In a major blow to Pemex, on May 18th the CNH issued a report that rejected the NOC’s development plan for its Lakach project, citing both technical and financial issues with the project. Lakach is one of Pemex’s largest discoveries in the last five years, adding 268.5 million barrels of oil equivalent (boe) to Pemex’s 3P reserves. Pemex believes that the field has the potential to produce liquids, and so stood a good chance of becoming Mexico’s first commercially viable deepwater project. However, following the CNH ruling, the NOC will be unable to move to the next stage of the project until it can provide a more detailed plan that addresses the concerns of Mexico’s upstream regulator.

The CNH has a number of concerns with the Lakach development plan, starting with the fact that according to the regulator, the reserves values listed on the submitted plan are not consistent with previous estimates. In order to address this, the regulator has ordered a review of the figures, and has requested gas samples from each formation at Lakach, at reservoir conditions, in order to conduct a pressure-volume-temperature (PVT) analysis. This is to ensure that Pemex correctly understands the reserves at each formation: in the NOC’s submitted development plan, a PVT analysis had only been conducted on separator gas from Lakach.

The CNH also states in its assessment that the front-end-loading (FEL) phase of the Lakach project is not sufficiently developed for such a complex deepwater project, and fail to take into account the level of financial resources that will be required.

Before the upstream regulator re-evaluates Lakach, it will require further documentation from Pemex related to the design and conceptualization of the project. It will also require better identification of operational risks, which the CNH deemed to be missing from Pemex’s submitted development plan.

According to the CNH, one of the major issues with the Lakach project that Pemex has failed to address is the international expectation for the future of gas prices, and how this will impact the profitability of the deepwater gas development. Although Pemex’s development plan shows that before taxes, the Lakach project would be profitable at the current gas price, the regulator argues that this fails to take into account the fact that generally, international agencies agree that the gas price will continue to fall in the years to come, as global gas supply grows.

The report concludes that the project does not incorporate an administration strategy based on international best practices, which should at least include an organizational structure, control mechanisms and performance metrics for certain aspects of the project, including contracting and management. The CNH calls for Pemex to present a new version of the project plan, which takes into account the recommendations included in their review.

This is not the first time that the regulator has delivered an unfavourable judgement on a Pemex project. In 2012, the CNH wrote a report that called for the Chicontepec project to be stopped and reinstated only when there was a more viable development plan. Following this, Pemex rethought its development strategy for Chicontepec, which by the end of 2011 was producing over 60,000 bbl/day, a marked increase from previous figures.

When asked for comment on how the CNH’s decision will impact the timeframe for the development of Lakach, a spokesperson for the regulator said that it will be a job for both parties to get the project back on track, and both will therefore have an impact in determining the timeframe for the Lakach development. They also made the point that this project should not be rushed into: “Lakach, as a deepwater project, is a key project and it needs a correct development according to industry’s best standards and practices. Pemex and the CNH are aware of this, so we have to assure that the documents presented and the technical opinion issued are in agreement with the project’s phase, objective and scope and the national and international regulation.”

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