Mexican reforms "on thin ice"News // August 11, 2015
Douglas-Westwood (DW) says the future of reforms in Mexico could be on "thin ice."
"After almost eight decades of Pemex monopoly, the Mexican energy sector is entering a new era of foreign oil company participation," said DW. "A decade of steady decline in domestic oil and gas production has incentivised the Mexican government to lift the regulations and allow international companies to start developing offshore projects in Mexican waters. The government is keen to attract private investors to its energy sector with the hope of kick starting its struggling economy.
"Over the last decade Mexico’s oil production decreased at a compound annual growth rate (CAGR) of -3.3 per cent. This was driven by a drop in drilling activity, which declined at a CAGR of -2.7 per cent 2005-2014.
"In spite of the country’s offshore potential, DW continues to take a conservative view on the country’s future oil production. Whilst the drilling activity is expected to soar over the balance of the decade at a CAGR of 13.3 per cent (as a function of Pemex offshore projects that are expected to come on stream in next years) Mexican production is expected to grow only at a modest CAGR of 0.3 per cent through to 2020. Operating fields are mature and additional drilling activity is only expected to offset the loss in production.
"Despite the low oil price environment, the government has remained committed to auctioning its offshore blocks, keen to drive international investment," said DW. However, as it noted, recent tenders failed to meet government expectations; out of 14 shallow water exploration blocks only two were awarded to a consortium of Sierra Oil & Gas, Talos Energy and Premier Oil, leaving the pre-qualified majors without new acreage despite previous recorded successes and infrastructure already in place.
"Following a disappointing result in the first upstream tender for shallow water exploration, lessons have been learned," said DW. "Raising the domestic flagging oil output is President Peña Nieto’s key economic target. The Mexican government will need to revise its expectations if it is to see more success for its subsequent auctions.
"Although it has been reported that the contract terms and requirements for future tenders have been improved, it remains to be seen if those are attractive enough for operators to splash their exploration budgets in Mexican offshore projects."