Upstream Sector to Face Challenges in 2023

The Mexican oil and gas upstream sector will remain active in 2023, with private companies ramping up exploration and production. However, the sector will face a shortage of rigs and PEMEX will remain under pressure, warns S&P Global.

Drilling by private operators and PEMEX will increase during 1H23 as companies rush to meet their commitments by the end of the year, according to exploration and production plans approved by CNH.

From the over 100 contracts that stemmed from the 2014 liberation process in Mexico, only a fraction of them are for production and companies have been busy. The Top 4 private crude producers in Mexico, Lukoil, Hokchi, Petrofac and Eni, will see a sharp increase in production compared with the last three years, according to CNH.

The upcoming months will play a crucial role for private companies to decide whether to continue their exploration activities. For instance, companies like TotalEnergies and Winthershall DEA will drill to determine whether to hold onto their blocks, according to S&P Global.

“Private companies have started carefully picking the best opportunities from their portfolios. In 2022, over 20 companies relinquished complete blocks or a part of them to the Mexican government as companies recalibrated their strategies,” reads the report. Relinquishments did not mean there were no resources but that companies decided to focus on more promising options, according to the CNH.

PEMEX will also remain active in 2023. The Mexican treasury assigned the state-owned company MX$404 billion (US$20.2 billion) to spend on exploration and production, MX$44 billion (US$2.27 billion) more than in 2022. CNH has authorized PEMEX the drilling of over 20 exploration wells in 2023.

Although the upstream sector will remain active, companies will face a major challenge in the form of rig shortages. Over the past 12 months, nine rigs left Mexico and only one has arrived so far, according to S&P Global data.

“Middle East clients are increasing drilling activity and according to market participants, they are willing to pay attractive fees to rig owners, outbidding others," says Aparicio Romero, Analyst, S&P Global Commodity Insights.

Most of Mexico’s rigs were contracted by PEMEX. Tight availability of rigs makes logistics challenging for private companies, as they are forced to use the same equipment for different wells or even share rigs with others.

In addition, PEMEX will face challenges of its own, with US$8 billion in interest payments in 2023 and 2024. The state-owned company will be under pressure to meet its production target for 2023, which stands at 1.9MMb/d, says Adrian Duhalt, Research Scholar, Center on Global Energy Policy, Columbia University: “PEMEX and the [country’s] president are likely to underdeliver on that promise, although it is important to recognize the company did manage to stop the decline from previous administrations."