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Mexico’s Oil Future Is In Jeopardy


Mexico’s future is in large part dictated by the future of its oil and gas industry, and the rolling back of landmark energy reforms has now put that all in jeopardy. 

Here’s what Mexico’s energy industry has to look forward to in the coming year.

No Oil Auctions

Mexico’s President Andrés Manuel López Obrador announced earlier this week that Mexico was indeed not looking to put oil and gas blocks up on the auction block this year, as some had hoped.  The announcement dashed all hopes that the world’s energy companies would be invited in to develop Mexico’s oil and gas resources.

Obrador’s no-auction stance is in character, following his efforts to seize more control of its energy sector as he continues to roll back some energy industry reforms that had ended state-run monopolies and opened the door wide to foreign oil companies to encourage competition.  Most see this nationalistic agenda as a step backwards for Mexico’s energy sector, after the previous administration, Enrique Peña Nieto, had been hailed for his progress in this area.

Obrador, however, has said that the reason for not offering any oil and gas blocks up for auction this year was because while oil and gas companies had been awarded over 100 contracts through previous auctions (during Peña-Nieto’s rein), they had not made enough headway with their projects.

“Of the 1.735 million barrels that were extracted yesterday only 10,000 were extracted by the companies that received the contracts,” Obrador explained.

But Amexhi countered that the private sector has so far invested more than $11 billion in the energy sector.

Related: IEA: The Oil Glut Is Going Nowhere

What, then, is Obrador banking on, if not foreign oil companies? A surge of state-run oil production, apparently. Most banks, analysts, and creditors, however, feel Obrador is reaching.

Pemex Not Just in Deep Water – Deep in Debt  

After all, Mexico’s state-run oil company, Petróleos Mexicanos (Pemex), is still deep in the red, to the tune of about $100 billion.

The IMF said that Pemex’s plan for 2019-2023 was unrealistic with regards to production growth and reserves replenishment.

“Current plans focus on areas where the company has had better success rates in the past,” the IMF said in a report published last November, “This strategy will likely lead to some short-term production gains, but the 60% increase in production by 2024 – to 2.7 million b/d – currently projected by Pemex appears optimistic.”

IMF’s take seems prudent, given that Pemex’s crude oil output came in under 1.7 million bpd in October last year—a figure that was 5.5% down year on year, and a far cry from the 3.4 million bpd it produced back in 2004.

But Obrador says this has all changed. “For the first time in 14 years, petroleum production didn’t fall, it was an extraordinary achievement due to the good management of Pemex,” Obrador said this week.

But analysts wholeheartedly disagree. Unless Mexico were to sink billions into its oil industry or open up its doors to foreign oil companies, “the outlook is bleak”.

Fitch has already downgraded Pemex to speculative grade, and more downgrades are likely on the way, Mexico’s Central Bank warned this week.

Not Just Oil, But Renewables Too

The pain will not be limited to the oil and gas industry. Mexico’s renewables industry may take a beating this year as well, as Obrador announced this week that the government would review solar and wind contracts in order to ascertain whether private companies in these sectors are being subsidized improperly.

Related: Low Gas Prices Crush Appalachia Shale Boom

This comes after Mexico’s Federal Electricity Commission considered in December putting an end to a few clean-energy contracts and deep discounts it was handing out for transmission costs for legacy permits.

A Glimmer Of Hope

Oil production issues aside, all is not lost for Mexico’s energy sector. It has a few things going for it this year, one of which is its typically successful Hacienda hedge. While Mexico is keeping a few of the details extra secret this year, the hedge cost around $1 billion for 2020, locking in a price of $49 per barrel, to protect its oil sales when prices fall too far. Mexico has made a killing from its hedge during years of ultra-low prices.

Pemex had some success late last year, finding more oil which will be critical to its future. Pemex called its Quesqui find a “giant” one, stating that it is estimated to hold as much as 500 million barrels of crude that will produce as much as 69,000 bpd by 2020, and 110,000 bpd by 2021. It is the largest find in more than 30 years, Pemex said. But while a positive development for Pemex, it alone will not be enough.

Another positive development for Mexico’s energy sector is Talos Energy’s Block 7 Zama oil find offshore Mexico. While this won’t be in production by 2020, it is expecting first oil by 2023. The production could generate as much as $28 billion in fiscal revenue for Mexico’s government. But again, this is a few years down the road.

Mexico’s oil industry accounts for 4% of the country’s GDP. 

By Julianne Geiger for Oilprice.com

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