Mexico and Brazil, two of Latin America’s energy giants, are considering the possibility of joining forces.
On May 27, Brazilian President Dilma Rousseff announced that Petrobras would offer technical support to Mexico’s national oil company, Pemex. Talks of energy cooperation between Mexico and Brazil span five administrations across the two countries but very little has come to pass.
Times, however, have changed. Mexico’s energy sector is undergoing a transformation, with the historic opening expected to usher in an unprecedented period of foreign investment and oil and gas production. Brazil’s energy sector has largely lost its luster and is in desperate need of a boost. Related: Why Has Chinese Spending On Oil Dried Up?
That has both sides looking at cooperation. An offshore exploration deal in the Gulf of Mexico would be a positive step for both parties.
Despite its political problems, Brazil’s Petrobras has a lot to offer in terms of deepwater expertise. Much of this was developed through its pre-salt operations located in the ultra deepwater off Brazil’s Atlantic Coast.
Yet given the corruption scandal currently entangling Petrobras’ management and partners, some would question whether this is the right time for the company to be entering a joint venture with Pemex, particularly in a low price environment. Then again, perhaps a little foreign distraction is precisely what Petrobras needs.
The notion of Petrobras working with Pemex is not new but much has changed since the idea was first presented by then Brazilian President Lula da Silva to Mexican President Fox in 2000. Related: Expect The Recent Oil Rally To End Badly If OPEC Doesn’t Cut
These initial talks were followed by an agreement in 2005 and then a Memorandum of Understanding, signed by Mexico’s next president Felipe Calderón in 2007, which focused on cooperation in the exploration and production of oil and natural gas. Nothing much has happened in the decade since – the idea of collaboration has floated around but there has been no concrete action.
Since the end of 2013, Mexico’s president Enrique Peña Nieto has spearheaded an energy reform process that has been astonishing in both its speed and reach. The Round Zero auction has already awarded Pemex a sizable portion of available assets and Round One bidding, in which private companies participate, is well underway.
The offshore blocks on the Mexican side of the US Gulf of Mexico are generally considered the prize. There are estimates that these offshore areas could hold up to a quarter of Mexico’s hydrocarbon reserves, or 27 billion barrels of oil equivalent. To exploit these resources, Mexico and Pemex need help.
Petrobras, meanwhile, has largely fallen from grace. When its immense pre-salt resources were discovered in 2007, Brazil’s economy was on the rise. The potential 8 to 12 billion barrels of oil would change the face of the national and regional energy landscape. Yet seven years later, a few dry holes, and a disappointing bid round in 2013, and the outlook has dramatically shifted.
Still, much of this is to do with what happened above ground rather than below the sea. Contract terms with onerous local content requirements and the stipulation that Petrobras be the sole operator of all pre-salt projects discouraged foreign investors. Corruption is another important factor.
Domestically, Petrobras is fighting politics and pressure to keep assets and operations at home. Since 2013, the company has sold billions of dollars in overseas assets, from Tanzania to Colombia. Some in Brazil view an international deal with Pemex, or anyone else for that matter, as unwise. Related: The Illusion Of A Rapid Energy Revolution
Still, cooperation could bring many benefits for both countries and their respective national oil companies. One of the reasons Pemex is opening its oil and gas sector is that the company lacks the technical capacity to operate them. Pemex is very good at operating in shallow water – most of its oil production in the last several decades has come from the ageing Cantarell super field. But it has little experience in deepwater. That is where Petrobras excels.
Whether this latest deal, or “qualitative leap” in the words of Mexico’s president, will result in quantitative results, remains to be seen. That Petrobras has much to offer is undeniable and many experts agree that maintaining an international portfolio would be positive for the company. Pemex would be better off too.
By Alexis Arthur Of Oilprice.com
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