The Oil Industry’s Comeback and 2022’s Underlying Challenges
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The Oil Industry’s Comeback and 2022’s Underlying Challenges

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Perla Velasco By Perla Velasco | Journalist & Industry Analyst - Tue, 12/13/2022 - 17:08

This year, Mexico’s oil and gas industry made a great step ahead in the recovery measures taken after the 2020 pandemic. However, various underlying issues regarding permitting and lacking new bidding rounds continue to be problematic. Along with newer conflicts based on the USMCA, these issues have shaped 2022’s market.

If energy security was not the top priority of any country this year, the outcome of the invasion of Ukraine reaffirmed just how essential it is. Oil and gas prices showed great volatility amid years of tensions that escalated into an armed conflict. Oil prices quickly rose after Russia first struck Ukraine. Moreover, OPEC decided to cut oil production to 2MMb/d, which put pressure on an already narrowed Mexican production capacity.

Although these changes benefited Mexico’s crude export revenue, the country was hit by higher fuel prices itself amid its renovation of the National Refining System (SNR). It was only during the last few months of the year, oil prices started to deflate. Despite advice from the IMF, the Mexican government relied on IEPS subsidies to fight inflation. While the formula to calculate this subsidy was modified due to an 8 percent increase in inflation, IEPS collection ended up amounting to a loss of MX$88.59 billion (US$4.51 billion) in 2022. It was not until the last weeks of 2022, with lower oil prices, that subsidies were cut gradually.

On the back of volatile prices, the government contracted an oil hedge to shield the 2023 budget. Oil price expectations for 2023 stand between US$70 and US$75/b, but Deputy Minister of Finance Gabriel Yorio confirmed that Mexico protects the Mexican mix should it fall below the US$68.7/b mark, normally covering from 200 to 300MMb.

Despite President López Obrador’s energy security promises, PEMEX’s financial state revealed how deep the challenge of turning around decades of spiraling debt truly was. López Obrador instructed the NOC to decrease crude oil exports to increase internal refining but according to Moody’s Investors Service, this was a flawed strategy. PEMEX lost money during 3Q22 from its refining business. As the end of 2022 approaches, PEMEX increased its refined production, although imports increased too. Equally, the goal to decrease fuel oil production was not achieved. Nevertheless, PEMEX CEO Octavio Romero Oropeza reported that the acquisition of Deer Park turned out to be a great decision. According to Romero, the investment has already been retrieved and the refinery is already contributing to energy security.

SENER reported on the development of the landmark Dos Bocas refinery, christened Olmeca by the government, saying that as of December of this year there is a 96.2 advancement. The refinery will start commercial operations at a 50 percent capacity by 3Q23. With an investment advancement of MX$235.79 billion (US$11.89 billion), Rocío Nahle, Mexico’s Minister of Energy, reported that security processes were being carried out before it could go into operation.

Exploration activities also paid off this year. PEMEX strengthened its reserves and private players contributed to national production. The NOC increased its 1P oil and gas reserves for the second year in a row, with a total of 7,382MMboe added to its portfolio from Jan. 1, 2020 to Jan. 1, 2021, which represents an annual increase of 4.8 percent. Analysts said this is a great achievement despite PEMEX’s debt constraints. 

In terms of production, PEMEX remains behind the 1.8MMb/d production goal, already adapted from higher estimates earlier this year. Nevertheless, the NOC is not far off and has managed to reverse a long trend of declining production recently. Private companies continue to contribute more as well: Eni saw its operations boosted after the arrival of a long-awaited floating production storage and offloading (FPSO)  facility this March, whereas Hokchi and Fieldwood are making significant progress, too.

The NOC reported that its debt decreased this year, estimated to reach US$100.43 billion by the end of 2022. While many exploration and development plans from the private sector were approved by CNH, a slew of areas granted have been returned. However, according to the National Hydrocarbon Commission (CNH), this is a normal process and is a sign of a healthy industry environment in which operators feel comfortable focusing on what creates the greatest value.

According to SENER, natural gas consumption has increased steadily over the past years while production has been declining since 2015. Nevertheless, CFE’s capacity to interconnect and distribute gas increased, widening its ability to sell its surplus supply to the industrial sector. Furthermore, The Mayakan and the Sur de Texas - Tuxpan pipelines’ injection capacity increased. What is more, CFE celebrated an agreement with ENGIE to expand the Mayakan pipeline.

Experts have highlighted that Mexico’s unique position and natural gas prices pose a great opportunity to further strengthen its energy capacity as well as benefit from nearshoring opportunities. However, the country continues to be very much dependent on US gas imports. “As observed from past events, natural gas supply chain disruptions in the US had and will continue to have important social and economic consequences in Mexico. Untapped natural gas reserves present Mexico with the opportunity to become an energy-sovereign country, to the benefit of its people and economy,” Merlin Cochran, General Manager, AMEXHI, said to MBN.

This year, the possibility of a USMCA energy panel was a cause for concern for the industry. Energy policy created discontent among private players and Mexico’s trading partners reached out to discuss a solution. “Against this backdrop, undue stress is being generated on the energy sector because of the Mexican government’s insistence on a nationalistic approach to the energy sector, irking our main commercial partner, the US. Clearly, Mexico has not honored some of the guidelines of the USMCA and will probably end up losing the contested controversies in discussion at the time of writing,” said Fernando Cruz, Business Director, Dolphin Drilling.

Amid the discussion, CRE’s stalled service station permits started to finally go through during 2H22. Throughout the year, many service stations returned to work with PEMEX. After the NOC’s control of the supply market fell to 73 percent in 2021, this year it regained 85 percent control. According to ONEXPO, changes in the type and number of companies that manage gas stations indicate maturity in the industry and the development of a freer market.

The energy transition remained highly relevant, as environmental concerns have made their way up to the strategic plans in the industry. PEMEX faced criticism over its safety and environmental practices. Pressured to meet production goals the company ran the risk of possible negative consequences. Several oil spills and accidents were reported this year. Moreover, according to Reuters, the NOC preferred to risk millionaire fines for excessive flaring rather than affect production.

In the context of COP27, Mexico promised a reduction in gas emissions of 35 percent by 2030 at COP2. Soon after, PEMEX reported on the steps it was taking to become more environmentally responsible. The NOC announced that it would stop flaring in Ixachi by January 2023. PEMEX also signed a collaboration agreement with the Environmental Protection Agency (EPA) for 1H22 to help it reduce its emissions. According to the Mexican Institute of Oil (IMP), there is a clear demand for clean fossil fuels and it is taken into account for its activities. “We are focusing on supplying technological solutions to support PEMEX on the incorporation of reserves, on reducing risks in exploratory drilling and to maintain and increase production. In downstream activities we participate with PEMEX in its plans to expand refining capacity, which has been boosted by the rehabilitation of the six refineries in the system, the purchase of the Deer Park refinery and the construction of the Olmeca refinery, the latter has been a priority task to the IMP since the project planning phase,” Marco Osorio, Director General, IMP, said to MBN.

Photo by:   Twitter @Pemex

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