Mexico's Renewed Focus On Oil And Natural Gas

Mexico's new President Andrés Manuel López Obrador(AMLO) took office on December 1 and will serve one six-year term. It was the largest landslide in Mexico's recent history, and AMLO claims that he will head the biggest transformation since the 1910 revolution.

Energy is clearly at the top of AMLO's agenda. In order of importance, the focus will be oil, natural gas, and electricity.

State-owned Pemex's oil and gas output has been plummeting. Over the past decade alone, crude oil production has been declining 4-5% per year, dragging Mexico's share of global output down from 5% to 2%. Despite the 2013 Energy Reforms that brought deregulation to help, Mexico's oil output today is about 30% below the 3 million b/d that was promised by then-President Peña Nieto back in 2015

Given that Mexico's natural gas extraction is associated (i.e., coming along as a byproduct of crude oil production), the country's gas output has dropped 40% since 2012.

With overly limited E&P of new wells, proven oil reserves have spiraled from nearly 50 billion barrels in the mid-1990s to 7 billion today.

Mexico's oil and gas collapse is an immense problem. With a population closing in on 135 million people and adding $35 billion in real GDP every year, Mexico's is the fastest growing OECD energy user. Expected economic growth is a solid 3-5% per year, and oil and gas supply 85% of the country's energy.

Revenues are dwindling. Although down from 40% a decade ago, oil sales still account for 20-25% of federal revenues - an over reliance that has syphoned money and not allowed Pemex the chance to re-invest in more E&P. The ability to export has plummeted, with sales of crude to primary customer the U.S. dropping 60% in the past 15 years to 680,000 b/d in 2017.

For natural gas, Mexico's most vital source of energy going forward, falling production has meant soaring reliance on U.S. shale gas. Over the past 10 years, the strategy has been to displace fuel oil in power generation with natural gas. Today, gas accounts for over 60% of the country's electricity. And Mexico gets nearly 65% of its natural gas from the U.S.

This increasing reliance on the U.S. has Mexican leadership concerned because the U.S. has plans to export huge amounts of liquefied natural gas to all corners of the globe. China and India and others want U.S. gas, and we could be exporting 25% of our current production by 2025.

The new administration has generally opposed the 2013 Energy Reforms to deregulate and bring in the outside investment required to develop huge deepwater and onshore shale oil and gas resources. AMLO has recently suspended auction bid rounds for three years, a decision that has helped Moody's go negative again on Mexico's investment outlook.

A lack of sound energy strategy in Mexico is perhaps best exemplified by the fact that despite producing a lot of oil, a refinery shortage forces the country to export crude to the U.S. to be refined and then expensively imports it as product. AMLO wants to focus on refineries but these projects are highly expensive for Pemex, a highly inefficient company that has been reported as having over $100 billion in debt. Unwisely, "AMLO says foreign investors barred from refinery projects." Pemex is now slated to build an $8 billion oil refinery in Tabasco.

To rebound production, AMLO wants to give Pemex a bigger E&P budget. The 2019 national budget includes an increase of 19% for the Pemex budget, seeing it rise to over $23 billion. This is to meet his target of increasing current output to 2.4 million b/d by 2024. In turn, the hope is to ramp up natural gas production 50% in the next six years, to reach 5.7 Bcf/d by 2024.

Although the deepwater of the Gulf of Mexico could hold over 60 billion barrels of oil, AMLO has disliked the fact that over 40% of Pemex's budget has gone to deepwater projects, which will not yield oil until 2025, hampered as well by sunken oil prices. As such, more immediate results are the goal. Pemex plans to focus upstream investment on shallow water and onshore conventional fields in the southeastern states of Tabasco, Campeche, and Veracruz and additionally the onshore conventional fields in the northern part of the country.

With collapsing oil prices in recent weeks, AMLO says that he supports Pemex's world's largest hedging strategy. In October, "Mexico Spends $1.2 Billion to Lock in Crude Rally for 2019." The program earned Mexico $6.4 billion in 2015 when OPEC flooded the market and prices sunk.

There is an obvious need for more oil, gas, and electricity suppliers in Mexico. The private sector must be involved as much as possible, from E&P to pipeline building to the storage market.

It is absolutely essential that state-owned Pemex (oil and gas) and CFE (electricity) face competition. Both have become bloated and stagnant, a common occurrence for national energy companies that know they will always be favored. AMLO will favor Pemex and CFE but he has said existing contracts signed under the reforms will be respected

I hold out hope Mexico's energy reforms will be a great success. Thus far, the International Energy Agency has cited Mexico as an example for others looking to deregulate. Tens of billions of dollars of foreign investment injected. I argue that AMLO is a practical business man that knows outside investment is mandatory to modernize the energy sector.

Notice that he has offered no alternative plan to the reforms, and the auctions could easily be re-installed. The legal framework of the 2013 Energy Reforms is still strong.

AMLO believes that the oil and gas industry is over-regulated though, and he has been working to cut budgets and workforces for regulating agencies, such as the CRE.

Although more private companies are taking part in the country's energy deregulation (e.g., there are around 25 non-state natural gas marketers), some are understandably quite hesitant: "Mexico’s Corruption Is Even Worse Than You Think."

Ultimately, I implore AMLO to not revert to resource nationalism, and I forever remain an optimist: "Mexico's Emerging Oil Opportunities Are Great."