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Surprise Crude Build Threatens Oil Rally

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 Very Risky Energy Bet

Mexico’s new government came into power with promises to turn around the country’s oil industry and boost production after, it said, the previous government failed. Despite these promises and the first decisive steps towards them, some analysts remain skeptical about the prospects of success.

When he took office, President Andres Manuel Lopez Obrador said his government would review all contracts with foreign oil companies that the Pena-Nieto government had signed during its term, which sparked worry in the international oil industry that Mexico would effectively close its doors to foreign oil companies.

This happened to some extent; the Obrador government announced that no new tenders for oil and gas will be held for the next three years at least until the contract review—seeking to establish if there was corruption involved—is complete. This means that, as IHS Markit analyst Fotios Katsoulas wrote this week, “The potential is big for this Latin American producer, but progress remains small as the country seems to keep most paths of expansion closed.”

The Obrador government has placed all its bets on state major Pemex, effectively reversing the Pena-Nieto opening-up approach to the country’s energy industry, inviting supermajors and other large oil players to help Mexico reverse a steady decline in oil production that has made it increasingly reliant on U.S. imports.

Pemex in December announced that it will increase its budget for 2019 by 14 percent to US$23 billion. Half of the total will be directed towards exploration and production, with some onshore deposits also benefitting from the investment alongside shallow-water blocks. Exploration in the deep waters of the Gulf of Mexico, however, will be put on hold. Related: Reuters: OPEC Cuts Weigh On Arab Oil Producing Economies

This year, the company said it would drill three times more wells by the end of 2019 as compared with 2018. This, according to Pemex’s chief executive, would increase its production by as much as 300,000 bpd. To date, Mexico pumps about 1.68 million bpd, but President Obrador has promised that by the end of his term in office, Mexico will produce almost 2.5 million bpd of crude – a level close to the 2013 average of 2.522 million bpd.

The government is pouring billions into Pemex in the form of direct support and tax relief to help stabilize the company that has a debt load of over US$100 billion. It is also spending several billion dollars on a new refinery to reduce Mexico’s dependence on U.S. fuels. Ratings agencies and investors have criticized the move on the grounds that it will cost a lot more than the government-projected US$8 billion to build, but the Obrador administration is nothing if not consistent and still plans to go through with the 340,000-bpd facility.

The latest sign that the new government is doing the opposite of what the previous one did came last week, when President Obrador approved what was effectively a cancellation of the 2014 energy industry reform that opened wider the doors to foreign companies. Now, foreign companies willing to produce oil in Mexico will do so under service contracts, the Wall Street Journal reported, and will be paid a fee rather than part of the oil produced. While this would be positive for oilfield services providers, it won’t be so positive for supermajors who were eager to tap Mexico’s deepwater reserves.

Whether or not the government’s approach will be successful in turnings things around for Pemex and Mexican oil remains to be seen. Ratings agencies and investors are sceptical as they usually are when governments take the reins of a country’s energy industry.

By Irina Slav for Oilprice.com

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