The Major Challenge of Investment in Mexico’s Oil Sector

Overall, the Mexican economy is showing clear signs of stagnation, which is beginning to cause concern. The 0.8% contraction in GDP during the first quarter of the year is largely due to weak investment, particularly in physical and public infrastructure. Although foreign direct investment has reached record levels, the problem lies in its composition: 67% consists of reinvested profits rather than new capital. In other words, established companies are continuing to invest in Mexico while awaiting the outcome of the USMCA negotiations.

In this context, investment in the oil sector is crucial. While the government has set ambitious goals in its strategic plan, the main challenge lies in translating these plans into action. Currently, discussions focus on two main areas: fracking and contractual models. These models must align with a long-term business logic that requires sufficient levels of certainty to attract investment from experienced operators with the capacity to execute projects.

It is important to note that the government's current priorities aim to reconcile two elements: recognition of market realities and the ideal of energy sovereignty, which reflects certain ideological traits within the government itself. Notably, this represents a significant shift from the previous administration, as the current administration openly acknowledges the need for private investment, albeit within a regulatory framework that imposes clear limits on participation in the electricity and hydrocarbons sectors.

Conversely, investment in the oil sector has not met its targeted goals. As of last year, according to data from the now-defunct CNH, only US$19 billion of a total committed amount of US$79 billion had been disbursed, representing 27% of the total. This discrepancy can be partly attributed to the cancellation of exploration blocks by various operators, who deemed them commercially unviable.

Regarding unconventional (shale) deposits, Mexico has significant catching up to do. Despite a change in the government's position, it has recently announced the establishment of a scientific committee to assess current fracking methodologies. The results of the study are scheduled for presentation in the coming months. The conclusion is likely to proceed under conditions that ensure the protection of the environment and local communities. This will initiate a new discussion on specific regulations that must be defined quickly to allow progress toward the development of specific projects with private-sector participation.

Even accounting for ongoing investment in key projects like Zama or Trion, which together total around US$20 billion, the level of additional investment required is considerable. Shale development is a capital-intensive and sustained process, necessitating a significant number of wells to achieve commercial viability. It is estimated that at least 3,000 wells are required per year, which, based on a conservative estimate of US$15 million per well, could amount to US$45 billion annually. However, the potential of offshore resources should not be overlooked either, making it essential to have a diversified portfolio that includes both shallow and deepwater assets, thereby avoiding delays in key decisions, such as the development of Nobilis-Maximino, where investment can be even higher than Trion. There is a considerable amount of exploration to be conducted offshore, commencing with seismic surveys, for which no investments have been made in years.

What are the main challenges to expedite oil investment?

The main obstacles are clear. I would highlight the most relevant:

• The principle of legal certainty is of fundamental importance in any legal system. It is widely recognized that the changes resulting from judicial reform have impacted investment decisions, especially regarding long-term projects. Despite the government's issuance of communications intended to instill confidence, these do not affect a fundamental alteration in the institutional framework. There is still room for concrete actions to strengthen certainty.
• Uncompetitive contract models. Although PEMEX has sought to strengthen its strategy through mixed contracts, the results have been limited. To date, 10 contracts have been awarded, primarily with domestic companies, while international operators have shown little interest. In light of new geopolitical and market dynamics, various experts believe that mixed contracts have not gained traction, making it necessary to adjust these schemes and eventually resume bidding rounds that allow for more competitive partnerships.
• Global competition for capital. Recently, the president of AMEXHI mentioned at the organization’s annual convention that there are open bidding rounds in at least 14 countries. I therefore believe that it will be quite challenging for Mexico to attract capital in this highly competitive environment. Currently, the private sector accounts for around 9% of oil production, indicating significant potential for growth contingent on the ability to attract investment.
• Risk allocation. Current models do not distribute risks evenly among international operators. The operator provides the resources and handles the execution, while sharing a minimum of 40% with PEMEX. This effectively means that the operator assumes all of the risk. This element is key to facilitating investment decisions based on mutual and fair benefits.
• Financial and regulatory conditions. Predictable cash flows, regulatory stability, and long-term visibility are essential. The current framework prioritizes the tax burden (DPB) over cost recovery, which affects the financial viability of projects and increases the cost of capital. Additionally, the lack of clarity in specific regulations makes compliance difficult, but all of this affects predictability in an environment where politics influences technical matters. Likewise, contract terms must align with the productive life of the fields, as is the case in regulatory frameworks such as the US model, where contracts remain in effect until the field in question ceases to be commercially viable.

Mexico needs to review its energy model to make it more competitive, flexible, and aligned with global trends. The model is not all wrong, but it is also not attractive enough compared with other countries in Latin America. This involves strengthening the rule of law, improving contractual frameworks, building long-term trust, and establishing a clear narrative of collaboration between the public and private sectors. It also entails adopting best practices from successful models such as those in the United States or Argentina and, in terms of operational efficiency, recognizing that Petrobras offers relevant benchmarks and is willing to help, but only if PEMEX is willing to implement structural changes for real.