The rise and fall of Mexican oil and gas

Materials World magazine
1 Apr 2018

After 75 years of state activity, Mexico opens its door to outside involvement in the country’s oil and gas sector to shore up the diminishing industry. Khai Trung Le reports.

On 18 March 1938, then-President of Mexico Lázaro Cárdenas signed the Mexican Expropriation of Foreign Oil. He nationalised all petroleum reserves, facilities, and foreign oil companies in the country, and declared all minerals within Mexico as belonging to the nation. He would later create Petróleos Mexicanos (Pemex), a state-owned company holding a monopoly on the country’s oil and gas (O&G) industry, as countries including the UK, the USA, and the Netherlands began sanctions against Mexico.

More than 75 years later, on 20 December 2013, current President Enrique Peña Nieto formally signed an amendment to Mexico’s Constitution, effectively opening the O&G industry to private local and foreign investors. Under the reforms, while the Government continues to hold exclusive ownership of hydrocarbons underground, foreign contracts to explore, develop, and produce are now permitted. Once the hydrocarbons reach the wellhead, they can change ownership. Other parameters of the reforms include flexible rates for royalties on a sliding scale, a standard corporate income tax, and a reduction in profit sharing taxes. Several bodies were strengthened or newly created to facilitate the reforms, including the Energy Regulatory Commission and National Hydrocarbons Commission.

Pemex estimates there are 29 billion barrels of oil equivalent (BBOE) in conventional and deepwater, and another 60 BBOE in shale. Although oil production in the country has declined by 25% from peak production in 2004, Pemex believes opening up the sector to external companies will help support the industry – dozens of international companies have been exploring opportunities in Mexico since, with the promise of billions in investment.

Momentum built up slowly, following the first round of bids and assignment in 2016, to persistent success in 2017. Zama-1, the first private offshore well in the country operated by Talos Energy, Sierra Oil & Gas, and Premier Oil that was discovered to hold 1.4 BBOE in place, far above the 500 million barrels expected. This mirrors a statement from Italian multinational O&G company, Eni, stating the resources found in its Gulf of Mexico field are significantly larger than anticipated. Potential is not restricted to upstream opportunities, but also within pipeline and port facilities, can be found across the entire value chain. Over 90 O&G production contracts with international companies including Royal Dutch Shell, Chevron, and Exxon Mobil have been signed since 2015.

So far, the outlook is positive. Professional services network Deloitte believes Mexican oil production will increase by at least 40%, up to 3.5m bbl/d, and double gas production from 5.7bln cubic feet to 10.4bln by 2025. This would push Mexico from twelfth to the fifth largest global oil producer. But while industry has gleefully engaged in the radical change across the country, the reforms may be undone within.

Playing politics

President Peña Nieto is moving swiftly to enshrine his sweeping energy reforms into a modernised North American Free Trade Agreement, and with little surprise – a general election will be held on 1 July, and the future of energy reforms is decidedly uncertain.

Presidential candidate forerunner Andrés Manuel López Obrador has signaled a desire to review current oil contracts and freeze new hydrocarbon auction rounds, a move that may shake international investors’ faith in the reforms. Miriam Grunstein, Chief Energy Counsel at Brilliant Energy Consulting, Mexico, is unsure energy reforms passed under President Peña Nieto will survive. She speculates Mexican businesses may be favoured, reducing competition and putting strain on a domestic industry that is yet to be fully formed. ‘Mexico already has a problem with crony capitalism, and we don’t want that to be aggravated,’ Grunstein said.

Mexican Congresswoman and leader of Morena, Rocio Nahle, has taken a stronger stance, stating outright that Obrador is committed to reversing the energy reforms, as well as ending imports of cheap fuel, increasing production at local refineries, and strengthening Pemex.

The makeup of O&G exploration and production (E&P) contracts is split between three departments – the energy ministry, responsible for technical and financial requirements, the National Hydrocarbons Commission, which awards contracts, and the finance ministry, which determines the economic formula. Contracts may be scuppered if opposition occurs within any of the three divisions. Grunstein said that Mexico has the right to unilaterally terminate any contract, and that the reform was ‘based on the fact and belief that every single administration after this one would support the reform’.

Happy holidays

18 March is a national holiday in Mexico. The country celebrates Día de la Expropiación Petrolera. There are stories of parades throughout the streets and women donating silver and jewellery to aid against the international sanctions imposed upon Mexico, back in 1938.

Outside of the country, the reforms look like a clear-cut success. But they have proved unpopular with the general public. According to polls from energy and commodities information provider, S&P Global Platts, only 20% support the energy reforms, while 61% of Mexicans want them abolished.

In 2014, Deloitte noted in the report, Mexican energy reform – Opportunity knocks, that the industry will benefit from less geopolitically challenging issues than countries including Nigeria and Venezuela, and a more forgiving geology than the Arctic. There was no mention of the at-the-time potential storm of public dissent and the Sword of Damocles that is the 2018 election hanging over the future of the country’s energy reforms.

Perhaps more frustratingly for the energy community, the reforms are a secondary issue, according to Lourdes Melgar, former Mexican Deputy Secretary of Energy for Hydrocarbons, who identifies crime and corruption as the prevailing concern approaching 1 July. Despite billions of new investment, the international energy community could find itself without a voice in two months time.