Can Mexico's Oil Production Rebound?



Can Mexico's Oil Production Rebound?
The need for an oil production rebound is Mexico's most obvious economic reality.

Mexico’s oil sector has been in free fall since the 2004 peaking of Cantarell in the shallow waters of its Gulf, once the second largest oil field in the world only behind Saudi Arabia’s Ghawar. Since then, Mexico’s production has plummeted nearly 45 percent to around 2 million barrels per day (MMbpd). 

The decline of Mexico’s oil production has been the impetus for a historic 2013 Energy Reform to deregulate and allow significant foreign investment. The hope is to install real competition for state-owned energy monopolies.

Nationalized in 1938, Mexico’s oil and gas company Pemex has symbolized an energy stagnation based on patronage, under-investment, and technological obsolescence. The situation has now been greatly complicated by the recently elected new president, Andrés Manuel López Obrador (AMLO), who has publically denounced the reforms.

Current Energy Minister Joaquin Coldwell says that a $640 billion investment is needed to expand Mexico’s oil production 50 percent to over 3 MMbpd. Pemex has long lacked the ability to stem the decline, so outside help is absolutely essential. Simply put, major U.S. investment and technical expertise is the only way that Mexico’s fading oil industry can return to former glory.

With a potential 60-70 billion barrels of petroleum in the Gulf, Mexico’s deepwater opportunities are as good as any in the world. The shale resource is massive too, but new domestic oil production overall is being hindered by lower oil prices, security risks, rampant corruption, governmental price controls, little to no investment protection, and an emerging political climate that has been vocally anti-reform. 

Estimated at over $100 billion in the hole, Pemex is the most indebted energy company in the world. Thus, AMLO’s primary oil focus to build more refineries is unrealistic because they can cost $7-9 billion, money that Pemex clearly cannot afford to spend.

Although recent oil block auctions have been deemed successful, the Mexican government has complicated things again by suspending new oil auctions previously slated for September and October until this February, two months after the new administration takes office December 1. 

The need for an oil production rebound is Mexico’s most obvious economic reality. Although down from 40 percent a decade ago, oil sales still account for 25 percent of federal revenues. New oil production is the cornerstone of a fast growing country where 50 percent of the people are poor.

Indeed, lifting petroleum production would pay huge dividends for Mexico. Falling output in the country has inevitably meant falling natural gas supply because gas comes as an “associated” byproduct oil extraction. Mexico’s gas production has therefore fallen nearly 25 percent since 2010.

This is a major problem for a country where natural gas is the most vital incremental energy source and now supplies a 60 percent of electricity. Mexico has been effective in its goal to replace fuel oil with natural gas for power.

In turn, Mexico’s reliance on the U.S. for 65 percent of its gas supply is increasingly problematic. Well beyond the already federally approved 15 billion cubic feet per day of U.S. LNG export projects (~18 percent of total U.S. gas production), there are another 14 projects with a whopping 26 Bcf/d of export capacity under review. Mexico is understandably concerned that loads of gas will be leaving the U.S., so new domestic oil production is imperative to be more self-sufficient in natural gas.

The good news is that the International Energy Agency (IEA) forecasts that the reforms will allow Mexico’s oil production to grow 50 percent in coming decades to 3.5 MMbpd. In fact, IEA has cited Mexico as an example for other countries wanting to deregulate. Now promising to review all oil contracts, AMLO must not just respect those already awarded but also fully retain the 2013 reforms for a brighter oil future.



WHAT DO YOU THINK?


Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.