Mexico’s Crude Oil Future Is In Jeopardy

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By Viktor Katona

The attentive reader might have come across numerous articles about Mexico’s numerous discoveries in the past months. Heavily indebted, mired in a myriad of corruption cases and facing the prospects of terminal (albeit gradual) output decline – Mexico in general and PEMEX in particular needs positive market stories that it can embrace as its narrative, a version of its future that does not necessarily mean to obsolescence. Yet upon closer inspection, much of the articulated narrative might seem rather counterintuitive. If anything, Mexico’s future seems to be tilting towards natural gas and light sweet crude, moreover, its future would be tangibly hit should foreign drillers be limited in their possibilities.

The pre-election pledges of President Lopez Obrador to increase Mexican crude production to 2.6mbpd by 2024 have so far remained a pipe dream, seemingly everything contributed to the opposite recently. On the other hand, participating in the OPEC+ cuts has cooled the narrative of Mexico’s continuously decline, now PEMEX’s production has been stagnating at 1.67mbpd (the average of Q2 2020 volumes) despite recurring bad weather conditions like the Cristobal and Amanda tropical storms that have brought about a series of field shut-ins. Interestingly, Mexico remains a participant to the OPEC+ agreement concluded in March 2020 when It promised to cut output by 100kbpd to 1.686mbpd – meaning that Mexican producers have underperformed the quota by almost 20 000 barrels per day.

Mexico’s exports, however, have been experiencing a much more significant downward slide. The crux of the matter lies in AMLO’s pledge to maximize domestic refinery output whilst bringing light crude imports from the United States to a halt. For this reason, PEMEX is building the 340kbpd Dos Bocas Refinery aiming to keep Mexico’s flagship crude Maya at home. This in itself will decrease Mexico’s exports in the post-2023 horizon, so not only are PEMEX’s current export volumes jeopardized by the ongoing corona virus nightmare and the investment curtailments that it has entailed, there will most probably be no rebound for the better. This is an especially noteworthy development for US refiners as Mexico’s other grades (Isthmus, Olmeca) have all but disappeared from the American market and Maya remains the only major stream.

Graph 1. Mexican Crude Exports to the United States in 2017-2020 (‘000 barrels per day).

Expectedly, the COVID-19 market slump has left an indelible mark on Mexico’s upstream segment, too. Of the 19 exploration wells that the National Hydrocarbon Commission (CNH) approved in Q2 2020, only 11 were drilled and just 5 resulted in discoveries. PEMEX remains the main driller in the country as 60% exploration wells and 96% of production wells were spudded by the national oil company. Concurrently to cutting exploration wells, PEMEX has cut back on using private drilling rigs – according to media reports the total number that they have renounced on stand at 76. Interestingly, Mexico’s legacy fields Ku-Maloob-Zaap and Cantarell will also suffer the fate of many other offshore fields.

Graph 2. Operating oil wells in Mexico in 2017-2020.

New discoveries might provide some momentum for Mexico in general, despite their relatively low number is Q2 2020 (a mere 3 fields were certified by CNH). Ironically, the two larger finds – Polok with estimated crude reserves of 187MMbbls and Chinwol with 88MMbls – were drilled by Repsol and its partners (PTTEP, Petronas and Wintershall Dea) in Mexico’s deepwater block 29 which was previously undrilled and untapped. PEMEX has had one discovery which despite wielding crude of remarkable quality (43° API for a shallow-water Tabasco find is really noteworthy) is only assessed at 32MMbbls of recoverable reserves. On the other hand, it has to be noted that PEMEX’s recent Ixachi gas/condensate discovery remains Mexico’s hottest gas prospect as the NOC pushes forward with its plan to drill a total of 47 wells at the site, with a view to swiftly bring gas output to a plateau level of 639 MMCf/day (6.6 BCm per year).

Mexico’s oil industry continues to be torn apart by the ongoing PEMEX court hearings whereby the former CEO of PEMEX Emilio Lozoya accused Enrique Peña Nieto (President of Mexico in 2012-2018) and his government of using the Mexican national oil company as a tool for the surreptitious bribing of national MPs. Initially an investigation into the dealings of Lozoya himself, focusing primarily on his dealings with Brazil’s Odebrecht, the case has grown into a national soap opera with implications for most of Mexico’s top officials in the Pena Nieto administration, coming in very timely for President Lopez Obrador who might use it concurrently as a national distraction amid an ever-worsening coronavirus pandemic and as proof that his long-standing opposition to Mexico’s 2014 energy reform has always been spot on.

Unfortunately for Mexico, the AMLO administration has found no other way out of the current quagmire than to seek a “strengthening of PEMEX”. Concurrently to the Lozoya case and the issue of structural corruption within PEMEX, President Lopez Obrador might trigger another long-running dispute: having flaunted the possibility of revising Mexico’s 2014 energy reform both legislatively and constitutionally. Looking at PEMEX’s current profitability numbers (in H1 2020 the Mexican NOC has generated a whopping $26 billion loss, of which $24 billion was booked in the first quarter) it seems rather disingenuous to claim that the state tightening its ties to PEMEX has reversed the crash course that the NOC remains at. To provide just one illustration of PEMEX’s woes – Its total financial debt tally already stands at $107 billion.

All things considered, one thing is almost certain: against all the difficulties and challenges PEMEX has been and will potentially face, it would be a miracle if AMLO’s vows of resurrecting crude production work out. The government seems to understand this, otherwise it wouldn’t have already introduced several amendments into Mexico’s 2021 budget proposal. The 2021 production target stands at 1.86mbpd whilst the 2024 “main” AMLO objective was lowered from 2.6mbpd to 2.28mbpd. In this context, the COVID-19 pandemic might serve a very useful explanation as to why Mexico underperformed, once again, its ambitious objectives and if politically expedient just pass over the profound structural issues that will continue to hamper its oil prospects.

Crude Oil

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