History Is on the Oil Industry’s Side in MexicoThu, 03/03/2022 - 13:00
Mexico is a country poised for change, and the once dominant oil industry now shows signs of fragility brought on mostly by endogenous factors. Over the last decade, there has been a continued decline in oil production, dropping from 2.52 million bpd in 2013 to 1.68 million bpd in 2019, and maintaining similar levels in 2020 after large investments from PEMEX to boost short-term output. Mature fields, such as KMZ and Cantarell, continue to provide the bulk of the country’s production, making up about 91.5 percent of cumulative output in 2020.
The fact that such a high percentage of production comes from assets that are entering their last stages of life highlights the importance of fields in the early stage of production. If Mexico stands a chance of maintaining a seat at the global supply table in the 2030s, it’s these fields that are under development, or discovered and yet to be developed, that will sustain and raise output in the medium term. Looking short term, crude production for the entirety of 2021 came to 1.7 million bpd, an uptick from 2020 but by 2025 it is projected to fall short of 1.5 million bpd. Overall, the remaining hydrocarbon potential of the country appears promising, with the government reporting 48.7 billion barrels of oil equivalent (boe) across identified prospects. Much will depend, however, on the success of any future exploration if the country is to reverse or even curb in a meaningful way the decline in production in the long term.
Since the nationalization of the hydrocarbons industry in 1938, different politicians, at different times, have recognized the need for internationalization of the oil business in Mexico if the prize was to be fully exploited. The return on the PRI in the 2010s finally brought the political weight needed to pass a series of constitutional amendments intended to open the hydrocarbons and power sectors to private and foreign investment. These effectively ended PEMEX’s long-standing monopoly over enormous oil and gas resources that had been in place since the 1950s. Through profit- and production-sharing contracts, combined with new exploration and production licenses, former President Enrique Pena Nieto awarded over 100 contracts to energy firms between 2015 and 2018 to explore and produce oil and gas in Mexico. PEMEX was also given the green light to form its own joint ventures with private partners.
The first wave of awards came after a 2015 licensing round and produced impressive results, as IOCs picked up exploration blocks offering vast investment potential. They came at a moment when PEMEX was facing declining revenue and backed the administration’s belief in Mexico’s remaining subsurface potential. The timing seemed exceptionally right, capturing interest and a significant amount of money in signing bonuses just before terms like ESG and “the energy transition” became de rigueur.
President Lopez Obrador came into power with a unique mindset as relates to the hydrocarbons sector. Taking into consideration the declining production numbers, he announced an ambitious target to boost Mexican production to 2.4 million barrels per day (bpd) and gas output to 6.6 billion cubic feet per day (Bcfd) by 2024. Accordingly, PEMEX identified around 20 small and medium-sized “priority fields,” all operated by the NOC, to help inject additional supply. However, this campaign has suffered setbacks, with field development plans running behind schedule and volumes not deemed large enough to sustain output for long. This has put the focus on the development of recent deepwater discoveries, such as Zama, Trion and Saasken.
For Mexico, the deepwater is of paramount importance for its hydrocarbon’s future. To meet targets laid down by the current administration, the country will have to have almost unprecedented success in the exploration space, particularly in the areas that promise big prizes, which in Mexico equates to offshore. In a comparative view, Mexico would need to find the equivalent of roughly a new Guyana to significantly increase its production in the coming years. Under any scenario, it seems that new licensing rounds would be necessary to help unlock the country’s conventional resource potential and reverse the steady decline in oil and gas production seen since the early years of the last decade.
The current administration has taken a different view and has temporarily halted any new bidding activity while also increasing and emphasizing PEMEX’s role as the primary operator in the country. IOC drilling activity from 2021 to 2023 will continue as planned due to contractual commitments, but the lack of licensing rounds could affect the country’s exploration performance once these commitments are complete, thereby impacting future crude supply. Moreover, the recent decision by the Ministry of Energy to designate PEMEX as the Zama field operator over US independent Talos Energy, amid a lack of agreement in a unitization proposal, has cast a shadow of pseudo-nationalization over future investments in the offshore shelf area.
But for all the consternation Mexico’s current inward-facing policies have caused, it is important to look holistically at the situation. Potentially, the greatest oil well ever drilled in Mexico, the Cerro Azul No. 4, proves a perfect analogy. Spud by a foreigner in 1916, during the most uncertain and dangerous time of the Mexican Revolution, it has produced through the Cristero War, the Maximato, the nationalization of the oil industry, through the rise and fall of the “perfect dictatorship,” the advent of democracy and the re-opening of the oil industry. It continues to produce today, in fact, increasing production from 2020 to 2021. In the 106 years of activity, the well has seen politicians and ideologies come and go. So too will the wider oil industry in Mexico.