Peak Oil is Closer than Ever. What Will Mexico Do?

Rystad Energy’s annual review of world oil resources predicts that the global health crisis created by COVID-19 “hastens peak oil” as it takes 282 billion boe in recoverable oil off the table for good.

The report highlights just how significant pandemic’s impact has been on the world’s global industry. In 2017, the influential Norwegian energy consultancy said that global recoverable oil resources stood at 2.2 trillion barrels, “73 times the current annual production rate.”

With the 282 billion boe removal, total recoverable resources now drop to 1.903 trillion barrels. Those recoverable resources in “remote exploratory areas” implying the need for a greater financial outlay and, potentially, more difficult conditions, are the first to be taken off the recoverable total.

According to the report, 42 percent of remaining recoverable resources are within OPEC territory, while the other 58 percent resides within territories outside of OPEC’s reach.

Rystad Energy’s Head of Analysis Per Magnus Nysveen said that “non-OPEC countries account for the lion’s share of ‘lost’ recoverable resources with more than 260 billion barrels of undiscovered oil now more likely to be left untouched, especially in remote exploratory areas.” The company’s statement reports that its “annual global energy outlook reveals that the COVID-19 downturn will expedite peak oil demand,” which may start alarm bells ringing in Mexico.

Government actions that have intended to fortify PEMEX’s position following years of falling production and mismanagement have effectively slowed the extraction of oil and gas and therefore the potential income for Mexico.

On one side, the administration is putting a costly and highly-consequential bet on oil. Works on the Dos Bocas refinery are still in early stages and the US$8 billion cost estimate appears low. Last month Rystad Energy’s Schreiner Parker told Mexico Business News that “Rystad Energy is hearing numbers like US$12 billion to US$13 billion for the construction, rather than the original US$8 billion.”

Bidding rounds were suspended by SENER despite the recommendations of the country’s independent oil and gas governing body CNH, which had said PEMEX could benefit from involvement with private companies, via methods like farmouts. At the time, Forbes reported that CNH Commissioner Sergio Pimentel said “canceling the bids is closing a door for PEMEX and the rest of the companies we have in the country today. There are more than 70 companies, 35 of which are Mexican. It is a bad sign.”

On the other side, the government’s oil bet is coming at a cost to the country’s burgeoning renewable energy sector. Private interests have taken CFE to court after it announced that transmission fees could be hiked by 800 percent. Energy journalist and industry analyst at Mexico Business News Cas Biekmann reported that “those affected are private companies on so-called ‘legacy contracts’, which had been signed before the Energy Reform in 2013.”

Rystad Energy makes clear that, with peak oil now on the horizon, it is imperative that Mexico, so focused on oil, acts quickly to generate value from its resources while it still can. The COVID-19 pandemic and the low oil price environment that is brought, has already caused delays in Mexican projects. In an article published today, Murphy Oil VP of Global Exploration Gregory F. Hebertson told Mexico Business News that the “two to three-well exploration and appraisal campaign that we were planning to begin in late 2020 prior” would be put back. “Unfortunately, given the prices in the market and our subsequent need to reduce our CAPEX, we decided to defer the program,” said Hebertson.

As AMEXHI Director General Merlin Cochran explained to Mexico Business News, “operators have completed 100 percent of the contractual commitments they signed up for across the bidding rounds.” Operators have contractual obligations that need to be met, driving the economy and helping oil regions recuperate after the heavy economic impact of the previous oil price collapse and COVID-19. But beyond those commitments, operators have a choice: to continue investing in Mexico or not.

With peak oil not so far away and the heavy reliance that the Mexican administration is placing on the health of the national oil industry and its ability to generate income, now is the time for reconsideration of tactics.