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Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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Mexico’s New President To Deal Blow To Oil Industry

Mexico will likely halt oil auctions for at least two years, dealing a blow to its oil industry.

Mexico’s president-elect Andres Manuel Lopez Obrador (AMLO) will reportedly suspend oil auctions for at least two years, according to the Wall Street Journal, with some experts believing that his administration won’t hold any new oil auctions at all during his six-year term. He has also vowed to review the 107 contracts already awarded to companies through auctions over the last few years to check for corruption, although he has said he would not try to invalidate them so long as they check out.

Also, AMLO wants to revise some of the energy laws that govern the oil and gas sector, which could dramatically alter the landscape for foreign oil and gas companies. He long opposed the historic reforms that ended seven decades of state control over the energy sector, although he moderated his position during this year’s presidential campaign. Rolling back the reforms would be exceedingly difficult, requiring a change to the country’s constitution.

Instead, AMLO wants more modest, though still significant, legislative changes. The WSJ reports that he will pursue legislative tweaks that bolster the power of state-owned Pemex, while weakening the regulatory body that has pursued a technocratic approach and presided over the oil auctions over the last three years.

AMLO’s desired changes include allowing Pemex to choose its own private-sector partners, without needing the approval from regulators. Current rules require Pemex to partner with the highest bidder for blocks put up for a farm-out. He wants the government to be able to award Pemex with oil blocks directly. And he wants to make Pemex the sole marketer of oil produced by private firms, the WSJ reports.

Related: A Saudi-Iran Oil War Could Break Up OPEC

These changes would amount to a partial rollback of the energy reforms, re-empowering Pemex and government control over the oil sector. Moreover, as president, AMLO chooses the head of Pemex, granting him a lot of leverage over the company. “If licensing rounds are canceled and joint ventures are the only vehicle for entry to the country, it reflects a consolidation of power within” Pemex, Maria Cortez, Latin America Upstream Senior Research Manager at Wood Mackenzie, told Bloomberg in an email. ”That could be viewed negatively by outside investors.”

On top of that, the WSJ says AMLO will push to raise local content rules, which would require a higher percentage of domestic involvement in oil projects. That means that if a company like ExxonMobil or Chevron or some other outside entity wants to drill for oil in Mexico, it would need to source a certain percentage of equipment and services from within Mexico. The idea is to capture a greater portion of the benefits of oil and gas development for the country, while also building up expertise for local industries.

However, many of these changes will be loathsome to the international oil companies, who will view them as onerous burdens that inject higher levels of uncertainty into their investments. Oil companies have repeatedly blamed strict local content rules in Brazil for years of cost inflation and delays.

“If all of this is confirmed, it would send a signal that the continuity of the oil opening may be in doubt,” Pablo Medina, an analyst with Welligence Energy Analytics, a research firm based in Houston, told the WSJ in an interview.

Related: What Caused Oil’s Longest Losing Streak In Years?

Meanwhile, in addition to the legislative changes to the energy reforms, AMLO’s core energy plan consists of pouring billions of dollars back into Pemex for oil exploration, with a particular focus on revitalizing the downstream sector. He wants $2.6 billion to rehabilitate Mexico’s six aging oil refineries, plus more than $8 billion to build a new refinery from scratch. The idea is to cut down or even eliminate gasoline imports from the United States.

(Click to enlarge)

Mexico’s oil production has been declining for over a decade, falling to 1.9 million barrels per day recently, down from 3.4 mb/d in the mid-2000s. The IEA sees output falling by another 130,000 bpd this year, due to the aging offshore oil fields, although that is a narrower decline compared to the 235,000 bpd the country lost last year.

AMLO is aiming to boost production by 600,000 bpd over the next two years, which will be a monumental task. If he is to succeed, AMLO is betting that Pemex will lead the way.

By Nick Cunningham of Oilprice.com

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  • dhinds on August 26 2018 said:
    "Rolling back the reforms would be exceedingly difficult, requiring a change to the country’s constitution."

    That's not true.

    Mexico's Constitution was changed to permit the Energy Reform instituted by Peña to the effect that the Secondary Laws define what is allowed.

    That was done to avoid the need for the two thirds majority required to implement Constitutional changes.

    In other words: A two thirds majority was obtained to reduce the majority required for that particular policy - a sneaky way of getting the reform passed next. However: The same principle holds for changing it again.

    This has not been publicized but I read the text of the change at the time and that is what was done. (I find it strange that no one else noticed).
  • JONATHAN on August 26 2018 said:
    A lot of its and possibility
    Real world execution is daunting
  • Hindenburg on August 27 2018 said:
    You can't take the third world out of Mexico. It keeps growing back out of residual pockets of corruption.
  • Greg on August 28 2018 said:
    @dhinds -- Mexican "law" can be changed without changing their Constitution...

    That is the problem.

    No one is going to commit $8 billion for a new refinery (or $2.6 billion for repairs mislabeled as "rehabilitation") when Mexican "law" is written in pencil.

    Any 3rd world politician can (and has) popped in and changed the rules right under everyone's feet. It takes a legislative "vote" (however rigged they are in Mexico or the USA).

    It takes months, if not years, to drill a new well or build a refinery. It takes minutes for a corrupt legislature to make that effort worthless.
  • Pascal on August 28 2018 said:
    Mexicans stole the oil company investments and proceeded to depreciate the investment. If the oil majors were in control Mexico would have tripled production in the past hundred years. Instead Mexicans cut production by half and the revenue does not cover costs. Third world people are not capable of running a profitable business. The best examples of third world incompetence are Zimbabwe, South Africa, Venezuela, Mexico, Libya, Spain, Saudi Arabia, Russia, Argentina, Brazil. Give a pile of bricks to Europeans and they build a city. Give a city to the third world and they make a pile of bricks.
  • Luis Zerpa on September 03 2018 said:
    Mexicans better brace themselves. They elected a socialist. They will regret this like the Venezuelans do.
  • Ginger Firestone on September 04 2018 said:
    Well, well, maybe this is exactly what the states need now. Mexico does this and we re-examine off shore drilling as well as limiting how much oil we export. Save it for the USA. This just might bring back the refining companies too. This just plays into Trump's hand for MAGA. Now if Mexico would just take control over their illegals that are here, that would help us too.

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