level.

This restructuring has been very important for us. What we are doing is speeding up development, focusing on production and new reserves. We are confident that this new structure will help us achieve the results that we are aiming for.

Another big milestone was that we received 3 deep water rigs- Centenario, Bicentenario and West Pegasus- that are currently in operation. In addition to all of these achievements, we have also managed to keep costs at a very competitive level, which has resulted in a net profit of 63 billion pesos.

There are three very important topics related to the achievements you mentioned. The first is incentive contracts, the second is the restructuring of Pemex E&P, and the third is deep water exploration. Could you outline the main issues of the deep water project?

We started to work in deep waters in 2004 when we began acquiring seismic information and drilling with the only rig that we had at the time, which was limited to operating in 1,000 meters of water. When we were doing that, we identified other areas, but they were in water depths greater than 1,000 meters. As a result, in 2007 we contracted three brand new rigs that were to be built in several yards abroad and that would be delivered to us in 2010/2011. It was last year, 2011, that we got them and started to operate in deep waters in the Mexican section of the Gulf of Mexico.

Since then we have been increasing our drilling capacity, and we are drilling new prospects in order to identify, firstly, the potential that we have in the Gulf, and secondly, the development strategy for the reserves that we find there.

Can you please expand on this?

Currently, we are drilling three wells. So far we have discovered a very significant gas province in deep water with the Lakach well, which we confirmed later on with Piklis, Noxal, and Nen. These are all new discoveries in Mexican deep waters. Based on that, we are building a stronger and wider prospect portfolio drilling three more wells: Kaxa, Kunah and Hux. We are in the process of drilling them, and as soon as we have more information, we will release the results.

Afterwards, we are going to move north to drill additional wells in deeper waters greater than 2,000 meters. So far we have drilled down to 2,000 meters in Lakach and Piklis, and we will move beyond 2,000 meters in the prospects that we have identified in the Perdido Belt (which is Supremus) – as well as what we call the sub-salt belt, west of Perdido.

Apart from what I have already mentioned, we have identified other prospects like Trion and Maximino, close to the US border, which will be drilled in approximately July and November 2012, respectively. All of these achievements are important steps for us and prove that we are moving into deep water.

Of course, moving into these new activities raises concerns; therefore, we are working very hard to increase safety conditions at those well sites. For example, we have contracted the US company Wild Well Control, a company that provides safety equipment and solutions.

Furthermore, we have set up a deep water technical team in all the areas including drilling and development, and we have been working with several companies highly specialized in engineering for deep water developments. As you can see, Pemex is ready to move forward with these activities.

An important issue that I would like to raise with regard to deep waters is that very recently Mexico signed a trans-border reservoir treaty with the US. That will allow us to develop trans-border reservoirs that will eventually cross the border, in conjunction with partners in the US and with the holders of the reserves in the US. This treaty, which is the first of its kind for us, is the civilized way of dealing with these reservoirs, and it will allow us to achieve maximum efficiency, not only in development, but also in the exploitation of those reservoirs.

Coming back to Perdido, if Pemex succeeds, what will be the scheme used to develop this area quickly and efficiently?

First we have to concentrate on the developments, and then we can look at the schemes.

There is a lot of talk about shale gas. What is the importance of shale gas for Mexico and how is Pemex preparing for it?

Last year the US Energy Information Agency identified several countries as having very strong potential for shale gas production. Mexico was one of them, with more than 600 TCF identified. We also made our own assessment of the prospective resources and we identified not as much as the agency, but something in the order of 400 TCF. Whatever the difference is, it is still a huge potential, so we started to work on identifying where this potential was.

First of all, we started looking at the continuation of Eagle Ford into Mexican territory, and so far we have drilled two successful wells there – one in the oil window and one in the gas window. In the course of this year, we will be drilling in the mid-zone, in the wet-gas window.

Furthermore, we are drilling another three wells in order to identify the shale gas potential south of the border in the state of Coahuila, and we also have plans to drill in the state of Veracruz.

