Oleum’s Fertilizer Plant: Key for Mexico's Oil and Gas Growth

Q: What main factors influenced your 2024 investment plan, and how did your 2023 investments play out?

A: This year, we focused on reviewing our technical plans as part of our transition phase under CNH regulations. We moved from the evaluation to the transition stage and are now heading toward the development stage, which includes the drilling of three more wells.

Throughout 2024, we worked on identifying best practices and techniques for well drilling, assessing the mechanical integrity of our existing wells, and conducting workovers to reduce downtime and the need for extensive maintenance. This approach aims to make our investment program more efficient.

We collaborated with various companies to analyze the integrity of our current wells, ensuring they are ready for production. Additionally, we closely monitored the political landscape, particularly the elections, to understand the signals and decisions being made by the new administration. We are pleased with the appointments, especially in PEMEX, as they involve experienced and capable individuals, which minimizes the learning curve and benefits the entire country. Overall, the government's positive signals toward private investment and efforts to increase private sector participation have made us feel quite comfortable with our plans.

Q: What role will private companies play in the new oil and gas scenario? How will companies and operators such as Oleum continue contributing to the sector?

A: There is a sense of reassurance in the market. Investors are confident in their investments, and programs for private projects will continue without interruption. However, collaboration strategies with PEMEX still need some clarification. Currently, we are seeing that third-party services will continue to be provided to PEMEX, but collaborative investments in drilling are still uncertain. We expect more clarity by 1Q25 or 2Q25, when we may see new opportunities for private investment in drilling new fields or increasing production.

The government’s goal is to expand the oil production platform, but the role of private investment in this process remains unclear. PEMEX’s leadership, composed of experienced individuals, will need to establish a framework that allows private investment to play a role while ensuring a secure environment for such investments. In the past administration, conditions were not particularly promising, with bidding processes being canceled multiple times. It is essential to create mechanisms that ensure a reliable return on investment to attract private participation in the sector.

Q: How are your operations in the La Laja field progressing, and what have been the main challenges you have successfully navigated?

A: The main challenges we have faced are the lack of financing and some technical issues. The main reason for the financing challenge is the perceived risk associated with the project payment stream. Development banks are hesitant to provide support because we sell to PEMEX, so there is uncertainty about payment security. This is a key issue that must be addressed to unlock financing opportunities. Without support from financial institutions, relying solely on partner equity makes it difficult to grow at the desired pace. This is the most significant obstacle we are currently working to overcome.

Q: What factors influenced the investment decision for Oleum’s urea plant in Reynosa?

A: The first element was the significant demand for fertilizers in Mexico, particularly urea, which national production struggles to meet, resulting in high import levels. Second, the government of Tamaulipas expressed interest in supporting the project due to its location, while the federal government also indicated its availability to back us. Given this interest, we partnered with two other groups to develop the plant in Reynosa, a US$1.3 billion project.

We have secured the location, land, and completed conceptual engineering, as well as a market study. The plant will serve both the Mexican fertilizer market and as a liquid additive for diesel in the United States. We are currently in the permitting phase, with about 50-60% of the environmental, social impact, and local permits secured.

This large-scale project has received significant support from the governor of Tamaulipas, and the three partner groups have aligned their expertise to drive it forward. The plant will occupy 40ha, and we have a clear vision and strategy for its development. The main challenge now is securing offtakers and financing to move the project to a "ready to build" stage. Our goal is to complete the project and begin operations before the end of 2027.

The fertilizer industry in Mexico has faced significant challenges, particularly with PEMEX plants struggling to maintain production due to natural gas shortages, which are a key input in fertilizer manufacturing. Historically, countries like China were major exporters of fertilizers to Mexico, but recent restrictions on exports have compounded the problem, as China now prioritizes its own domestic demand. This situation has created a risk of fertilizer shortages in Mexico, which could disrupt the agricultural supply chain. 

If local production is insufficient, Mexico may be forced to increase food imports, as the domestic agricultural sector would be unable to meet demand.

Q: How is Oleum’s portfolio shaping up, and what projects are you most excited about in the near future?

A: Oleum is involved in a significant project in Colombia, which is now an active investment. We hold a 15% stake in the Sinu 9 natural gas field. We began investing in this field, and production started in early November at 10MMcf/d, with plans to increase this to 200MMcf/d. Next week, we will receive official recognition from Colombia’s National Hydrocarbons Agency (ANH) confirming our 15% ownership of the exploitation rights for this field. This project is important for Colombia as the country is facing a natural gas shortage. By increasing production, we are contributing to the national economy’s energy needs. 

We have strategically diversified our portfolio across the United States, Mexico, and Colombia to capitalize on regional opportunities. The natural gas price in Colombia is significantly higher than in Mexico, where proximity to the US market influences pricing. This diversification allows us to maximize returns by investing in regions where gas prices and market conditions offer the best opportunities.

Q: What are the main challenges you identify in utilizing natural gas in Mexico to continue driving economic development?

A: The primary challenge lies in the fertilizer project, which relies heavily on natural gas as the main input for producing ammonia and, subsequently, urea. We plan to utilize natural gas in Mexico to support the production of these fertilizers, thereby contributing to increasing Mexico’s fertilizer supply. The government of Tamaulipas envisions allocating a portion of this production to the state, while another part may be directed to a federal fertilizer distribution program. Additionally, many distributors in Mexico supply fertilizers to small-scale farmers, which helps ensure the entire supply chain is covered.

Given the plant’s annual capacity of 700,000t, we must consider the seasonality of fertilizer demand. Fertilizer consumption is not constant throughout the year; it peaks during planting seasons. Therefore, we must carefully manage cash flows to sustain this investment year-round. Beyond the Mexican market, we also see demand in the United States, particularly in Texas, where urea is used as a diesel additive. This market can help us mitigate the seasonal demand fluctuations in Mexico.

Q: What are Oleum’s main objectives for 2025 and what is your strategy for next year?

A: Our main objectives for 2025 are to expand both nationally and internationally. We are exploring opportunities in countries such as Ecuador and Argentina, where we are assessing potential projects, including in the energy sector. We aim to conduct thorough analyses to determine viable investment opportunities in these regions. 

Domestically, we plan to continue expanding by seeking new business opportunities to offer services to PEMEX. Additionally, we intend to advance the La Laja project and complete our investment plan to achieve financial stability. This will enable us to consider further growth in both international markets and additional projects within Mexico.

Oleum explores and develops hydrocarbon fields in Mexico, Colombia and the USA. As a branch of Cosmos Global Holding, Oleum aims to be a leader in the energy sector by prioritizing sustainability and innovation. The company engages with local communities and adopts new technologies to increase efficiency and safety.