Over the past decade, Mexico’s crude oil production has been falling due to a natural decline at mature fields and a lack of significant start-ups to compensate. Over the past years, Mexico has opened its energy sector to private investment, ending a seven-decade monopoly of its state oil firm Pemex.
Last year, Pemex’s crude oil production dropped, again. OPEC and the International Energy Agency (IEA) expect Mexico’s production to continue to fall this year.
But last year was also a year of two very significant oil discoveries in Mexico — a huge offshore discovery by private companies, a first in 80 years, and a large onshore discovery by Pemex.
With its landmark energy reform from 2013, Mexico now hopes to attract a growing number of international companies to explore its offshore waters in a bid to offset declining production and fill state coffers with potential royalties.
On January 31, Mexico will hold an auction for deepwater oil blocks for which major international companies have been pre-qualified to participate — including Chevron, ExxonMobil, BP, Shell, Statoil, Total, Eni, Hess, Inpex, Pemex, Repsol, and China Offshore Oil Corporation.
But these deepwater blocks will have to compete for the oil majors’ attention with other promising offshore areas in the Americas such as Brazil and Guyana.
In addition, there is some uneasiness about a political risk in Mexico as incumbent President Enrique Pena Nieto — the architect of the energy reform — is completing his last term in office this year. The front-runner for the July 2018 presidential election is a leftist populist candidate, Andres Manuel Lopez Obrador, who has pledged to hold a referendum on the energy reform and review the oil contracts with international firms. Although it’s far from certain that Obrador would entirely undo his predecessor’s reforms, there’s industry concern that the Mexican market could present some difficulties for foreign investors, or that an Obrador presidency could create uncertainties in the regulatory landscape.
Attractive investment opportunities are crucial for Mexico to lift its crude oil production. Pemex Exploración y Producción, the upstream unit of Pemex, has seen its crude oil production drop each year since 2009, with the average production down from 2.601 million bpd in 2009 to 2.154 million bpd in 2016. In 2017, production was less than 2.1 million bpd in each month, with the last above 2-million-bpd production figure in June 2017. Production in November and December was even less than 1.9 million bpd.
According to OPEC’s latest Monthly Oil Market Report, oil supply from Mexico is expected to have dropped by 220,000 bpd annually in 2017, the largest non-OPEC supply decline last year, followed by China. Mexico’s production decline will not be so steep this year, according to OPEC, with the country forecast to lose just 140,000 bpd of oil production in 2018.
The IEA also expects Mexico, alongside China, to see its production drop this year, but strong growth from the U.S. and increases in Brazil and Canada are expected to lead to a total non-OPEC production increase of 1.7 million bpd in 2018.
Still, it’s not all doom and gloom in Mexico’s oil sector. Last summer, the energy reform started to pay off when a consortium including foreign companies struck oil in a world-class discovery off the Mexican coast, with initial estimates suggesting that Zama-1 holds in excess of 1 billion barrels of oil.
Then in November, Pemex announced the largest onshore discovery in the last 15 years—excellent quality light crude oil and gas—with estimated volumes similar to the Zama-1 discovery. Globally, the volume of oil discoveries hit an all-time low last year, but Mexico made the top three countries in terms of largest volumes discovered in 2017, together with Senegal and Guyana, Rystad Energy has estimated.
Since 2012, an average of 400 million barrels of oil equivalent (boe) resources have been discovered yearly in Mexico, Aatisha Mahajan, Exploration Analyst at Rystad Energy wrote in an October 2017 article. However, shallow-water discoveries in mature areas have taken an average of six to nine years to start up, while recent discoveries are not substantial enough to reverse the declining trend in Mexico’s production that has been down since 2007, with annual declines of nearly 9 percent between 2014 and 2016.
Rystad Energy has estimated that Mexico’s offshore still has around 36 billion boe of undiscovered resources, and further successful exploration has the potential to upturn the production trend by 2024, according to Mahajan.
To do this, Mexico needs policies and contract terms attractive enough to compete for Big Oil’s investment.