Mexico’s O&G Sector Toward the End of the AMLO Administration

The current federal administration under President Andrés Manuel López Obrador (AMLO) set ambitious production goals but faced challenges due to a decline in the production trend and the financial strain on PEMEX. Initially aiming for 2.6MMBD, the focus was on increasing production from existing fields, as well as shallow water and onshore projects.

While the production decline has been halted, the new target of reaching 2MMBD by the end of this administration is considered achievable but insufficient. Private producers, currently at 100,000 bpd, also contribute to overall production.

Private producers have shown positive performance, with 19 discoveries since the eEnergy Reform, significantly increasing estimated reserves for assigned blocks. However, their performance could be further improved if oil rounds were reactivated.

Throughout the administration’s term, the change in energy policy has failed to improve hydrocarbon production. This is largely due to an ideological approach that prioritizes state companies' dominance in the sector. The pursuit of energy sovereignty is often confused with energy security.

But where are we headed toward the end of this six-year term and what could and should change to have a robust and sufficient O&G sector to supply energy demand?

First, where are we headed toward the end of the current administration?

Continuing with the current trend in energy policy and regulatory control without relevant changes may limit future potential and goals. While the replacement rate of proven reserves is positive, insufficient investment in exploration, particularly in deepwater, poses challenges for replacement rates in the next decade. Reserves only support 10 years of production at the current rate.

It is important to acknowledge that the energy transition will gradually reduce the global relevance of the oil and gas sector, although it will not disappear entirely. Despite an increase in total investment approved by CNH, reaching US$48.2 billion by the end of May this year compared to approximately US$41.8 billion the previous year, this positive increase does not necessarily indicate it is sufficient to significantly boost production.

Considering the state of reserves, the sector investment, and energy policy, it is likely that the energy sector is experiencing stagnation. This stagnation, coupled with challenges faced by private renewable energy producers in the electricity sector, has the potential to greatly limit the country's growth and miss out on the benefits of nearshoring, which could potentially contribute an additional 3% to GDP. However, to tap into this potential, sufficient investment in oil and gas as well as green energy is crucial.

Reaching the 2 MMBD target requires an investment greater than the current investment approved by CNH. On the other hand, private producers have returned some contractual areas; no doubt the exploration success factor is the main explanation but is uncertainty in the legal framework part of this? And how can we compensate for this if there are no more allocation rounds in the future? The rate of increase in private production is very positive, but it could be much better. As an example, the best discovery made since the Energy Reform is ZAMA, whose future potential is estimated at a production of 180KBPD. Are there more ZAMAs? Surely, if we take into account that practically half of the prospective resources located in the Gulf of Mexico have not been explored!

Regarding the regulatory framework, I think that there will be no substantive changes during the remainder of this administration, but there will probably be an opportunity to discuss and improve the sector's regulations until 2025. This will depend on the balance in Congress after the election in 2024.

On the other hand, there are many projects that will remain unfinished at the end of 2024. Among them we have projects in the rehabilitation of various refineries, the Dos Bocas refinery, infrastructure projects, and others., so the result will be very similar to maintaining the status quo of the energy sector but without major developments that allow us to think that we will have a robust sector and grow at the pace required to supply Mexico’s future energy demand.

What could or should change?

PEMEX

First, PEMEX’s brutal debt, which to date is approximately US$107 billion, must be solved. Some restructuring and bond placements have been made to relieve short-term pressure; however, the impact has been marginal due to the deterioration of PEMEX’s investment grade and the high interest rates contracted for new debt. Although the government has invested resources and reduced the special tax rate, the tax continues to be a heavy burden that limits the generation of net profits in an environment of high prices that will eventually decrease in the future and further complicate the situation. In the next three years alone, about 38% of the total long-term debt will mature.

To control debt growth, it is essential to undertake a comprehensive review of the state-owned company's structure. This includes streamlining the organization, addressing labor liabilities, investing in asset repair and maintenance, and divesting assets where outsourcing would be more efficient. Additionally, implementing digital transformation in internal processes and fostering partnerships with the private sector are crucial for operational efficiency. Prioritizing suppliers with technological innovations and proven results, rather than solely focusing on the lowest price, is vital. A talent management system should ensure that only qualified personnel are assigned to key decision-making positions. Furthermore, selecting projects with long-term potential, rather than easy wins, is recommended. These are just some of the steps needed, and the success will depend on the effective implementation of these decisions.

Energy Policy

Another thing that should change is, as I have mentioned in other articles, the focus of the energy policy. I believe that the ideological part should not necessarily be opposed to the idea of having a diversified sector that prioritizes energy security beyond the idea of sovereignty that goes down a different path. International pressures will start to be greater and greater, and the reduction of the carbon footprint will become, as it is becoming, a deal breaker in terms of investments. Compliance with the Paris Agreement by 2024 seems unattainable and, although CRE has modified its regulations to artificially increase the percentage of clean energy generation, we will not be complying with the agreement.

The change of government every six years, the difficult financial situation of PEMEX, the need to increase production and the potential of prospective resources in the Gulf of Mexico could open a new window of opportunity for the participation of the private sector in the exploration and production of hydrocarbons as well as the participation in the generation of clean energy. Everything will depend on the level of radicalization of the policy in the next year and on who wins the next presidential election and, of course, it will depend on whether reality tells us that there is a need to change.

Investment in Oil Is a Necessity

Global oil companies have increased their profits due to high oil prices, which have soared in recent years; however, they are not reinvesting in the oil and gas business. With the energy transition in mind, many are prioritizing their investments in clean energy and profit withdrawal for shareholders. This is a concern since the lack of investment in exploration and production can threaten the world's energy security; despite the progress in the transition, the demand for fossil fuels remains high and will continue to increase.

I am concerned that this approach sacrifices energy security to give greater importance to sustainability, which, don't get me wrong, is important, but underinvestment in oil and gas may have adverse effects on the ability to meet energy demand in the current and next decade, which may trigger greater risks and economic crises.

JPMorgan estimates the investment shortfall for 2030 to be close to US$400 billion, and it is also estimated that even the combination of fossil energy and green energy at the current rate of growth will not be enough to meet the increase in global demand.

Investment cannot and should not be done by PEMEX alone, but by the private sector, with better efficiencies and ensuring income for the Mexican state (without risk), which it can access with greater economic and technical resources that other 50% of prospective resources that remain to be explored.

Conclusion

Hydrocarbon production in Mexico has faced significant challenges during the current administration. Despite efforts to halt the decline in production and achieve ambitious goals, there is still a need to implement changes in energy policy and encourage the participation of private producers to boost the sector.

While modest progress has been made and the decline in production has been halted, it is crucial to recognize the importance of a long-term vision and the need to invest in exploration, especially in areas such as deepwater, to ensure the replenishment of reserves and maintain the viability of the sector in the future.

In addition, it is essential to consider the global energy transition and the growing importance of renewable energy sources. While oil and gas will continue to play an important role in the energy mix, it is necessary to adopt a strategic vision that encompasses both energy security and diversification toward more sustainable sources.