Moment of Truth for Mexico's Hydrocarbon Sector

In recent weeks, hydrocarbon prices have reached numbers not seen in decades. Although many would like to say that they saw the fall in prices coming, it is evident that no mathematical model could have predicted it. Moreover, no one could have predicted that a "tweet" could cause a growth effect of more than 40 percent in the price of hydrocarbons in a single day.

In addition to the drop in prices, the COVID-19 crisis appeared. A health crisis that has triggered the loss of human lives, put the health and tranquility of millions of people around the world at risk and also caused economic activities to be interrupted or slowed down.

It is noteworthy that the Mexican oil company, PEMEX, maintains growth within its strategies thanks to large projects that include investment in hydrocarbon exploration, production and refining. Such projects are expected to increase the production of hydrocarbons and other oil products under a framework of austerity and reduction of expenses.

Companies worldwide, in the face of a crisis, have had to make adjustments in their expenses and even take more radical measures such as stopping projects, early retirement of their personnel, declaring bankruptcy and even stopping production of thousands of barrels that have turned unprofitable given the fall in prices.

Mexico, a country with more than 70 oil companies with exploration and extraction contracts, has also suffered. However, given the circumstances, companies would expect CNH to understand that the projects could suffer ups and downs during this global crisis. Considering that many companies are currently working on projects with defined times and objectives, CNH would be expected to consider the situation and to act in accordance with a “Fortuitous Event and Force Majeure” framework. Additionally, the fall in oil prices has added other factors to be possibly reconsidered among its strategies.

Surely companies operating in Mexico may face liquidity problems, greater competition for projects with other countries, limited funds from investors, among other barriers that make it difficult for them to return to the conditions they enjoyed before the sanitary crisis. Therefore, continuity of oil operations in Mexico and the country's oil industry could be at greater risk.

Hopes are that contracts will be sufficient to maintain the sector or that measures will eventually be taken to guarantee its continuity, since having oil investments means employment, contracts for national companies and, above all, maintaining Mexico’s hydrocarbon exploration and extraction capacity.

It is a crucial moment for the country because it will be possible to determine whether the conditions and the current measures will be enough to maintain a competitive economic sector. If that is the case, companies will continue investing in the exploration and extraction of hydrocarbons, as well as participating in the innovation required to overcome this difficult and challenging time for the industry.

Gaspar Franco was CNH’s Deputy Director-General of Opinion for Production Project in 2010. Later, Franco held various positions at CNH until he was elected by the Mexican Senate as Commissioner in May 2016. Before joining CNH, Franco worked for 14 years and held several engineering positions at PEMEX. Moreover, he has been a member of the Engineering Faculty at UNAM since 2011 and has published various papers related to Mexico’s oil industry. In addition to being a member of the Mexican Association of Petroleum Engineers (AIPM).