Private companies leaving Mexico after marginal exploration results
Lack of exploration puts oil production growth at risk
Presidential front-runner expected to maintain status quo
Upstream oil and gas activity in Mexico is likely to slow down in 2024 as private companies do not expect new opportunities to arise after a new president is elected in June.
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Out of the over 50 exploration blocks that were awarded during the liberalization process of the previous administration, led by former president Enrique Peña Nieto, almost 30 have been returned and that trend is likely to continue in 2024, said Pedro Martínez, head of aboveground risk at S&P Global Commodity Insights.
Exploration results have been marginal and without more areas to explore, companies have to decide whether to stay or look for other opportunities in the neighborhood, like Surinam, Guyana or Brazil, Martínez said.
Upon taking office in December 2018, President Andrés Manuel López Obrador kept his campaign promise of undoing Nieto’s energy reform and cancelled the oil and gas bidding rounds.
Mexicans will go to the ballots on June 2 to choose a new president. According to opinion polls, the leading candidate is Claudia Sheinbaum, who sources say is unlikely to change Mexico’s current energy policy as she belongs to MORENA, the party founded by López Obrador.
“It is only logical that companies renounce to acreage in Mexico: they came with the expectation of building a portfolio,” said Óscar Ocampo, an energy expert at the Mexican Institute for Competitiveness, a public policy think tank.
Attracting capital for more upstream activity would require a change in policy, Ocampo said. But Mexico may not be as attractive now as it was in the past, he added. Ocampo pointed to countries in the region are attracting interest away from Mexico, including Guyana, Brazil, and Argentina.
The lack of exploration was one of the main topics discussed during a November 2023 forum organized by Mexico’s National Hydrocarbons Commission (CNH), where participants argued that exploration has been insufficient, and said Mexico must explore unconventional and deepwater deposits, areas that have been neglected by the López Obrador administration.
The peak of exploration in Mexico happened in 2021, when over 60 wells were drilled, but the expectation for 2023 is less than 20, said Vinicio Suro Pérez, vice president of the board of directors at Hokchi Energy, during the forum. According to the work plans approved so far by the CNH, private operators will drill only 10 exploration wells in 2024, while Pemex has been authorized to drill close to 20 wells, but it is not clear if the state-owned company will drill those wells or drill them on time.
“The country must explore more if it wants to make discoveries,” Suro Pérez said, adding that the exploration must aim for large deposits.
According to CNH data, 50% of the country’s P2 reserves of 11.5 billion barrels of oil equivalent are concentrated in 14 fields. From those, only two hold over 1 billion boe in P2 reserves each, and six more hold over 500 million boe in P2 reserves each.
The next administration may have to make that decision out of necessity and allow private companies back in to keep production flowing, said Daniel Enrique Guerrero Rodríguez, an independent consultant who formerly served as head of natural gas and petrochemicals at Mexico’s Energy Secretariat.
Mexico’s crude production has fallen to roughly 1.8 million b/d from around 3.3 million b/d in 2005. S&P Global expects output to hold steady in 2024 before edging up to 1.84 million b/d in 2026.
The only fields in the country that will make a difference in the near future in Mexico are Trion and Zama, Martínez said. Zama is expected to start production in 2025 and reach a peak of 180,000 b/d in 2029. Trion is expected to start production in early 2028 and reach a peak production of 110,000 b/d at the end of the year.
Presidential options
Sheinbaum has been close to López Obrador during her political career and is believed to have his backing. Xóchitl Gálvez, a former senator from the opposition, is polling at a far second place.
López Obrador’s oil policy focused on interrupting the process of liberalization started in 2013 to favor the state company Pemex. Although the president failed to modify Mexico’s Constitution, he did manage to block key parts of the open market reforms, such as international oil and gas auctions. If Sheinbaum wins the election, breaking away from López Obrador’s policies will be difficult given her ties to the president and his popularity.
With the budget expected to be tight, it may prove hard to maintain the money flow to heavy-indebted Pemex, S&P Global’s Martínez said. The next president will need to find a solution to “fix” the company’s problems as its condition today is unsustainable, he said. Pemex’s financial debt is over $110 billion and its operations, mainly the refining business, lose money. In the third quarter of 2023, Pemex lost $4.5 billion.
Rosanety Barrios, a former Mexican energy official who is currently on Gálvez’s team, told S&P Global in a recent interview that in order to address the problems facing Pemex, the government must allow more private capital and in particular scale down its refining operations, which lose the most money.
The company has been following instructions dictated by López Obrador to maintain output by concentrating in areas where there have been previous discoveries in the shallow-water Gulf of Mexico and onshore. It has done so by exploiting a few newly discovered fields, like Ixachi, Quesqui and Tupilco Profundo, which already reached peak production and have begun to decline, according to CNH data.
As Mexico’s main fields decline, Pemex’s crude oil production has been falling, and the company has only been able to stabilize its output with condensates from the new fields, said Ocampo.
“Whoever is chosen as president in 2024 will have to make the decision to pursue the prospective resources in the territory while the chance is still there,” Guerrero Rodríguez said.
