Mexican oil is taking hit after hit this year. First, a deadly fire led to disruptions in production and then output was once again hindered by the anticipation of hurricane Ida, not to forget the ongoing pandemic restrictions as Mexico experiences another surge in Covid-19 infections. As Hurricane season approaches, will Mexico be able to weather the storm?
A fire at Mexican offshore oil operations in the Ku-Maloob-Zaap oilfield killed five earlier this month and led to a drop in production of 420,000 bpd, around a quarter of Mexico’s total daily output, or around 0.5 percent of the world’s output.
Petróleos Mexicanos or Pemex, the state oil company responsible for the offshore operations, has repeatedly come under fire for its safety protocols, particularly following two fires in less than two months. The company has also been criticized for its poor environmental controls, burning off high levels of methane through gas flaring as well as other concerns.
In June, Pemex announced it would start reporting its carbon-equivalent emissions, after pressure from investors asking for the company to explain the significant rise in emissions in this year alone. But are these measures in response to growing global pressure too little too late? In a time where oil majors need to be seen as more responsible, both in terms of worker safety and in response to environmental degradation, Pemex appears to be failing on both fronts.
John Padilla, managing director at energy consultancy IPD Latin America explained, “It’s going to take more than a PowerPoint slide in their quarterly presentation to say that they’re handling ESG issues.”
Safety concerns about the company do not just stem from the most recent incidents. Plans to buy Shell’s Deer Park refinery in Texas were criticized by U.S. Representative Brian Babin based on Pemex’s inability to operate refineries to international standards.
In fact, Pemex’s self-reported safety challenges speak for themselves. From April to June this year, 32, or one in every 4,000 employees was injured across the refining, oil and gas exploration and production, corporative, and logistics operations. Moreover, its Covid-19 death toll has been one of the highest of any oil major, with around 600 employees.
Following a summer of challenges in Pemex’s safety controls, Moody Investor Service has now downgraded the company’s bonds. This will negatively impact Pemex, which is already around $115 billion in debt, the highest amount of any oil major.
Follow the most recent fire, Pemex acted quickly, bringing all 125 oil wells back online and resuming normal production levels within days. But Mexico’s oil industry continues to take hit after hit, not only in regard to Pemex operations.
Mexico faces the ongoing challenge of rising Covid-19 infections, as Delta hit the country hard this August sending many cities back to red in terms of hospitalizations and restriction levels. Travel has also been restricted between Mexico and the U.S. as well as with parts of Europe, meaning increased levels of uncertainty once again surround the country’s industries.
And to add to the mix, Hurricane Ida, a tropical storm that was upgraded to hurricane status last week, led oil firms to cut 96 percent of U.S. output in the Gulf of Mexico. On Sunday, several energy companies halted the production of 1.74 million bpd of oil in the region as Hurricane Ida hit Mexico’s east coast oil operations. Several offshore platforms were evacuated ahead of the storm as a safety precaution, leading many operations to completely shut down until after Ida passed.
And as operations start up again following the huge tropical storm, firms investing in the oil region must be prepared for the rest of hurricane season. Last year saw the largest decrease in crude oil production since 2008 in the Mexican Gulf, as a result of two August hurricanes – Laura and Marco. Output dropped by 453,000 bpd of oil, around 27 percent last August.
With these types of weather phenomena looking more commonplace, Mexico and international investors in the region must consider the consequences of these regular and unavoidable cuts to production.
Moreover, Pemex will have to take serious action on its safety and environmental protocols if it wants to regain its international reputation as a key player in the oil and gas industry. Meanwhile, the country, and foreign companies with a stake in Mexican oil, must be prepared for the growing severity of tropical storms in the region, which could send oil operations offline for prolonged periods of time around three months of the year.
While Mexico still offers significant potential for the future of oil, as it continues to develop both shallow and deep-water projects, the benefits must outweigh the challenges if it hopes to remain a major oil power in the Americas.