Mexico's state oil company Pemex and Brazil's Petrobras are pooling their efforts and expertise to drill exploration prospects in Mexico's portion of the Gulf of Mexico, aiming to unlock vast oil resources from source rock formations that lie miles deeper and are eight times older than the formations currently producing in the U.S. Gulf.

Exploring the Jurassic formations buried deep beneath the Mexican Gulf seabed in Campeche Bay carries high risks, but the reward in case of a discovery could be enormous, geologists and analysts told Bloomberg.

Pemex has already tested the play once. In 2018, the company drilled more than 7,800 meters (25,600 feet) below the sea floor and penetrated the Campeche salt layer in an exploratory well that was ultimately declared unproductive. Although the Mexican oil giant has not drilled a new exploratory well in the area since then, industry experts believe Pemex may have encountered something of significant geological or hydrocarbon-bearing potential — enough to keep the pursuit alive.

Pemex has not publicly disclosed any results from its 2018 drilling campaign offshore Campeche, but analysts say there is a reason the company has not abandoned its search for huge resources as it seeks to reverse years of declining domestic oil production from legacy wells.

"Apparently what Pemex found did not scare them away," Mark Rowan, a Colorado-based geologist and consultant who specializes in deep Gulf of Mexico discoveries, told Bloomberg. "That suggests there was no absolute play-killer, and possibly something that gave them real reason to keep testing," Rowan added.

Heavily indebted Pemex — which carries one of the heaviest debt loads in the global oil industry, at roughly $100 billion — cannot take on such a challenge alone. That is where Petrobras comes in. The Brazilian company brings two decades of experience drilling through the pre-salt layer off Brazil's coast, where it has opened one of the most prolific offshore oil plays in the world in the Santos and Campos Basins. Production from beneath the salt layer now accounts for roughly 80% of Brazil's oil output, and those pre-salt discoveries have propelled Brazil into the top ten of the world's biggest oil producers over the past decade.

In June, Pemex and Petrobras — the biggest oil companies in Latin America — signed a memorandum of understanding for strategic and technical cooperation to assess, develop, and jointly execute projects, including opportunities in exploration and production (E&P). The companies will evaluate development opportunities in deepwater and ultra-deepwater areas, including assets located in the Gulf of Mexico; as a framework agreement, the memorandum puts assessment and knowledge-sharing first, meaning any commitment to specific wells would follow the joint technical evaluation.

"The partnership also includes the exchange of technical knowledge, technologies and best practices, leveraging Petrobras' recognized expertise in highly complex offshore operations," Brazil's oil giant said.

Drilling into Jurassic source rocks offshore Mexico is indeed a highly complex offshore operation with high execution risk. These formations lie much deeper and are far older than those in the U.S. waters of the Gulf, where oil firms, including the supermajors Chevron, Shell, and BP, have for decades been pumping oil that accounts for about 14% of total U.S. crude oil production.

The risks in Mexican waters are higher, but so are the potential rewards. If the Pemex-Petrobras partnership successfully drills and proves hydrocarbon resources beneath the salt layer, it could open a major new province of oil and/or gas — one capable of changing the fortunes of Pemex.

The Mexican state-owned company certainly needs a turnaround. Output has declined in recent years, down from a 2004 peak of about 3.4 million bpd, as its legacy shallow-water workhorses — first Cantarell, more recently Ku-Maloob-Zaap — have aged, and Pemex has relied on government financial support to refinance its huge debt obligations.

In July, Pemex reported a second-quarter net profit down 70% from a year earlier, despite the oil price rally during the April-June period driven by the Middle East crisis. The company continued to struggle to boost production, pumping an average of 1.66 million barrels per day (bpd) of crude oil and condensate together with partners in the second quarter — below the Mexican government's target of 1.8 million bpd of oil production.

A potentially successful high-risk but high-reward campaign offshore Campeche could go a long way toward turning the fortunes of Mexico's oil giant.

By Tsvetana Paraskova for Oilprice.com