Pemex and Petrobras to Team Up in Hunt for Mexican Pre-Salt

(Bloomberg) The national oil companies of Mexico and Brazil agreed to work together to discover, produce and refine oil as both Latin American energy giants push to expand their reserves.

Petroleos Mexicanos and Petroleo Brasileiro SA signed a non-binding memorandum of understanding to begin joint cooperation on exploration and production, including in shallow and deep waters of the Gulf of Mexico - and to determine whether a pre-salt layer exists there - as well as in refining, natural gas, petrochemicals and other areas, the chief executives of both companies said in an event in Rio de Janeiro.

The agreement brings together Latin America’s two biggest oil companies. For Pemex, it’s an opportunity to work with one of the world’s top deepwater operators as it grapples with huge debts, declining output and a reputation as one of the world’s most inefficient oil producers. Petrobras, meanwhile, is on the hunt for places to drill beyond Brazil as it tries to line up reserves for the decades ahead.

The agreement will kick off further collaboration on exploring Mexico’s largely untapped deepwater resources, though exploration will not be limited to the Gulf, Petrobras Chief Executive Officer Magda Chambriard said. 

Other opportunities could exist in shallow waters, increasing output of heavy and super heavy crude from Mexico’s maturing oil fields, and in natural gas, Pemex’s chief executive Juan Carlos Carpio said at the event. The companies will also explore whether a pre-salt layer of oil exists in the Gulf of Mexico, he said. 

In Brazil, the major pre-salt fields brought on line in the 2010s deliver about 80% of the country’s production.

Mexico’s deepwater and ultra-deepwater Gulf of Mexico remains largely unexplored, making it a promising frontier for Petrobras, according to geologist Pedro Zalan. Offshore areas such as the Bay of Campeche contain salt and warrant further exploration, said the consultant, who spent 34 years at Petrobras.

Pemex is also committed to turning the agreement into concrete opportunities and tangible commitments for joint investment as the companies look for ways to team up in refining, petrochemicals, fertilizers, gas processing, clean energy and industrial safety, Carpio said.

The idea of a partnership between the state-run oil majors began earlier this year after the Brazil’s leader suggested the nations could explore Mexico’s largely untapped deepwater assets together. President Luiz Inácio Lula da Silva discussed energy cooperation with his Mexican counterpart Claudia Sheinbaum in a video call earlier this month, as the leaders of Latin America’s two biggest economies seek to strengthen trade ties.

Pemex has been seeking joint ventures to boost crude output from its aging oil fields, increase gas production and explore for new assets. Pemex has struggled with its finances in recent years under a roughly $80 billion debt load, a loss-making refining business, inefficiencies, explosions, oil spills and flagging profits.

Pemex’s production woes partially stem from the fact that many of its key offshore assets like Cantarell, a once-massive shallow water field that at its peak produced more than two million barrels per day, have begun drying up in recent years. Output at its 60,000 barrel-a-day Ku-Maloob Zap formation is also declining, while its Zama field, a 750-million barrel play under development with partners Wintershell Dea and Harbour Energy, hasn’t yet come online.

For its part, Petrobras is seeking discoveries to expand its international upstream portfolio and extend the Brazilian oil boom, led by the 2006 discovery of the massive pre-salt offshore basin. The discovery helped Brazil become Latin America’s top energy exporter, with oil surpassing soybeans, beef, iron and other commodities as the nation’s largest export by 2024. 

Pemex is hoping to leverage the expertise Petrobras developed by lifting crude from Brazil’s ultra-deep water reserves trapped 5,000 meters (3.1 miles) or more below sea level. It’s a proposal that has a lot of appeal for Pemex, even if major questions remain over how the deal will be structured and which party will finance the exploration, John Padilla, founder and director of consultancy Paramos Energy, said in a June 5 interview.

“Details matter, and the question is whether the Mexican government will be willing to put up a significant portion of major risk capital that’s going to be needed,” Padilla said, adding that similar wildcat offshore exploration often require tens of millions to hundreds of millions of dollars in financing. “Presumably, Pemex isn’t going to put up that money, so that would imply that Petrobras would fund the vast majority of those efforts.”

Petrobras has had difficulties during previous expansions in Latin America this century. It had gas fields expropriated in Bolivia, and in Venezuela it scaled back and eventually exited after the investment climate deteriorated and fiscal terms got more onerous. 

While around 2 million barrels per day are produced in deep water fields in the US territorial waters of the Gulf of Mexico, on the Mexican side there’s not yet any commercial output from such projects. Sheinbaum’s predecessor, President Andres Manuel Lopez Obrador, discontinued competitive oil auctions that had begun to offer up offshore fields a decade ago.

Chambriard said both companies, which are responsible for national energy security, have lagged at building robust exploration portfolios in recent years. Mexico’s side of the Gulf is an opportunity, and the two companies could even look at opportunities in Africa and Brazil, she said.

“Did all of the Gulf of Mexico’s oil really end up only on the US side?,” she said Tuesday. “We need to look at the Mexican side of the Gulf through a new lens and with new technologies.”

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