A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Evaluating PEMEX's Drilling Expansion to Combat Declining Oil Reserves

Nicholas NigroGoldman School of Public PolicyUniversity of California, Berkeley

A project partnering the University of California at Berkeley and Global EESE, a globally collaborative, distributive foresight network initiated by the U.S. Department of Energy

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Presentation Overview

PEMEX Overview

ProblemGovernment dependency on PEMEX revenue

Decline in oil reserves since mid 1980s

Decline in oil production since 2004

Analysis of Drilling Expansion Policy

Final Recommendations

Future Work

Note: All data presented from PEMEX and U.S. EIA

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Acknowledgements

Dan Milstein and Carol Dumaine, U.S. Department of EnergyDan Kammen, University of California-BerkeleyArmand Peschard, Center for Strategic and International StudiesMatthew Rodrigues, Natural gas trader from private sector

UC-Berkeley faculty and colleagues: Candace Hamilton, Blas Perez Henriquez, Rucker Johnson, Steven Raphael, and Armando Salcedo

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX Overview

Latin Americas largest company

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX Overview

Mexicos national oil and gas company

Nationalization of hydrocarbon sector in 1938

Supports the entire production chain

16th largest proven oil reserves in world

3rd largest supplier of oil to U.S.

High Federal taxes on revenue (not profits)

Historically little autonomy

Historically high profits (before tax) and low investment since oil was easy to extract

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX Objective

Maximize hydrocarbons and by-products economic value, contributing to the sustainable

development of the country

PEMEXs forecasts 100% reserve replacement rate by 2012

PEMEX must address: labor relations and negotiations, transparency, efficiency, and financial stability

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Project Problem

Government dependency on PEMEX revenue and diminishing oil reserves and production

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

An Imminent Energy Problem

40% of government revenue is from taxes on PEMEX

Oil reserves have been declining since the mid 1980s

PEMEXs answer in 2000: Expand Drilling

Oil production has fallen sharply since 2004

Net importer of oil by 2020 according to U.S. EIA

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Federal Government Revenue

36%30% 33%

36%40%

43%

38% 42%

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000 2001 2002 2003 2004 2005 2006 2007

Millio

n P

es

os

Non-PEMEX Tax Revenue Tax on Pemex

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Oil On The Decline

0

200

400

600

800

1000

1200

1400

0

10000

20000

30000

40000

50000

60000

1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Oil p

rod

uc

tio

n (

milli

on

ba

rre

ls)

Oil r

es

erv

es

(m

illi

on

ba

rre

ls)

Oil reserves (million barrels) Oil production (million barrels)

2008 production

level is same as 1984

but revenues are

substantially higher

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Drilling Expansion Since 2000

600

650

700

750

800

850

900

950

1000

200

300

400

500

600

700

800

2000 2001 2002 2003 2004 2005 2006 2007

BO

E p

er

day

We

lls

Wells completed Oil production by well

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Drilling Expansion Policy Analysis

Evaluate policy effectiveness to determine path forward

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Analysis Overview

Drilling Expansion Policy Definition

Policy Criteria

Revisiting Moroney-Assad analysis

Sustainability evaluation using econometric models

Cost-benefit analysis of drilling expansion

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Drilling Policy Expansion

Oil production increases mandated by President Vicente Fox in 2000; support continues with current President Calderon

Huge increases in drilling for exploration and development since 2000

Production losses at Cantarell have led to steep production declines since 2004

New oil is not being found at a rate fast enough to replace extracted oil

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Policy Criteria

PEMEXs Fiscal State

Energy Reform in 2008

Mexicos Energy Forecast

U.S. Energy Policy Changes

Political Barriers

Economic Limitations

Technological Limitations

Historical Perspective

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX Revenue Allocation

62.7% 59.2% 61.0%61.1%

61.3%

62.5%54.9%

59.6%

58.1%

-200000

0

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

2000 2001 2002 2003 2004 2005 2006 2007 2008

Millio

n P

es

os

Operating Costs Tax Costs Net Loss Note: % is percentageof revenue that is taxed

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Energy Reform In 2008

Program for Growth and EmploymentUse nearly all funds from Stabilization Fund for Oil Income Investment to build a new refinery

