Mexican plan for Gulf deepwater wells sparks new worries

McClatchy NewspapersApril 3, 2012 

MEXICO CITY — Two years after the worst offshore oil spill in U.S. history, Mexico's state oil company is about to test its hand at drilling at extraordinary depths in the Gulf of Mexico.

If all goes as planned, Petroleos de Mexico, known as Pemex, will deploy two state-of-the-art drilling platforms in May to an area just south of the maritime boundary with the United States. One rig will sink a well in 9,514 feet of water, while another will drill in 8,316 feet of water, then deeper into the substrata.

Pemex has no experience drilling at such depths. Mexico's oil regulator is sounding alarm bells, saying the huge state oil concern is unprepared for a serious deepwater accident or spill. Critics say the company has sharply cut corners on insurance, remiss over potential sky-high liability.

Mexico's plans come two years after the Deepwater Horizon catastrophe, the worst oil spill in U.S. history. On April 20, 2010, a semi-submersible rig that the British oil firm BP had contracted to drill a well known as Macondo exploded off the Louisiana coast, killing 11 workers and spewing 4.9 million barrels of oil in the nearly three months it took engineers to stop the spill.

BP has said the tab for the spill — including government fines, cleanup costs and compensation — could climb to $42 billion for the company and its contractors.

Pemex's plans to sink even deeper offshore wells underscore Mexico's pressing need to maintain sagging oil production — exports pay for one-third of government operating expenses — along with oil companies' desire to leverage technology and drill at ever more challenging depths.

Carlos A. Morales, the chief of the Pemex exploration and production arm, which employs 50,000 people, voiced confidence that his company has to the ability to sink wells in ultra-deep water.

"Pemex is ready to undertake the challenge and to do it safely," Morales said in an interview in his 41st-floor office at Pemex headquarters in this capital city.

"You have to bear one thing in mind," he said. "Pemex is the biggest operator in the Gulf — including everyone — both in production and in the number of rigs we operate. We are operating more than 80 rigs offshore."

Sometime in May, Morales said, Pemex will move the Singapore-built West Pegasus semi-submersible oil platform, owned by the Norwegian company Seadrill, over a seabed formation known as the Perdido Fold Belt and drill a well named Supremus. At nearly the same time, a South Korea-built platform known as Bicentenario, owned by the Mexican company Grupo R, will drill the slightly shallower Trion well, a little to the west of Supremus.

The area where the two wells are to be sunk is some 30 miles south of the maritime boundary in the Gulf between Mexico and the United States.

Morales said the rigs are both "sixth generation, which means they are the most modern. They have all the safety devices that rigs should have."

Still, the technological challenges of ultra-deepwater drilling — anything more than 5,000 feet of water — are significant because of the high pressures and complex seabed extraction systems, akin even to launching spaceships into orbit, experts said. The Deepwater Horizon was drilling in about 5,100 feet of water when it exploded.

Since Pemex decided in 2004 to expand from shallow offshore wells into deep water, it's drilled 16 wells at increasing depths, with two in ultra-deep waters, Caxa and Kunah, the latter at 6,500 feet.

Mexico's nationalist constitution bars Pemex from operating joint ventures with oil companies that already are experienced at very deep water. It can contract only with global oil service companies, ordering them to perform functions.

"This requires managerial expertise that Pemex lacks," said Miriam Grunstein Dickter, an oil expert at the Center for Research and Teaching of Economics, a Mexico City institute in the social sciences. "When you contract a service company, they perform the work that you command them to perform. Here, Pemex does not know how to command the service company."

"Like rocket science, you can find the people. They are out there to be hired," added Kirk Sherr, the head of North American operations for Regester Larkin Energy, a global consulting company. "But who's going to coordinate?"

It's when disaster strikes that the resources — or lack of them — come into stark relief for an oil company or even a nation.

After the Deepwater Horizon disaster, BP, the U.S. Coast Guard, and state and federal officials mustered some 3,000 vessels to help set booms, clean marshes and gather spilled crude.

