Mexico’s Oil & Gas Industry in 2021

As the year comes to a close, Mexico’s oil and gas industry can look back at 2021 and see a reasonably successful continuation of the recovery efforts that were launched in 2020 as a response to the pandemic. At the same time, new challenges have made it clear that the road out of financial and productive struggle remains as long and as treacherous as ever. 

The Mexican government’s decision to designate upstream activity as economically essential at the start of the pandemic in 2020 continued to pay off dividends in 2021, making Mexico one of the most competitive exploration and drilling markets at a global level. This is true not only because this activity has remained constant, while other markets have been slowed or closed down completely by COVID-19, but because exploration and drilling success has been common throughout this time, revealing the lingering potential of Mexico’s geological resources. As CNH Commissioner Alma América Porres noted in her latest interview with MBN, “the rate of exploration success has been quite astonishing: our average is at 54 percent. This figure is incredibly high when you consider that the global average for deepwater activities, for example, is around 30 percent, which is already considered significantly high. In Mexico, we are looking at an average drilling success rate for deepwater activities of 56 percent.” 

Porres also highlights the role that CNH has played in making sure that this activity was continuous. During 2021, CNH approved over 22 exploration plans, including modifications to previously approved initiatives, plus seven approved appraisal programs. This means that between 2019 and this year, CNH approved a total of 189 exploration plans and 29 appraisal programs. “The discoveries that defined 2020 and 2021 cannot be understood outside of the context of all previously approved exploration plans, which speaks to the importance of our industry as an ongoing process,” she said.

These discoveries included ENI’s discovery in the Sayulita-1EXP well back in August, which is part of ENI’s Sayulita Exploration Prospect within Block 10, and Lukoil’s late November discovery of an offshore oil field in the Yoti West-1 exploration well of Block 12, the first one drilled in the block and located 60km off the coast of Tabasco, with a possible reserve of 250MMB. At the same time, other major IOCs conducting exploration activities in Mexico chose this year to remain in the country despite their divestment from similar exploration projects in other parts of the world. Examples of this trend include BHP’s decision to continue its work in the deepwater Trion project and the approval of BP’s exploration plans. PEMEX also experienced an important discovery in March, in the onshore well Dzimpana-1, which now adds to similar discoveries made in the same month over the last two years in fields such as Ixachi and Quesqui. 

PEMEX: A Steady Rescue Amid Political Uncertainties 

The NOC’s exploration campaigns demonstrated its ability to share in the upstream success that private operators experienced throughout the year. Their production levels also continued their upward trends despite occasional setbacks. PEMEX’s finances were also assisted by a comprehensive government aid program that included a recently approved package that will provide a US$3.5 billion cash injection. However, the NOC still reported a debt of approximately US$113 billion at the end of 3Q21, a level that remains too high for credit rating agencies and business analysts. These lingering doubts were compounded by the proposal made earlier this year for a new energy legal framework that would remove institutions which represent an important backbone for investor confidence, such as CNH. The discussion and approval of this new legal framework ended up being postponed until 2022. 

The NOC also experienced significant structural changes which raised some eyebrows among the press and markets. These included the recent changes made in top executive positions, such as the replacement of CFO Alberto Velazquez Garcia for Antonio Lopez Velarde, formerly PEMEX’s Risk Management Chief Officer. PEMEX’s downstream operations have also been part of this structural change, as the government’s shift in LPG pricing and distribution policies have led the NOC to approve the formation of a new subsidiary that aims to sell petroleum products, gas and petrochemical products to the domestic market.

Midstream, Downstream: Infrastructure Development Poses Larger Questions

PEMEX’s infrastructure development, which has included important investments in midstream and downstream facilities despite budgetary limitations, has raised larger existential questions about the industry’s future in the context of the energy transition. For example, the progress made in the construction of the Dos Bocas refinery and the purchase of the Deer Park refinery in Houston, soon to be finalized, are part of a strategy to reduce all hydrocarbon imports for the country to become as self-sufficient as possible when it comes to fuel consumption. However, the environmental impact of focusing resources in this energy model without an equivalent investment in the development of natural gas infrastructure and new renewable energy sources, puts the industry at the center of growing doubts regarding this administration’s true environmental priorities, especially as 2021 saw fuel oil, the most polluting of refined commodities, become PEMEX’s top refined product. Meanwhile, PEMEX’s lack of dedicated natural gas development as evidenced by their midstream strategies in 2021 also revealed a lack of prioritization of environmental benchmarks. COP26 marked 2021 as another decisive year in the global climate change debate, yet PEMEX policies remain at the center of Mexico’s environmental and economic conundrums. 

While some analysts have argued that PEMEX’s focus on productivity and “energy sovereignty” is part of a strategy to commercialize more oil and oil products so as to increase public revenue which will later be used for energy transition investments. This would appear to be contradicted by the fact that PEMEX’s crude exports decreased significantly in 2021. Rising crude prices have meant that PEMEX managed to keep its upstream profitability stabilized despite these falling export numbers, but President López Obrador has made it clear that he wants crude oil exports to decrease to zero so that all national production serves the domestic market by being inputted into Mexico’s midstream and downstream infrastructure. This rather extreme scenario means that all the progress witnessed in 2021 might still be directing the industry toward an uncertain future with indeterminate opportunities for investment and growth, not to mention an energy consumption paradigm of vague economic and environmental reliability. However, these questions should not distract from the fact that Mexico’s oil and gas industry did successfully fulfill its ongoing recovery objectives for 2021, and thus its reach is yet to exceed its grasp.