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Mexico’s slowly reforming oil and gas industry

Hydrocarbon Engineering,

Business Monitor’s latest report looks at how Mexico’s oil and gas industry is now beginning to reform. Never before has a Mexican energy sector report been more critical and attainable. Without the reform and a resulting increase in foreign investment, the country is set to move away from becoming one of the world’s largest oil exporters to a new importer over the next 10 years. Business Monitor has reported that whilst Partido Revolucionario Institucional (PRI) has introduced a proposal to remove long standing limits on private sector involvement in upstream activity, whether there is a substantial increase in interest from major international oil companies will be largely determined by secondary legislation wording and specific contractual details. Business Monitor retains a relatively pessimistic forecast for the Mexican oil and gas sector.

The forecast

The report expects there to be a steady decline in Mexico’s proven oil reserves and production over the next 10 years, with the country moving to become a net importer rather than one of the world’s biggest net exporters. Production has been declining for several years and there is a significant amount of time left before new production comes online. Also, some of the country’s most important fields are maturing at a rapid rate, encouraging the trend in reserve depletion.

Reinforcing prediction

Business Monitor’s bearish view of the Mexican oil and gas industry is reinforced by several interconnected fundamentals.

  • Pemex’s relative inexperience in deepwater drilling.
  • High tax.
  • High debt burdens.
  • Current inability for Pemex to work with foreign partners.

Mexican pipeline imports of natural gas have grown in parallel with the US natural gas production boom, because the imported gas is prices at the US Henry Hub benchmark, keeping imports cheap despite surging demand growth. The prices have a reinforcing effect and therefore will support future demand growth. Business Monitor are expecting this trend to remain in place for the foreseeable future, with its associated negative implications for Mexican domestic natural gas production, underpinning the country’s gas growth forecast of 1%/y in the long term.

Foreign investment and interaction

The stakes in liberation of the Mexican energy sector are high. At the time the report was written, PRI had put forward a reform proposal, which would amend the constitution to allow private sector actors to play a more significant role in upstream activity. This is an important step, but there is some risk that the government party’s proposed reform may not be sufficient enough to reverse the country’s declining oil production as it centres on a profit sharing model which is less attractive to international oil companies than concessions or production sharing frameworks.

In the report Business Monitor describe how they believe that the extend to which Mexico is able to boost investment will be largely dependent on weather forthcoming secondary legislation is favourably written and how lucrative the contract terms on offer are. 

Adapted from a press release by Claira Lloyd.

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