Mexico’s Production Drop to Last Until 2021By Peter Appleby | Thu, 07/23/2020 - 18:21
Prices have remained volatile this week as the fear of COVID-19 outbreaks persist and US cases continue to climb. Nevertheless, a group of several super-majors committed to reducing their upstream emissions to aid Paris Agreement goals, while OPEC predicted Mexico’s production drop would remain until at least 2021 and former CNH Commissioner Gaspar Franco made an argument for gas.
The Oil and Gas Climate Initiative, which counts super-majors like Shell and BP among its members, announced that it would reduce the collective average carbon intensity of member companies’ aggregated upstream oil and gas operations to between 20kg and 21kg CO2e/boe by 2025, from a collective baseline of 23kg CO2e/boe in 2017. The OGCI’s announcement is intended to “support Paris Agreement goals” and comes at a time when many oil companies are setting net-zero goals themselves. At the start of this year, BP announced that it would “become a net-zero company by 2050 or sooner,” followed by Total and Shell, among others.
Former CNH Commissioner Gaspar Franco this week wrote an Expert Contributor article for Mexico Business Publishing arguing that gas will be central to Mexico’s energy security. In his article, Franco suggests that with a long-term energy vision, both gas and renewable energies can be mainstays within the Mexican energy mix. He points out that Mexico’s reliance on the US for gas means that Mexico is susceptible to changes outside of its control. But gas is used commonly in Mexico as a direct source of energy, as well as at combined cycle plants to generate electricity. Mexico, says Franco, “has the potential and the opportunity to increase gas production to reduce dependence on foreign sources and generate conditions that allow the country to balance its energy matrix.”
In May and June of this year, Mexico cut its oil output by 100Mb/d as part of the OPEC+ agreement to reduce oil production by 9.7MMb/d in the wake of the price collapse. This commitment was met but the country’s production has remained below its pre-pandemic position. Now, OPEC has forecast that the country’s production will remain 50Mb/d below pre-pandemic levels for the rest of the year, with a small recovery of just 10Mb/d in 2021. However, in 2021, OPEC predicts there will be a “recovery of the world economy and energy markets” though it admits that this outlook could change considering the uncertainties surrounding new COVID-19 outbreaks around the world.
The price of Mexico’s famous oil hedge, known as the Hacienda Hedge, is rising due to the volatility of oil prices. This price rise means that the government will proceed with caution ahead of its purchase this year. Minister of Finance Arturo Herrera told Bloomberg that “buying hedges in an extraordinarily volatile market is expensive, so we need to be cautious.” The hedge has been a powerful form of protection during the downturn where prices went negative. Mexico should receive a US$6 billion windfall from its hedge this year.