Mexico's Energy Paradox: Abundance, but Dependence

Mexico's current position in the energy sector is pivotal in determining the timeline for increasing oil and gas production. In this context, PEMEX presented its strategic plan for 2025-2035, which includes both financial and production objectives. On the other side, private companies and operators are analyzing the risk/benefit balance of participating in the first wave of the so-called mixed contracts.

From a financial perspective, the plan emphasizes the implementation of measures to enhance the organization's balance sheet position, to discontinue external transfers from the federal government by 2027, and reach financial autonomy. From a technical standpoint, the objective is to achieve a production target of 1.8 MMbl by the 2026-2027 timeframe. This target will be primarily met through the implementation of the mixed contracts.

The ideological aspect is still — and will remain — present: the state seeks to always maintain predominant control, with recently renewed regulatory bodies that, in terms of autonomy, are far from international best practices. As it is often said, “It is what it is,” and in this environment, the private sector must adapt and assume risks to continue participating and contributing value to the Mexican energy sector.

Although SENER and PEMEX's plans to increase production, reduce dependence on imports, and advance in the energy transition are somehow viable in general terms, there is still a lack of fundamental definitions: secondary regulations, contractual details under review and with many questions to be answered, payment methodology, closing of negotiations, and the execution itself of the first mixed contracts, whose eventual benefits will be seen in the long term.

In this context, we should take a look at some of the sector's shortcomings, as they could also turn out to be areas of opportunity.

Structural Dependence on Imports vs. Hydraulic Fracturing

The importation of natural gas, which currently accounts for more than 70% of total consumption (with occasional peaks approaching 90%), poses a significant threat to the nation's energy security. Mexico's storage infrastructure is practically non-existent. The "reserve" consists of gas that has been packaged in the pipelines, which allows for a mere two or three days of survival in the event of a supply interruption by the United States.

The only realistic alternative to reduce this dependence is to take advantage of unconventional reservoirs through hydraulic fracturing (fracking). To this end, it will be essential to adapt mixed contracts so that operators with experience and access to state-of-the-art technology find suitable conditions to participate, especially those related to money return, and it would be much better to explore other alliance vehicles that are more attractive and suitable than the mixed contracts.

The ideological considerations must be superseded by pragmatic concerns: The substantial resources present in these deposits will not be utilized without cooperation and transparency.

Nationalist Energy Policy and Confusing or Absent Regulations

The government has defined its route, privileging state-owned companies. However, a clear and flexible regulatory framework is indispensable to allow the incorporation of hydraulic fracturing under modern technical and environmental conditions, prioritizing the main objective of increasing production and adding reserves.

The debate on fracking must address perceptions that are based on outdated technologies. Today, advances in engineering make safer and more sustainable operations possible, with greater extraction efficiency and less environmental impact. The development of specific regulations that allow fracking is, therefore, an urgent necessity.

The CEO of PEMEX himself recently expressed in a forum in the Senate of the Republic that I had the opportunity to attend, that, “drilling techniques are no longer the same as they were many years ago. Today, we are talking about something different.” He acknowledged the potential implications of certain terminology, such as "fracking." He chose to address this subject indirectly to avoid calling it fracking; the political component does not cease to be present at all times. The bottom line here is that the government is clearly aware that fracking is the way forward, but is somehow caught up in political positions against it that were promoted by the previous administration.

PEMEX's Financial Weakness and Support from the Federal Government

PEMEX's plan contemplates financial instruments to improve its balance sheet and reduce debt. The recent placement of US$12 billion pre-cap bonds will reduce financial debt to US$88 billion by the end of 2025. In addition, the government has successfully placed another set of bonds in euros (€5 billion (US$5.9 billion)) to smooth the long-term debt maturity profile. To help with 2025 project funding, an investment fund will be created through the government development bank Banobras, with resources of up to US$13 billion, which will support 2025 projects.

The goal is for PEMEX to achieve financial self-sufficiency by 2027. However, an obvious risk remains: the resources released will hardly be enough to regularize the backlog of payments to suppliers, which amounts to some US$23 billion and growing. Most likely, the government will end up transferring more debt than planned or, failing that, postpone the goal of self-sufficiency.

In addition, the investment fund will further compromise the financial health of development banks, as it will increase their balance sheet exposure.

Value and Prioritize Farm-outs for Specific Projects

A clear example is the Lakach field. PEMEX has been trying to develop it for years without success, mainly because it is a deepwater gas field that requires large investments. Although it has previously signed and canceled agreements — and is currently under discussion with Grupo Carso — the current conditions make it unfeasible. The price of gas imported by pipeline from the United States (US$2.7-$2.8/MMBtu) is well below the estimated cost of production at Lakach (more than US$7/MMBtu), and PEMEX already has US$1.3 billion of sunk costs in this field.

In such circumstances, farm-outs emerge as the optimal strategy. They enable experienced private operators to contribute capital, operating capacity, and agility in decision-making. The aforementioned scheme finds application in onshore unconventional fields and deepwater fields.

Conclusion

Mexico has vast potential: close to 113 billion barrels of prospective resources, of which 57% correspond to unconventional reservoirs. The key is not in the “what,” but in the “how.”

The weaknesses are evident: high dependence on imports, limited infrastructure, tight public finances, and regulatory gaps. But there are also clear opportunities to redefine the course: modernize and make the public sector more flexible, activate strategic infrastructure, and consolidate a solid long-term vision.

If Mexico can successfully combine regulatory pragmatism, strategic alliances with the private sector, and comprehensive planning, it will be able to transform its weaknesses into strengths. The time to act is limited: The window of opportunity is open today, but it will close quickly if decisive actions are not taken and if politics and ideology take precedence over pragmatism and best business scenarios.

The potential is there, waiting to be unleashed; what will define Mexico's energy future is not the resources, but the will to transform them into results.