Mexico’s Near-Term Opportunities Highly Depend on Energy Supply

It is the time of the year where plans are tuned up to lead next year’s business expectations. As usual, several challenges ahead are in the loop. Investment in key assets is one of the game changes for many companies in the oil and gas sector, especially considering the current energy transition, resulting in a tighter time frame from an ROI perspective.

While Mexico’s energy policy is adjusted to fit with global trends more aligned with the energy transition (because it must happen, either through government decisions or pushed by market competitiveness), the oil and gas sector has many opportunities to increase production and contribute to Mexico’s overall economic improvement.

Unconventional plays are definitely one of the big opportunities for Mexico to increase oil and gas production, but efficient development necessarily requires the contribution of expertise, technology, and investment from private players to those like PEMEX that really can use a collaborative approach to increase their chances and effectiveness.

n Regarding PEMEX, clearly it will have a challenge operating Zama as a unified consortium. Drilling and infrastructural investment is elemental for it to succeed. The other key oil fields for PEMEX are Ixachi, Quesqui, Ayatzil and Maloob, where again, partnerships are key to allow PEMEX access to expertise and technology.

But what about opportunities for the near future in different economic sectors? And why do those highly depend on energy supply? Here are some aspects to consider,

• Nearshoring. So-called nearshoring is gaining attention in the economic discussions in different industries. This is not  something new for Mexico —maquila has been here for decades — but now we see a change in the direction of global companies in regard to the supply chain. As largely discussed, China’s position is key and Mexico has clear opportunities to take advantage of the USMCA. How well we use this advantage depends on how much the government learns from reality rather than sticking to ideological approaches.

• Foreign investment. Even though direct foreign investment has experienced some positive recovery in the last year, we are still seeing levels of investment similar to a decade ago. Now, there is an opportunity to add 2 or even 3 percent additional growth to annual GDP in the next couple of years just by incentivizing the capture of supply chain relocation into Mexico. The potential here is huge. We are talking about up to 500 potential companies with global operations that could select Mexico to invest in production facilities.  The first ingredient to make this happen is certainty and the second is energy supply, which fully depends on the legal framework and consistency of government policies.

• Talent/Education. Sadly, the focus of the government on prioritizing budget expenditure for social assistance programs has a terrible long-term downside. Do not get me wrong; yes, of course, in a country with close to 60 million people in poverty, those programs are important to provide some relief to those with no opportunities to meet even  elemental needs, but social assistance will turn much of the population into a dependent and eventually a low-grade workforce with no value added. Therefore, education is key to improving value and that requires access to technology in remote locations all over the country.

• Gas first and green close behind. Yes, renewable energy is key but so far, the lower hanging fruit is gas, and we need to use it as much and as fast as possible to supply energy demand and especially to relocate energy supply in different regions. This while we adjust energy policy to embrace the transition and try to catch up with the world. We are several years behind already. This will probably be helped by the USMCA discussions in progress. There is no other way around this and it is not that renewable energy has less importance than oil and gas, it is just the unfortunate reality where Mexico now finds itself and we need to move forward.

• Environmental impact. While most of the private operators are controlling their environmental footprint, we know that PEMEX is not precisely keen on preventing incidents with environmental impact, especially those related to methanol emitted to the atmosphere. This while we are still burning fuel oil to produce electricity — yes, probably less than expected but still. This is another key element to consider if we want to maximize potential, attract direct investment and use nearshoring to pump up our economy. The bad news here is that most of the 500 potential companies mentioned earlier have increasingly  stronger ESG policies, and if not enough green energy is available then we know what is going to happen.

• US East Coast. We know that in the last decade the intensive development of renewable energy in this region has significantly increased power supply. The US East Coast region needs to be in the loop for Mexico as there are opportunities there.  These include the supply chain, as many industries are gradually increasing access to green and cheaper energy supply and the connection can be furthered with the nearshoring opportunities. As well, many of the key assets that are currently working in that zone will be increasingly  available to work in the Gulf of Mexico, where we know we have infrastructure to maintain, investment to increase exploration and more than 50% of prospective reserves unexplored, not to mention the deeper water reservoirs that have to be used even though shallow reservoirs are becoming exhausted.

• Southwest Mexico and Yucatan Peninsula. The country’s development has been unbalanced, with the center and north regions having  more industrialized cities and economic development while the southwest has been historically behind (well behind!). In this balance, Yucatan has been the exception in the last decade. Something is being done so well there that it is now  the safest region to live in and has become a medical destination for many surrounding states as well as Americans in retirement. Its state GDP growth is well above the average of other states, there is internal migration from northern and central cities and, finally, it is attracting  highly valued talented people. But the main weakness has been the lack of energy, as the generation supplied by renewable sources is still in progress and faces challenges from adverse governmental policies. The solution in the short term is gas supply. Fortunately, the construction of a 700km pipeline (Cuxtal II) seems to be approved and will contribute to balance out the energy supply in the region. The project to upgrade the commercial dock in Puerto Progreso seems to be very promising and will add connectivity, making it a hub for maritime transportation. This again is an opportunity for commercial connections to the US Gulf and especially the East Coast.

I may be missing some other important factors on the opportunity horizon for Mexico, but what all the above have in common is they all highly depend on energy availability, either fossil-based, renewable or the right combination of both. It is clear that the oil and gas industry is still key for supplying energy until  renewables can get back on track in Mexico, but it is determinant that the potential be unlocked with the right combination of government and private investment, while private operators can expedite exploration and production working together with PEMEX,   which needs to do its homework  regarding environmental initiatives and focus investment in those areas where there is the most need from a technical perspective without ideological assumptions.