OREANDA-NEWS. May 24, 2017. Mexico's state-run Pemex could lose a significant chunk of the acreage it was awarded under a 2014 energy reform in a matter of months, if authorities deem it has not complied with minimum work programs.

As a result of the energy reform that swept away the company's monopoly, the government in August 2014 awarded Pemex a portfolio of 489 areas, including 108 earmarked for exploration.

Mexico's oil regulator CNH says Pemex has to file this month a progress report on all of the exploration areas indicating whether it has complied with the minimum work programs it initially pledged to fulfill by August 2017.

Pemex could be forced to relinquish the exploration areas on which it is out of compliance, unless it can justify an extension or a planned farm-out. Either way, the process is likely to open up new upstream opportunities for local and foreign oil companies.

"There could be dozens of [areas] where Pemex will not be able to invest," a Pemex adviser told Argus, citing financial difficulties. Under the reform laws, Pemex had three years to comply with the minimal work programs – a deadline that expires in August of this year.

Pemex did not respond to a request for comment. But industry participants concur that Pemex lacks the capital to develop all of the exploration acreage on its books.

Falling export revenues stemming from the 2014 oil price collapse and steep government-imposed budget cuts have eroded the company's finances.

"The amount of equipment contracted by Pemex has fallen drastically, so I do not think it will be possible (for Pemex to develop all of the areas)," Ignacio Quesada, Pemex chief financial officer in 2011-2013, told Argus.

Oil market conditions have worked against Pemex since the 2014 allocation of 83pc of Mexico's proved and probable (2P) reserves to the company in a reverse tender known as Round Zero.

Mexico's crude export basket fell by 58pc from $85.48/bl in 2014 to $35.63/bl in 2016, leading to losses of over $20bn in crude export revenues.

Pemex has also weathered two consecutive budget cuts – Ps62bn in 2015 and Ps100bn in 2016 –imposed by the government. The company's projected expenditures for exploration and production, included in the government's annual federal budgets, fell by 16.7pc to 331.2bn pesos between FY2014 and FY2017.

Its exploration budget was hit the hardest, falling by nearly 56pc to 14.7bn pesos in the same period.

Exploration drilling targets plummeted from 67 wells in 2014 to none in 2017, the government's budget documents show.

"Pemex's exploration and production budget comes from the government. This should be taken into account when analyzing progress," oil regulator CNH commissioner Gaspar Franco Hernandez told Argus. "We won't ask anyone for anything impossible."

According to Hernandez, Pemex has three options for the exploration allocations: ask the government to extend the deadline for exploration work, return them to the state or farm them out, either alone, to benefit from a better fiscal regime, or through a tie-up with another company, sharing costs and risks.