• Planning seen as key for future policy
• Opinions vary on what Mexico should focus

Sheky espejo, Platss S&P Global

MEXICO CITY
EnergiesNet.com 09 01 2023

The pendulum of Mexico’s energy policy has swung from total openness to state protectionism in the last decade. So, as the country approaches its 2024 presidential election, market participants and industry observers are calling for the country’s leaders to define a clear and consistent strategy for what Mexico will do with its vast oil and natural gas resources.

Mexico is sitting on roughly 110 billion barrels of oil equivalent in prospective resources, most of which are currently in the hands of state oil and gas company Pemex. Observers say Mexico risks missing the opportunity to develop those resources if it fails to define its strategy quickly, although ideas on how to do this vary.

Mexico’s crude output is expected to remain flat unless there are clear actions to liberalize the sector again, said Nick Blanco, an upstream analyst at S&P Global Commodity Insights. In his projections, Mexico’s crude production will remain at around 1.6 million b/d until 2030.

“Although there are some projects in the country that will have an increase in production, such as Zama, they will not be able to be able to significantly lift the overall output as the large Pemex fields will continue their decline,” Blanco said.

Although energy transition and decarbonization efforts globally are increasing, the world cannot simply stop depending on oil from one day to another and crude will continue to be important in the short and medium terms before it is replaced, observers said. And Mexico needs to act quickly to take advantage of that last wave of investment in its energy sector, they said.

During the current administration of President Andres Manuel Lopez Obrador, planning in Mexico’s energy sector has been abandoned and the availability of data has been limited, said Arturo Carranza, head of energy projects at Akza Advisors. From delays in the publication of data to market reports disappearing entirely, the lack of transparency has allowed the government to conduct its policy without technical explanations, he said.

“Mexico needs a comprehensive planning exercise that shows the way in the short term, medium term, and long term,” he said.

Mexico’s advantage

When planning its energy strategy, Mexico has an advantage over other nations: its resources are so abundant that it needs not rely on one source for its national policy, said Leonardo Beltran, a fellow at the Center on Global Energy Policy at Columbia University in New York.

“The country has the right conditions to develop a diversified portfolio that includes onshore and offshore deposits of oil and gas, as well as unconventional resources,” said Beltran, who is based in Mexico City. There is capital in the market available and willing to participate if the state lacks the resources, he added.

During a recent review of the oil and gas exploration and production areas in Mexico, the National Hydrocarbons Commission identified 187 areas “fit” to be offered to private investors. Although Lopez Obrador decided to halt the oil rounds predecessor Enrique Pena Nieto organized from 2015 to 2017, the legal framework remains intact and the next administration could retake them, observers said. But for that to happen, the government needs to sit down and plan its strategy, they added.

The planning should be done using a holistic approach that considers the global needs and avoids the ideological premises like “energy sovereignty” that have been used so far, Duncan Wood, senior advisor to the Mexico Institute at the Wilson Center think tank, told S&P Global.

In its analysis of Mexico’s energy policy, the Wilson Center has identified several issues that must be addressed, Wood said. These include, he said, a clear policy for its gas resources, a strategy for the power sector that ensures availability of clean and affordable electricity for foreign companies establishing operations in the country, investment in transmission infrastructure and a strategy to create the talent needed to serve nearshoring. All this requires the involvement of private capital, he added.

“It is the only way to squeeze all the juice of the energy industry,” he said.

Priorities

All observers agree that a clear policy is needed to attract investments, but there are different views as to what resources Mexico should prioritize in its strategy.

For the companies in the upstream industry, more openness is better.

“There is interest in all the resources, whether they be ultra-deepwater crude or gas in unconventional deposits, and companies should be allowed to bid for whatever they find interesting,” said Merlin Cochran, head of Mexico’s upstream association AMEXHI, which includes Shell, BP and Eni among its members.

With knowledge generated and infrastructure developed by the private companies in recent years, future rounds will enjoy different economics than previous rounds, such as the possibility to create clusters, Cochran said.

“The future rounds could execute precision shots that are less risky,” he said.

For Jorge Perez, an analyst atrisk and financial advisory Kroll, although there is a lot of potential both in the deepwater and in unconventional resources, the latter may be a better option for the country to attract investments and increase short-term output.

According to the National Hydrocarbons Commission, Mexico holds 64 billion boe of prospective resources in unconventional deposits, 37 billion of which are available and the rest are in the hands of Pemex, which is not developing them at the moment. Most of the resources identified have been located in the northern states of Nuevo Leon and Tamaulipas. Those states are border the US.

“Gas has always been on demand, and across the border there are companies with plenty of experience and infrastructure that are already familiarized with the formations,” Perez told S&P Global.

Farm-outs

Jaguar Exploration and Production is one of the companies interested in developing Mexico’s gas resources and one which would like to see the oil rounds come back.

Particularly with respect to gas, Mexico is “in desperate need for more production,” said Warren Levy, the Mexico City-headquartered company’s CEO.

Mexico’s total gas demand stood at 9.1Bcf/d in June, as power burnneeds soared to 5.4 Bcf/d, S&P Global data shows. The increase in demand led to an increase in imports from the US to 6.9 Bcf/d, as domestic production remained flat at 2.7 Bcf/d, according to the data.

“More investment in the gas sector is needed in Mexico to ensure that it does not become a barrier to growth,” Levy said. There are vast areas of the country with deposits that have not been assigned and would be of interest to investors, he added.

But some are more skeptical.

Marco Cota, CEO of consultancy Talanza Energy, agrees that the unconventional resources are faster to develop than deepwater deposits and that they could probably attract more interest from investors, but he said that the real “treasure” of Mexico and what would attract the most interest from global investors is the resources currently in the hands of Pemex.

“What the next administration needs to do is to farm out the areas given to Pemex under Round Zero, which hold the majority of the reserves; there is where the long-term potential lies,” Cota said.

Bringing partners through farm-outs makes more sense to increase recovery factors that could significantly boost production at current fields, like Cantarell or Ku-Maloob-Zaap, which are in decline, he said.

Cota, who was part of the team of high-level officials that designed the liberalization process that began in 2013 under Pena Nieto, notes that the prospective resources that are left unassigned may be vast, thought mostly in an exploratory phase.

“To make the right decision and take advantage of nearshoring and the last wave of global investments in upstream, the next administration in Mexico needs to sit down and think about all these factors and make a decision,” said Severo Lopez Mestre, senior energy and policy consultant for Mexico and Latin America at Chinese multinational Huawei.

Going forward, the policy of using public funds to help Pemex could be too costly politically, and the next administration must choose to share the risks, even if it means also sharing on the profits, Lopez Mestre said.

“Mexico must avoid the dream of energy sovereignty,” Lopez Mestre said, noting that not even big economies like Japan or China, which are large energy consumers, aim to produce the oil and gas all they use.

The geopolitical, environmental and economic conditions have changed and Mexico risks missing opportunities if it does not act quickly, Lopez-Mestre said.

“We are already late,” he said. “Going forward we as a country could take good decisions, but the time the country has lost will never be recovered.”

spglobal.com 09 01 2023