A New Oil Boom in Mexico’s Aging ‘Golden Belt’

More than a century ago, an enterprising Californian struck oil near this Gulf of Mexico port city, the first of many finds that tagged this area as “the Golden Belt” and propelled Mexico into the top ranks of oil producers.

Now the cradle of Mexico’s oil industry is set to kick-start a new energy boom, after President Enrique Peña Nieto ’s government invited private companies to explore for and extract oil, ending more than seven decades of government monopoly.

While the biggest boost to Mexico’s oil output is likely to come from deep-water fields in the Gulf of Mexico, those fields could take up to a decade to start pumping. Long before then, production is widely seen coming from aging oil onshore fields in this region, which once attracted the famous Standard Oil Co. monopoly.

“A boom is coming,” Joel Vázquez, the head of Mexican-Canadian drilling company DCM, said at his downtown office here. “Not a week goes by without an oil company contacting us asking about making a joint venture or saying they’re interested in investing here.”

In the coming weeks, Mexico’s government plans to unveil terms for the first auctions of oil-exploration blocks under the new energy law. Bidding, set for next year, is expected to attract heavy interest from big and small companies alike. Of the 169 blocks up for grabs, 47 lie within 70 miles of Tampico.

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Federal police and the Mexican army patrol Tampico’s streets. Juan Montes/The Wall Street Journal

Many older fields will require new technologies to boost oil recovery, such as horizontal drilling and hydraulic fracturing. But they hold little interest for state-run Petróleos Mexicanos, which doesn’t have such expertise.

“We know there is a lot potential here, but for Pemex, the enhanced recovery from wells wasn’t economically viable,” said Deputy Energy Minister Lourdes Melgar.

Big energy companies including BP PLC and Royal Dutch Shell Shell PLC are widely expected to focus on the deep-water fields, while tapping the mature fields will mostly fall to smaller companies.

Canada-based Pacific Rubiales Energy Corp. , which has had success in Colombia, said it had set aside $1 billion to invest in Mexico, possibly for mature fields. Mexican startup Sierra Oil & Gas SRL has received $525 million in investment commitments and plans to focus on shallow waters and mature onshore fields.

Most of Pemex’s 2.4 million barrels a day in crude-oil production comes from deposits in the southern Gulf of Mexico. The northern region that includes reserves around Tampico, generates about 129,000 barrels a day.

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Those mature fields, along with shallow gulf waters and onshore fields in southeastern Tabasco state, are expected to contribute most of Mexico’s expected 500,000 barrels a day in increased output between now and 2018, Ms. Melgar said.

DCM, a joint-venture of Mexico’s Grupo Diavaz and Canada’s CanElson Drilling Inc., is in charge of drilling the Ébano oil field, an area of green woodlands encircled by swamps. The field, 40 miles west of Tampico, is where Mexico’s first oil well was drilled in 1901 by Mexican Petroleum Corp. founder Edward Doheny.

Until now, contractors have been limited by Mexican law to getting fees from Pemex for service work, such as drilling wells and maintaining them.

Under the new law, Pemex is working to turn fee-based service contracts into more profitable deals to share oil production, hoping to attract investment and increase drilling. DCM’s Mr. Vázquez predicted that oil output at Ébano would increase over the next five years to about 40,000 barrels a day from 11,000 now.

Mexican contractors such as DCM eventually could bid for small blocks. “We will be able to work as service contractors for big private oil firms and at the same time be their competitors,” Mr. Vázquez said.

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DCM engineer Alejandro Carrasco supervises a well at the Ébano oil field. Juan Montes/The Wall Street Journal

At the Ébano field recently, DCM engineer Alejandro Carrasco stopped his pickup truck on a dirt road and pointed at the two drilling rigs piercing the horizon. “The idea is to turn this into a sea of drilling towers,” he said.

The government bets that opening the energy sector could be the key to emulating the success of the U.S. fracking boom.

The area around Tampico forms part of a long stretch of land in Tamaulipas and Veracruz states that the Energy Ministry estimates contains as much as 35 billion barrels of oil equivalent, making it home to some of Mexico’s biggest shale-oil deposits. The U.S. Energy Information Administration estimates that Mexico has the world’s eighth-largest shale-oil resources.

Not that getting the oil will be easy.

Chicontepec, a geologically difficult basin 125 miles south of Tampico, produced just 47,000 barrels of oil a day in September. Pemex had targeted 600,000 barrels a day by this year.

“These are very complicated oil fields that in some cases may have less oil than predicted or could even be impossible to extract,” said energy consultant Antonio Juárez, a former Energy Ministry official.

Jorge Piñón, a former president for Latin America at Amoco, said problems related to infrastructure, water and qualified labor add to the challenges.

There are also concerns about security.

Disputes between the Zetas and Gulf Cartel drug gangs have led to violence. Kidnappings, extortion and fuel theft are a frequent concern. After 11 at night, street activity comes to a halt in Tampico, where before leaving home, people routinely check local Facebook pages for alerts about shootouts. DCM’s headquarters are in a discreet gray building with tinted windows and no signs outside announcing that the company is there.

But DCM’s Mr. Vázquez said he was undeterred.

“It’s not easy to operate here,” he said. “But there’s one thing that will persuade all of us: money. You can make a lot of money here.”

WSJ