Mexico has nowhere near that fleet of vessels at its disposal. Its navy has 189 ships. Pemex itself contracts around 180 boats.

That's one of the concerns of Juan Carlos Zepeda, the head of Mexico's National Hydrocarbons Commission, a regulatory body created in 2009 that's wrestled with Pemex over its practices, demanding that it adopt global standards on safety and preparation for worst-case scenarios.

The two sides have been in a power struggle. The 74-year-old state company is used to setting its own rules, not following the impositions of regulators.

"Pemex is just not accustomed to being bossed around," Grunstein said.

A point of contention has been insurance. Zepeda wants Pemex to have insurance to pay for even catastrophic spills, like BP's Macondo well. But Pemex balks.

"They are probably thinking, why are we going to give all this money to the insurance company?" said David Shields, an energy consultant in Mexico City.

Morales of Pemex said the company was insured for coverage of $2.5 billion.

"I feel comfortable with what Pemex is capable of doing. You can always argue that $2.5 billion is not enough. We can always argue that $10 billion is not enough," he said.

But he said that Pemex had uniquely deep pockets.

"The owner of this company is the government of Mexico," he said.

In the event of a deepwater disaster, whether claimants could ever get Pemex, or the Mexican treasury, to pay is an open question. Major damage claims haven't been tried against a state oil company. Given that Pemex turns over most revenues to the treasury, Mexican taxpayers would have to pay much of the cleanup costs and legal claims.

"It's going to be a really big hit on the Mexican economy if there is a catastrophic disaster, and it will be catastrophic for the relationship with the United States," said Shields, the consultant.

Some industry experts said Pemex wasn't taking greater risks than private oil companies sometimes took.

"It's not inherently reckless," said John Rogers Smith, an offshore drilling expert at Louisiana State University. "They can hire competent contractors. They can buy equipment from reputable vendors. The big question is . . . who have they hired to help them?"

Pemex signed a contract last week with Wild Well Control, a Houston company with blowout expertise. Morales said Pemex was negotiating a contract with a second Houston firm, Cameron International, that had sophisticated tools — such as huge underwater capping stacks — that helped BP control its Macondo well below the Deepwater Horizon.

In mid-February, the United States and Mexico signed a framework accord on developing trans-border oil fields in the Gulf. The accord includes terms for safety cooperation, including allowing joint inspection teams to ensure rigs' compliance with safety and environmental regulations, key to preventing worst-case spills.

"I don't think we should be any more concerned about what they are doing than some of the things we are doing on our side of the Gulf," said Jeremy Martin, the energy program director at the Institute of the Americas, a La Jolla, Calif., nonprofit organization that promotes cooperation and economic development.

Still, the Deepwater Horizon disaster haunts like a lingering nightmare.

"Macondo was a watershed in deepwater drilling. There is before Macondo and there is after Macondo," said Fabio Barbosa, an economist at the National Autonomous University of Mexico who specializes in the oil industry.

Barbosa said Pemex was deeply concerned about sustaining oil production and stemming a decline of proven oil reserves, 50 percent of which were in deep water. Pemex's production has fallen from 3.4 million barrels per day in 2004 to about 2.55 million barrels a day now.

"They consider it their duty to elevate crude production. They are moving about, driving production in every way they can," Barbosa said.

Shields, who edits a Spanish-language industry magazine, Energia a Debate, said it was one factor impelling Pemex but that Mexican leaders had observed rapid development of U.S. offshore wells in the Gulf and wanted to lay claim to nearby undersea areas of their own, even if it stretched their capabilities.

"They want to put the flag there," said Shields, who's a nationalized Mexican. "The oil industry is a lot like that. They want to go after bigger and bigger challenges. Once you go up a small mountain, you want to go up a bigger mountain."

Shields added: "The risks are massive and the potential benefits are comparatively small."

Morales, the Pemex executive, disagreed that his company can't handle the risk: "We are going there because there are resources that belong to the nation. We have the mandate to explore and produce for the nation."

He added: "We are capable of fulfilling all our obligations."

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