Petroleos Mexicanos LawPublic works and service contracts: allow for more partnershipsCitizen Bonds: finance debtDebt: greater autonomy for establishing debtBudget: PEMEX can make budget adjustments without approvalNational Suppliers: Preference for Mexican suppliers

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Moroney-Assad Analysis

From Energy and Sustainable Development in Mexico from 2005

Used data from 1975-2000

Evaluated econometric models forExploration and Developmental Drilling

Successful Exploration and Development

Additions to Oil Reserves

Oil Production

Models revisited to include 2000-2008 data

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Model Summary through 2000

Total Drilling

Net Mexican oil export price predicts drilling

Drilling Success Ratio

More drilling increases success ratio

OilReserves

More drilling adds to reserves

Oil Production

Production depends on reserve levels

Moroney-Assad Conclusions

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Model Summary through 2000

Total Drilling

Net Mexican oil export price predicts drilling

Drilling Success Ratio

More drilling increases success ratio

OilReserves

More drilling adds to reserves

Oil Production

Production depends on reserve levels

Moroney-Assad Conclusions

Model Summary through 2008 Still Significant

Total Drilling

Unable to reproduce original modelDebt financing funds 95% of drilling

NO

Drilling Success Ratio

Developmental drilling reached plateauExploration drilling ratio still increasing

YES

OilReserves

Drilling expansion only marginally successful

NO

Oil Production

Oil reserves still accurately predict production levels

YES

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Sustainability Evaluation

Three areas of focusOil reserves

Operational costs

Marginal cost per barrel of oil

Econometric models and correlations establish relationships with areas of focus

Comparing 2000-2008 versus business-as-usual evaluates effectiveness of drilling expansion for oil reserves

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Oil Reserves And Wells Drilled

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

30000

32000

34000

36000

38000

40000

42000

44000

46000

To

tal S

uc

ce

ssfu

l W

ells

Dri

lle

d

Oil r

es

erv

es

(m

illio

n b

arr

els

)

Total successful wells drilled Oil reserves (million barrels)

Inverse Relationship: Correlation coefficient of -0.98 since 1993

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Oil Reserves And Employee Count

30000

32000

34000

36000

38000

40000

42000

44000

46000

48000

50000

30000

32000

34000

36000

38000

40000

42000

44000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Nu

mb

er

of

Em

plo

ye

es

Oil r

es

erv

es

(m

illi

on

ba

rre

ls)

Pemex-Exploration and Production Employee Count Oil reserves (million barrels)

Strong Relationship: Correlation coefficient of -0.99 since 1996

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Marginal Cost And Employee Count

150

200

250

300

350

400

450

500

550

30000

32000

34000

36000

38000

40000

42000

44000

46000

48000

50000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Pe

so

s pe

r b

arr

el o

f o

il

Em

plo

ye

e C

ou

nt

Production and Exploration Employee Count Operating Cost Rate (pesos/barrel)

Statistically significant correlation between employee count and operating cost rate

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Oil Reserves Evaluation

-4.24%

-5.67%-4.93% -1.59%

-0.94%1.35% 5.17%

25000.00

27000.00

29000.00

31000.00

33000.00

35000.00

37000.00

39000.00

41000.00

2000 2001 2002 2003 2004 2005 2006 2007 2008

Oil R

es

erv

es

(m

illi

on

s o

f b

arr

els

)

Oil Reserves (forecast) Oil Reserves (actual) R2 value of 0.68

Net oil reserve gain of 2019 million barrels from 2000-2008

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Oil Production Evaluation

R2 value of 0.45

1.29%

4.77%

6.37%

12.78%13.11%

11.37%

8.70%

2.62%

-6.92%1000.00

1050.00

1100.00

1150.00

1200.00

1250.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Oil R

es

erv

es

(m

illi

on

s o

f b

arr

els

)

Oil Production (forecast) Oil Production (actual)

Net gain of 733 million barrels from 2000-2008

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Sustainability Evaluation Summary

