The Year in Review

The year 2015 marked a historic change in Mexico’s oil and gas industry, with the awarding of the first blocks in the newly open market. R1-L01, which tendered shallow water exploration blocks, took place on 15 July 2015 and oversaw the allocation of two out of 14 blocks. The two following bidding rounds, which respectively concerned shallow water production blocks and onshore production blocks, each experienced an increase in the award rate, eventually reaching 100% for R1-L03. Not only was 2015 marked by the opening of the country’s hydrocarbons market, but also by record-low oil prices. The year started with the WTI crude oil spot price at US$52.69 and continued falling until February, when it hit a low of US$29.44/b, while the Mexican Mix, trading at a discount compared with WTI, dropped below US$20 in early 2016. WTI has been crawling back up since then, with the Mexican Mix following this upward trajectory, reaching US$45.22/b at the end of April. Although the industry does not expect to see it return to US$90-100/b, it does have its hopes set on US$50/b in the medium term. Throughout this period, Mexico has proved to remain an attractive investment destination, although companies have been forced to rethink their strategy and priorities, with PEMEX being no exception.

In addition to a budget cut of US$5.52 billion, which represents 20.9% of the company’s 2016 budget, PEMEX also announced a change in Director General. José Antonio González Anaya, former Director of IMSS, will be in charge of deploying a sustainable strategy in order to strengthen the NOC’s financial position and help it reach its potential.

CRUDE OIL PRODUCTION

Crude oil production for 2015 totaled 2.267 million b/d, which is 162,000b/d or 6.7% less than in 2014. Several factors contributed to this production drop. Firstly, the natural decline in Cantarell’s production, as well as an increase in the fractional water flow of its wells, led to an 8.9% drop in heavy crude production. Secondly, the country experienced a 7.5% decrease in the production of extralight crude as a result of an increase in the fractional water flow at the Pijije, Sen, and Terra fields in the Samaria-Luna business unit, as well as a natural decline in production in the fields of the Bellota-Jujo and Macuspana-Muspac projects. Finally, the production of light crude oil was hit by a 3% drop due to delays in production that occurred as a result of the Abkatún Alfa platform explosion in April 2015. In general, fields in Bellota-Jujo, Cantarell, and Litoral de Tabasco, as well as the Samaria field, experienced a natural decline in production. The decrease in crude production was partially offset by a 36.6% increase in production at the Onel and Chuhuk fields of the Abkatún-Pol-Chuc asset, the Tsimin, Xux, and Xanab, fields in the Litoral de Tabasco asset, the Kambesha field in Cantarell, and the Homol field in Abkatún-Pol-Chuc.

During the first quarter of 2016, total crude oil production averaged 2.230 million b/d, a 3% decrease compared to the same period in 2015. The variation was caused by a 4.1% decrease in heavy crude output resulting from a natural decline in production and an increase in the fractional water flow of wells in highly fractured reservoirs in Cantarell. When excluding this field, heavy oil production remained stable based on the 850,000b/d produced from Ku-Maloob-Zaap. Light oil production experienced a 4.5% decrease due a decline in the Tsimín field off the coast of Tabasco and in Ixtal in the AbkatúnPol-Chuc unit. Additionally, the Abkatún Alfa 2 incident led to production deferrals. This decrease was partially offset by a 42% increase in light crude oil production at the Xanab, Chuhuk, and Onel fields. These fields reached an average production of 202,000b/d by the end of the first quarter of 2016. Production in the Xux field, which began production in June 2014, also helped offset the production decline, contributing 63,000b/d.

EXPLORATION

Exploration activities in PEMEX led to discoveries amounting to 1.1 billion boe during 2015. However, the low oil price had a negative impact on deepwater resources due to their development costs. Approximately 400 million boe in deepwater resources were reclassified as contingent resources. On the bright side, the company drilled 30 exploration wells in 2015 with a 45% success rate. PEMEX’s work in shallow waters led to the discovery of six fields, which amount to 650 million boe. Some of the fields discovered in 2015 include Xikin-1, Batsil-1, Esah-1, and Cheek-1 in shallow waters, which are estimated to have combined reserves of 350 million boe, while Cratos Hem were discovered in deepwaters. In January 1, 2015, Mexico’s 1P reserves stood at 9.711 billion barrels of oil, 15.290tcf of gas, and 13.017 billion boe. These figures decreased during the year, and on January 1, 2016, the country’s 1P reserves were 7.640 billion barrels of oil, 12.651tcf of gas, and 10.242 billion boe.

CRUDE OIL EXPORTS

The volume of crude oil exports increased from 1.142 million b/d in 2014 to 1.172 million b/d in 2015, representing an increase of 2.6%. Although the volume of export of light oil decreased, Olmeca and Isthmus, both heavy crudes, saw respective increases in their export volumes of 36.2% and 45.1%. The latter two are PEMEX’s priciest crude exports, with values of US$51.36/b and US$48.78/b. In the first quarter of 2016, revenues from crude oil exports totaled MX$69 billion, representing a 35% or MX$37 billion decrease. The drop in total export sales was driven by low oil prices and a 28% reduction in export volumes. The Mexican crude oil basket was at US$25.85/b in the first quarter of 2016, a decrease from the US$45.38/b seen in same period in 2015.

