Mexico’s market liberalisation crucial to reverse economic hit

The total impact of the decline in Mexico’s oil sector has sliced half a percentage point off real GDP growth on average annually over the last three years, according to S&P Global Ratings, meaning the liberalisation of its energy industry and markets could not come at a more crucial time, writes James O’Connell, Editorial Director, Americas Energy News, S&P Global Platts. Mexico’s oil and gas production is down 40% from peak levels while first 1Q2017 imports of US petroleum products were up over 125% year-on-year. June crude oil output figures of 2mn b/d were down substantially from a peak of 3.4mn b/d in 2004.

The picture for dry natural gas production is not dissimilar – down to 3.2bn cf/d this year from 5.1bn cf/d in 2010, forcing the country to rely heavily on US pipeline gas and expensive LNG imports. Pipeline imports of US natural gas now make up nearly 60% of total Mexican natural gas supply, compared to just 22% in 2010. Platts Analytics, a forecasting and analytics unit of S&P Global Platts, expects that US natural gas imports will account for 70% of total supply by 2022.

The historically weak financial position of the state-owned producer, Pemex, didn’t allow for sufficient investment to grow production, reserves or even slow down the declines. Mexico’s proven oil reserves have dropped nearly 50% over the last five years to 7bn barrels as of 1 January, according to National Hydrocarbons Commission data. Pemex drilled an average of 72 exploratory wells each year from 2002 through 2009, but drilling fell to average 31 wells annually from 2010 through 2016. The decline in oil production can be explained mainly by the maturing of Mexico’s largest oil field, the Cantarell Complex, which accounted for 60% of the country’s total output in 2004, but now produces just above 100,000 b/d, barely 6% of the total.

Through a series of upstream oil and gas auctions, Mexico has awarded dozens of E&P contracts to a number of companies and consortia, which has already led to some significant finds by US independent Talos Energy and Italy’s Eni. In fact Talos scored a home run with its first exploration well, unveiling what it called a ‘world class’ oil discovery holding more than 1bn barrels of resource offshore Mexico. While it’s a positive signal for risk takers, it will take time for these finds to feed through to the market and reverse the economic impact.

The country is also opening up its refined petroleum products sector, allowing competition to import and market gasoline and diesel fuels, and has begun phasing out retail price caps. Mexico’s Energy Regulatory Commission expects the number of gasoline service stations in Mexico to reach 23,000 in 2022 from the current 11,500, representing investments of $12bn.

In the petroleum midstream sector, state-owned Pemex has begun to auction the use of refined products pipelines and storage to encourage competition, but additional capacity is required and over $4bn in new fuel pipelines, rail terminals and storage projects has already been proposed.

‘There is no Soviet-style plan leading investment in this new capacity,’ CRE member Guillermo Zuniga said recently. ‘It is the market deciding where and how to invest.’

Assuming the liberalisation of Mexico’s oil sector goes as planned, the International Energy Agency (IEA) estimates that crude output will hit bottom close to current levels around 2018 and then start to tick up. But it will not reach 2004 peak levels until 2040. Mexico has been a major crude exporter for decades, but following years of underinvestment the loss of export revenues has reduced the sector’s share of Mexico’s GDP to less than 5% today from nearly 10% in 2004, when production peaked.