Diminishing rate of return for each new well drilled

Increasing marginal cost per barrel may prevent some oil from being extracted

Marginal success for drilling expansion Rate of oil reserve decline has lessened since 2000

Higher production than business-as-usual

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Cost-Benefit Analysis

Use total sales for benefits and total operational costs for costs

Using company-wide numbers accounts for benefits and costs in refining and other subsidiaries of PEMEX

Project business as usual using data from 1990-1999

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Operational Costs

0.59%0.68%

-10.15%

8.51%

10.95%

36.99%

46.35%

51.84%

108.88%

200000.00

300000.00

400000.00

500000.00

600000.00

700000.00

800000.00

900000.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Op

era

tio

na

l C

osts

(m

illi

on

s o

f p

es

os

)

Total Operational Costs (forecast) Total Operational Costs (actual)

Year

Operational

Costs(million pesos)

2000 1,718.90

2001 1,988.64

2002 0.00

2003 27,631.06

2004 37,700.95

2005 130,855.04

2006 172,370.50

2007 200,380.68

2008 449,639.75

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Sales Benefits

7.87%

-6.02%-7.89%

10.47%

24.89%

39.70%

48.12%47.36%

56.42%

400000.00

500000.00

600000.00

700000.00

800000.00

900000.00

1000000.00

1100000.00

1200000.00

1300000.00

1400000.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

To

tal S

ale

s (

mil

lio

ns

o

f p

es

os

)

Total Sales (forecast) Total Sales (actual)

YearSales Benefit(million pesos)

2000 54,067.92

2001 0.00

2002 0.00

2003 79,863.32

2004 225,916.43

2005 411,319.54

2006 552,012.89

2007 558,300.70

2008 749,770.63

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Cost-Benefit Summary

Year Accumulated Benefit(million pesos)

2000 687,004.86

2001 599,625.62

2002 620,922.21

2003 763,133.92

2004 907,783.10

2005 1,035,970.21

2006 1,147,093.83

2007 1,178,750.95

2008 1,328,950.00

Drilling expansion provided millions of additional pesos in revenue for PEMEX

Much of the additional revenue is due to high oil prices from 2004-2008

Financial crisis of 2008 could lessen benefit significantly in 2010

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Final Recommendations

Defining a path forward for drilling at PEMEX

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

1. Parntnerships to Change Political Will

ProblemDeficient technological capabilityEconomically inefficient policies

SolutionIncrease collaborations and communication with other national oil companies like Petrobras and StatoilHydroLearn implementation of effective policies that improve social welfare and productivity of national oil industry

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Parntnerships to Change Political Will (Cont.)

PEMEX undertakes massive public advertising

campaign highlighting partnerships with

Petrobras and StatOilHydro

Mexican government holds joint conference with Brazil

and Norway to discuss public polices related to the hydrocarbon sector

Assessment of political will for further reform of hydrocarbon sector

including law changes to allow PEMEX to operate

more efficiently

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

2. Continue Drilling Expansion

ProblemDeclining oil reserves and production

Increasing operational costs and marginal cost per barrel of oil

SolutionContinue drilling expansion

Use more contractors or part-time workers to limit full-time employment expansion

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Future Work

Carrying this analysis forward

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

Future Work

Highlight demand side opportunities in Mexico to help prevent the 2020 switchover to a net importer of oilInvestigate partnerships with universities in the U.S. to learn advanced drilling techniquesEvaluate ballooning retirement costs at PEMEX and its affect on long-term financial stabilityInvestigate potential for alternative energy infrastructure in Mexico to allow PEMEX to transition to an energy market without fossil fuels

A presentation by Nicholas Nigro from the Goldman School of Public Policy at the University of California, Berkeley

PEMEX's Future

16th largest proven oil reservesContinually decreasing reserves since 1984

Increasing possible oil reserves since 1999Technology can turn possible into proven reserves

Federal Government and PEMEX support reform and operational improvements

Energy reform in 2008 is a good step

Drilling expansion marginally successful since 2000

More reform is necessary to reverse declining trends in oil production and oil reserves