February 23, 2012

U.S.-Mexico Offshore Oil Agreement May Help Mexico Rejuvenate Oil Production

The United States and Mexico have come to an agreement that
would allow both countries to drill for oil and natural gas along their
maritime border in the Gulf of Mexico. According to a U.S. Department of
Interior press release, the Transboundary Agreement “removes
uncertainties regarding development of transboundary resources in the
resource-rich Gulf of Mexico
” and opens up approximately 1.5
million acres of the U.S. outer continental shelf
to exploit the estimated
172 million barrels of oil and 304 billion cubic feet of natural gas
. “This
agreement makes available promising areas in the resource-rich Gulf of Mexico
and establishes a clear process by which both governments can provide the
necessary oversight to ensure exploration and development activities are
conducted safely,” Secretary of the Interior Ken Salazar said.

The U.S.-Mexico agreement was penned a week after Mexican
oil regulators cautioned that Petroleos Mexicanos – or PEMEX, the national oil
company – is ill prepared to manage a serious offshore oil spill. According to
a February 15, 2012 report from The Wall
Street Journal

regulator's chief, Juan Carlos Zepeda, said Petróleos Mexicanos has relatively
little experience with deep-water drilling, much less with the ultra-deep
wells—those at depths exceeding 6,000 feet—that it could tackle as soon as next
Pemex plans to drill as many as six deep-water wells this year,
including the two ultra-deep wells, more than at any time in its history. 

The U.S.-Mexico agreement provides a framework for both
countries to
conduct joint inspection of the others’ oil rigs in the Gulf of Mexico,
part intended to ensure safety standards are met.  The agreement also allows U.S. companies and PEMEX to
jointly develop oil and natural gas reserves in the transboundary region, which
could provide an opportunity for U.S. companies with a long history of offshore
oil drilling to cooperate and share lessons learned with PEMEX. “Coordination
and sharing communications, training, personnel, equipment and technology are
essential for safe and productive drilling
,” said Jorge Piñon, a former
president of Amoco Oil Latin America and a current research fellow at the
University of Texas, in an interview with The
New York Times
on Monday.

In recent years, Mexico’s oil industry has been plagued by a
range of technical deficiencies and declining production in its largest and
most important oil field, the Cantarell. Oil production there has dipped from about
2 million barrels a day in 2004, to close to 700,000 barrels a day in 2009
Meanwhile, PEMEX officials have cautioned that production is likely to decline
by about 15 percent a year through 2015.

The decline in production is in part a symptom of the lack
of technical development in Mexico’s oil sector. Mexico’s oil industry has been
plagued in recent decades by a constitutional prohibition that restricts
foreign oil companies from working with the domestic oil industry, which also
prohibits new technology sharing that may otherwise help PEMEX rejuvenate oil

In a 2009 blog post, Joseph S. Nye, Jr. Researcher Seth
Myers aptly described the consequences that seem to be playing out today.
According to Myers:

One of the unintended consequences
of Pemex’s monopoly and the preeminence of Cantarell in the national oil
industry has been that Pemex’s technical
capabilities have seriously lagged behind the times. Cantarell is an
extremely small field for its production capabilities, located in extremely
shallow water with very high initial pressure a
nd very low water saturation
– by and large, it has been an extremely easy field to develop and produce oil
from. As a result, Pemex grew somewhat complacent in terms of developing new
drilling capacity – its deep water capabilities beyond 1,000 meters are largely
nonexistent and it was forced to close wells in Cantarell when water content
reached even minimal levels (96% less than what U.S. wells are capable of handling).

The U.S.-Mexico agreement still has to run domestic traps
before it is finalized, but it looks like both countries are on their way to
cooperatively developing offshore oil in their respective maritime boundaries
of the Gulf of Mexico. Although it is not very clear how the agreement will square with the existing constitutional restriction, the agreement may help PEMEX develop safe technology for offshore drilling in a way that avoids violating that restriction. It will be interesting to see how much production Mexico
is able to safely develop, and what effects this could have across the rest of
Mexico, considering that oil revenues account for roughly 40 percent of the
government’s budget. Despite one’s feelings about the merits of offshore oil
drilling, rejuvenating Mexico’s oil production may help bring about more
stability – but only if those revenues translate into government programs that
help bring about that stability.