CRUDE PROCESSING

Crude oil processing totaled 1.06 million b/d in 2015, a 7.8% decrease compared to 2014, due to scheduled maintenance and non-scheduled operations, as well as overhaul works. Operational issues resulting from the quality of the oil supplied at the end of 2014 also contributed to the annual decrease. During the first quarter of 2016, total crude oil processing increased by 2.3%, amounting to 1.08mbd, due to an increase in light crude oil processing. The ratio of heavy crude oil to total crude oil processed by the National Refining System decreased by 3.6 percentage points. However, the ratio increased by 4.8 percentage points at the three revamped refineries, Minatitlán, Cadereyta, and Madero, as part of an effort to take advantage of highly specialized equipment to convert residuals and maximize the output of middle distillates.

NATURAL GAS PRODUCTION

Throughout 2015, the production of natural gas dropped by 2%, totaling 6.40mcf/d, mainly as a result of an 8% reduction in non-associated gas production due to scheduled reductions in drilling activities and in the completion of wells in the Veracruz and Burgos business units. The latter decreased natural gas production in those areas by approximately 7.6%. The southern region experienced a 13.4% drop in production. As a portion of total production during 2015, associated gas production represented 75%. The production of associated gas remained relatively stable between 2014 and 2015, with respective production of 4.81mcf/d and 4.82mcf/d. Natural gas production decreased by 10.1% during the first quarter of 2016, amounting to 5.17bcf/d. This was due to a decrease in associated gas production caused by the natural decline in production of crude oil and closing of wells with higher gas-oil ratios at the Akal field in Cantarell. Production referrals in Abkatún-PolChuc also had a toll in natural gas output levels. In addition, a natural decline in production in Burgos and Veracruz negatively impacted non-associated gas production.

NATURAL GAS PROCESSING

In 2015, natural gas processing decreased by 6.2% as compared to the previous year. This reduction is attributed to a decreased availability of sweet and sour gas from the offshore and southern region resulting from the Abktatún incident in April 2015 and a natural decline in the output from mature fields. Dry gas production decreased by 6.7%, 242mcf/d, while natural gas liquids production decreased by 9.8%. The production of condensates experienced a 7.1% decrease explained by a reduction in the supply of sweet condensates in Burgos and sour condensates in the southern region. In the first quarter of 2016, natural gas processing saw a 10.5% decrease to 3.8bcf/d as a consequence of the decreased availability of sour and sweet gas from the Burgos onshore and offshore assets. This also led to a 9.5% decrease in the production of dry gas and a 12.3% decrease in the case of natural gas liquid. The insufficient supply of sweet gas condensates from Burgos also affected the processing of condensates, which saw a 5.6% reduction during the first quarter of 2016, as compared to the same period of 2015.

PETROLEUM PRODUCTS

The total production of petroleum products decreased by 8.8% in 2015 compared to 2014, mainly due to non-scheduled maintenance and inspection operations, operational issues resulting from the quality of the oil supplied in the last quarter of 2014, and a decrease in the supply of gasoline production inputs due to preventive maintenance works at the continuous catalytic regeneration plant in the Cangerjera complex. The ultra-low sulfur diesel and gasoline plants in the Cadereyta and Madero refineries strated operations in 2015. Total petroleum products output decreased by 1.3% in the first quarter of 2016 compared the same period of 2015, which is explained by a decrease in production of natural gas and thus lower LPG availability.

PETROCHEMICALS PRODUCTION

The production of petrochemicals amounted to 4.5 million tonnes in 2015, decreasing 14% compared to the 5.25 million tonnes produced in 2014. This is explained by lower availability of raw materials due to maintenance and overhaul works in the Morelos ethylene plant and the NohochCiudad PEMEX-Nuevo PEMEX sour gas transportation system. During the first quarter of 2016, the production of petrochemicals decreased by 9.2% compared to the same period of 2015. Additionally, ethane supply was reduced and initial operations in Etileno XXI had a negative impact in the production of high-density polyethylene and ethylene oxide. The decrease in production of petrochemical products was partially offset by a 79,000-tonne output increase in the aromatics and derivatives chain due to an increment in the production of high octane hydrocarbons resulting from higher demand from the Minatitlán refinery.

PEMEX FINANCIAL PERFORMANCE PEMEX

has taken important structural measures to adapt its financial strategy and operational priorities to the current price environment, planning its budget based on a US$25/b oil price. In addition to the February 6, 2016, budget cut of US$5.6 billion, PEMEX will also benefit from the Federal Government Support Plan, which includes a cash flow injection of US$4 billion and a Fiscal Regime Improvement representing US$2.8 billion in permanent tax relief. In 2015, PEMEX recorded a net loss of US$30.3 billion as compared to a net loss of US$15.4 billion in 2014.