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The Silence Before The Storm In Oil Markets

Current market volatility may seem…

Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Mexico’s Oil Crescent Faces A Perfect Storm

Most analyses of the 2014 oil price crash and its effects tend to focus on the oil industry itself. There are bitter accounts about how the price crash affected the lives of communities that were dependent on oil in the United States and Canada, but what happens in a country with a serious gang-related crime problem such as Mexico when oil prices crash? Nothing good, writes Reuters’ Gabriel Stargardter writes in a recent story.

Mexico had been struggling with declining oil and gas production for years before Enrique Pena Nieto’s government passed a major energy sector reform in 2013. The timing of the reform was ill-fated, however. The changed went into effect in 2014 as prices began to slide, dampening foreign investor appetite for Mexican oil and gas exploration.

Tens of thousands of people working for or with state energy major Pemex were let go during the crash. Many turned to crime for lack of other options, or simply to make an easier life, especially in the state of Tabasco. As of 2016, the oil-rich state, home to the first Mexican oil discovery, had the highest unemployment rate in the country and was the only Mexican state where poverty and extreme poverty have risen in recent years. In such an environment, crime is bound to thrive.

Crime seems to be rife among Pemex employees as well—while many are victims of crime, some are instigators or informants to local gangs that deal in stealing fuel from Pemex refineries as well as equipment and machinery. The company has said it has “zero tolerance” for criminal activity against its products and property, but there is only so much a company can do, even with the help of state and federal law enforcement authorities.

It looks like a perfect storm: after more than a decade of aggressively fighting drug cartels, the cartels shifted into other criminal areas, including theft and extortion across industries. Poverty, exacerbated in some parts of the country after the oil price crash, gave them more power and made it more difficult for the government to stimulate the much-needed foreign investment in oil. Some companies that had considered entering Mexico’s oil industry, Stargardter says, dropped their plans, too afraid they would become the target of kidnapping or theft.

This is how things look on the ground in oil-producing regions of the country that holds 29 billion barrels of oil equivalent in conventional fields and another 60 billion barrels in shale deposits. Higher up, however, in the National Hydrocarbons Commission, there is cause for hope.

Related: This Is Aramco’s Spare Production Capacity

Since the energy sector reform went into effect, Mexico has attracted some US$150 billion in potential oil and gas investments, which is more than Deloitte estimated it would attract back in 2014. Of course, these investments still have potential, but companies winning exploration rights have already spent millions of dollars in upfront payments for the drilling rights.

Companies including Exxon and Shell are expanding their presence in Mexico, and there are already new discoveries being made, including Pemex’s largest in 15 years, made in 2017. The company struck oil in the Ixachi well in Veracruz and has estimated the reserves of the field at 1.5 billion barrels of oil equivalent.

Now, there is concern that the frontrunner for the July 1 presidential elections, Andres Manuel Lopez Obrador, will make it difficult for foreign energy players to do business in the country. Yet the latest news from his camp is encouraging: an aide said this week Obrador could continue the tendering of oil fields despite earlier threats to suspend them “if everything we find is alright,” Alfonso Romo said, referring to Obrador’s suspicions of corruption in the contract-awarding process.

By Irina Slav for Oilprice.com

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