What kinds of contracts will be used? Will they be something like the incentive contracts, and when will they begin?

In general, national oil companies do not have all the skills and execution capability that a country demands. That is the case with Mexico, but we are quite confident that incentivized contracts will be part of the solution and that they will speed up development of the resources that we have here in Mexico.

In terms of when these contracts are going to begin for shale gas, it might take a while. We have completed the first round for mature oil fields in the South. Now we are in the second round for mature fields in the North. Upcoming bids will be for several blocks in Chicontepec. Then the fourth round will be for deep water, and after we do everything I’ve mentioned, then we will move on to shale gas.

The round for Chicontepec and deep water will happen this year?

Yes.

Shale gas is very new. What are going to be the challenges in order to meet your ambitions?

There are several challenges, the first being technical. To begin with, you need to identify where the liquids are. That is because today dry gas is not good business. Therefore, we have to move to liquid gas, and that is what we are focusing on.

The second challenge is to identify, according to the characteristics of the rock, the best strategy to maximize the flow or the productivity of the wells.

The third challenge is regarding water use, and here I am not talking about polluting water since shale gas operations are very deep and the aquifers used for potable water are very shallow, so it is not possible to contaminate it. The issue will be having enough water to carry out this activity since it is needed on a massive scale.

The last challenge is to build the entire infrastructure and the logistics to handle the massive development of these resources.

An additional challenge, I would say, not as a company but as a country, is to develop the gas market. We have to shift from the use of fuel oil to gas – to shift from LPG to natural gas – and this could take some time.

Sir, we have been talking much about shale gas and deep water. How will they change the face of the Mexican oil industry?

Deep water holds 60 percent of the prospective resources that we have identified for the future. So with regard to oil production in the future, it is critical to have discoveries in deep water and to have the skills to develop those resources.

As for shale gas today, we produce 5.5 billion BCF a day; hence, with the potential that we have, there is the possibility to at least double that production. And depending on the scale of the operation that we are able to build, we could even triple or quadruple production, and this will change not only the face of Pemex, but of Mexico as well.

Sir, with elections coming soon, how can Pemex guarantee that it will continue doing the right thing in the future?

Very few people have the correct point of view about this. Pemex has been transforming itself for 74 years. It is one of the oldest oil companies in the world. If you look at the Pemex that existed back in the 1960s, it is a very different Pemex from the one that was in the 1970s with the development of the discoveries in Chiapas and Tabasco, and then in the 1980s with Campeche. As far as production goes, there are many things happening all the time.

In the 1980s and 90s, and part of the 2000s, we were highly dependent on a single field — Cantarell. That kind of dependency is no longer feasible, and I do not think we are ever going to find a second “Cantarell”.

The era of easy oil is over. However, now there are many small fields, and we have to work on them to build success. To do that, we have to be very efficient, we need to move faster with regard to contracting, identifying new forms of contracting, increasing the technical skills of our staff, raising the number of people working towards advanced degrees, and we also need money to tackle all of our projects.

Regarding continuity, I think government has been able to adjust to the different conditions we have had throughout Pemex’s history, and today the company has stronger skills in order to cope with future challenges. I am convinced that to take steps backwards would be a grave error that nobody wants to commit.

What is your final message to potential investors with regard to why they should consider Mexico?

Mexico has a very strong oil company. If you look at the discoveries, the development costs, and the production costs, we are very competitive.

Geologically, we have a very strong reserve base with significant reservoir volumes. Therefore, we have great potential.

We have a very safe and solid legal framework. We are not trying to change what we are doing, and we are not trying to change the conditions that we have; however, we can guarantee investors that we are going to maintain a viable and sound legal framework.

Also, given the size of the opportunities that we have in Mexico, we have a very competitive contractual design.

Finally, we are very close to the markets. That is another great advantage of our country. With everything that I have mentioned, what else is needed to consider investing in our country?

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