7 Oil & Gas Problems That Mexico Must Solve

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7 Oil & Gas Problems That Mexico Must Solve

1. Since peaking in 2004, Mexico’s oil production has been sliced in half to below 2 million b/d Although nearly 45% back then, oil revenues still account for 20-25% of the federal budget. Amid plummeting production, the country has actually been very lucky that domestic demand has remained surprisingly flat, thanks to a successful gas displacing fuel oil program in the power sector. Mexico’s proven oil reserves have collapsed from 50 billion barrels 20 years ago to just 7 billion barrels today. Exports to primary customer the U.S. have plummeted 60% since 2006 to 700,000 b/d in 2018, exacerbated by the American oil boom that has soared U.S. production 140% since 2008.

2. With upside domestic demand for gasoline and diesel fuel very strong, new President AMLO (who only gets to serve one six-year term) wants to focus on more refineries, to reverse the highly expensive and non-sensical requirement to export domestic crude to the U.S. for refining and then imported back into Mexico again. These refineries, however, can cost at least $8 billion. Last reported at $107 billion, state-owned Pemex is the most indebted oil and gas company in the world, where profits that should be used for more E&P investment get taken by the government.

3. With half of Mexico poor, leadership must satisfy the largest incremental energy needs of any member of the OECD. To illustrate, per capita, Mexicans consume just a third of the electricity and the oil of their OECD counterparts. This “absolutely sure to soar” domestic demand must be affordably met, or leadership confronts de Tocqueville’s “Revolution of Rising Expectations.” Huge amounts of domestic oil and gas are required because increasingly turning to foreign suppliers is sure to up costs.

4. Mexico does not have the money or the experts needed to exploit its huge deepwater crude reserves (60 billion barrels or more) and the substantial shale oil and gas resources in the northeast of the country (550 Tcf of gas). Although the 2013 Energy Reforms were meant to bring in outside investment, technologies, competition, and expertise, President AMLO’s reversion to resource nationalism gives potential partners obvious pause for concern.

For gas and oil, Pemex will surely be favored, while state-owned CFE will be favored for power and gas. Other than that, non-state energy companies and third-party buyers in Mexico have no assurances of what the future will hold. AMLO must understand that he has helped make non-state players more hesitant and afraid of an overbearing federal government that might not even respect already signed contracts. Oil, gas, and power auctions are getting canceled for no explained reason. In short, deregulation efforts to modernize Mexico’s energy sector could collapse.

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