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Monday, September 1, 2014

Mexico could increase oil production by 75 percent

by Traci Eatherton, WLJ Managing Editor

Mexico’s Aug. 11 move to end a longstanding monopoly on oil and natural gas could be the start of a rather large boost in the country’s production, according to the Energy Information Administration (EIA).

Mexico’s President Pena Nieto signed into law legislation that will open its oil and natural gas markets to foreign direct investment, effectively ending a 75-yearold monopoly of state-owned Petroleos Mexicanos (Pemex).

“These laws, which follow previously adopted changes in Mexico’s constitution to eliminate provisions that prohibited direct foreign investment in that nation’s oil and natural gas sector, are likely to have major implications for the future of Mexico’s oil production profile,” EIA shared in an official announcement.

The elimination of the monopoly, along with developments in Mexico over the past year, has EIA revising its long-term expectations for Mexico’s oil production.

“Although there are many complexities to the new reform and many details that still must be settled before the reforms can take effect, reform is expected to improve the long-term outlook for growth in Mexico’s petroleum and other liquids production,” EIA said. “Analysis in EIA’s upcoming International Energy Outlook 2014 (IEO2014) will include the potential effects on upstream oil exploration and production and the potential for foreign participation.”

The changes in EIA’s assessment of Mexico’s liquids production profile are extensive.

“Last year’s International Energy Outlook projected that Mexico’s production would continue to decline from 3 million barrels per day (MMbbl/d) in 2010 to 1.8 MMbbl/d in 2025 and then struggle to remain in the range of 2.0 to 2.1 MMbbl/d through 2040. The forthcoming outlook, which assumes some success in implementing the new reforms, projects that Mexico’s production could stabilize at 2.9 MMbbl/d through 2020 and then rise to 3.7 MMbbl/d by 2040—about 75 percent higher than in last year’s outlook. Actual performance could still differ significantly from these projections because of the future success of reforms, resource and technology developments, and world oil market prices,” EIA said.

A report released last week by the Atlantic Council’s Adrienne Arsht Latin America Center agrees there may be a possible Mexico oil boom, and points out that Mexico’s recently enacted energy reform will “transform Mexico into a major energy and industrial power.”

Co-authored by the Arsht Center’s Senior Non-resident Energy Fellow and former U.S. State Department Special Envoy and Coordinator for International Energy Affairs David Goldwyn, the report reviews the legislation for the energy reforms.

It concludes that the reforms seek to increase investment in Mexico’s hydrocarbons sector and boost oil and gas production levels, and also present ample investment opportunities in the pipeline or midstream infrastructure that will bring natural gas to and throughout Mexico. “Natural gas is the lynchpin of the energy reform”, said Goldwyn, “The key to delivering lower cost and more reliable electric power to Mexico is increasing access to natural gas first by pipeline from the U.S., and then over time from indigenous production.”

According to EIA, since 2008, the contract structure for any private company partnering with Pemex, holding the monopoly, was a performance-based service contract, which offered financial incentives to private contractors working in Mexico’s upstream sector. Incentives were provided in some cases, such as when a project is completed ahead of schedule, when Pemex benefits from the use of new technology provided by the contractor, or when the contractor is more successful than originally expected. These contracts also include penalties for environmental negligence or failure to meet contractual obligations.

Mexico’s new legislation introduced three new contract types that will provide more opportunity for foreign investment in its energy sector, EIA shared:

• Profit-sharing contracts allow companies to receive a percentage of the profits resulting from oil and natural gas development. While companies entering into these contracts would not own the resources being developed, they would be allowed to include the revenue from their part of the estimated future profits.

• Production-sharing contracts allow companies to own title to a percentage of resource volumes as they are produced.

• Licenses allow participating companies to be paid in the form of oil and natural gas extracted from each project.

The production-sharing contracts and licenses will effectively allow foreign companies to account for reserves, which is a particularly attractive incentive for investment in Mexico’s energy sector. Different contract types will likely be applied according to the degree of risk associated with specific projects. For instance, licenses will likely be used for projects that are very capital intensive and high risk, requiring advanced technology, like oil shale or ultra-deep water projects. Less risky onshore and shallow offshore projects would more likely use profit-sharing arrangements.

But despite the reform possibilities, other reports following the signing, including a Wall Street Journal story, say that the Mexican government is expected to give Pemex more that 80 percent of Mexico’s oil and gas reserves.

Mexican industrial conglomerate Alfa said a joint venture is in the works with Pemex, particularly in three onshore mature fields, the company’s top energy executive, Raul Millares, said.

Pemex announced plans to seek partners in three mature onshore fields covering 313 square kilometers and containing nearly 250 million barrels of oil equivalent (boe). The first-ever joint ventures with Pemex, in mature fields, are set to be announced in the first quarter of 2015. Among the 10 joint ventures Pemex is seeking, the heavy oil shallow water Ayatsil-Tekel-Utsil field, located off the coast of Campeche state, contains the largest estimated proven and probable oil reserves at nearly 750 million boe.

More details on EIA’s projections for Mexico’s oil production will be available with the release of the International Energy Outlook 2014. — Traci Eatherton, WLJ Editor


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