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News Article

Is Mexico’s Oil Bet Swimming Against the Tide?

By Peter Appleby | Tue, 06/16/2020 - 09:19

BP’s potential US$18 billion write-down of assets as reported by Bloomberg underlines the impact that COVID-19 has had on the oil industry and signals the direction the industry may be taking. Mexico, however, is on its own course.

According to Bloomberg, the British oil giant will soon make its largest write-down since the Deepwater Horizon disaster. The decision to move forward with the write-down was made after BP’s own estimations to cut oil prices by “between 20 percent and 30 percent” across the next few decades.

The news came as oil prices once again took a dip while countries began to act on a second wave of COVID-19 cases. India is set to reinstate its lockdown in Chennai in the state of Tamil Nadu, after cases have soared again, reports The Guardian. The lockdown will affect 15 million people.

In China, one of the largest oil consumers in the world, lockdowns have been imposed again in neighborhoods of the capital, Beijing, after 79 new cases were found following two months of zero spread, says CNN.

These instances have sent ripples of worry throughout the markets and resulted in the major mixes dropping in value on Monday morning, following last week’s wobbles. According to CNBC, WTI fell 17 cents to US$36.09 per barrel on Monday morning.

The global response to the pandemic resulted in the suspension of industry and on the movement of people. This led to oil prices falling into negative territory, as demand plummeted and storage space ran out. Consequently, the majority of the world’s operators slashed budgets for this year and next by up to 25 percent, while service providers cut jobs and companies, including drilling mainstay Diamond Offshore Drilling, declared bankruptcy.

BP, Shell, Repsol and Total are some of the leading IOC’s that have set out their green agenda as pressure for sustainable and environmentally friendlier energy sources mount. A recent Rystad Energy report predicted that upstream investment will be reduced 29 percent in 2020 in comparison to 2019, a 15-year low.

Mexico’s approach has contrasted that of other major oil hubs. The administration’s decision to suspend more bidding rounds until production is seen from the first batch will slow access of Mexico’s resource-rich subsoils. The environment created around energy in Mexico is also having the effect of making the country less attractive to international companies.

But the new global energy situation, brought forward by COVID-19, should give Mexican authorities pause for thought. The clock, which was already ticking on oil, appears to be getting faster.

The so-called Hacienda Hedge, a US$1 billion hedge strategy that guarantees Mexico a price of US$49 per barrel for its crude exports, has so far shielded Mexico from the heaviest impact of the price collapse. Bloomberg suggests that Mexico’s hedge could see the country receive US$6.2 billion. The Hacienda Hedge coverage is the most expensive sovereign hedge in the world. However, with the current market environment, Reuters reports that its price is set to grow by 40 percent every year. According to Reuters, “resources available to finance coverage are declining as the government has spent more of the stabilization fund it uses to pay for it.”

In a recent interview with Mexico Business News, Rystad Energy’s Latin America Vice President Schreiner Parker noted that slowing down accessing oil in Mexico may simply result in country receiving lesser value for its resources in the future.

There needs to be a change in government thinking in Mexico […] the country must understand that oil has a finite value. If there is still oil in the ground in 2060, it may be worth nothing. Mexico is at a turning point and we hope that it does not miss out on what could potentially be the last big wave of oil and gas investment,” he said.

Peter Appleby Peter Appleby Journalist and Industry Analyst