• 3 minutes e-car sales collapse
  • 6 minutes America Is Exceptional in Its Political Divide
  • 11 minutes Perovskites, a ‘dirt cheap’ alternative to silicon, just got a lot more efficient
  • 1 hour GREEN NEW DEAL = BLIZZARD OF LIES
  • 8 hours How Far Have We Really Gotten With Alternative Energy
  • 10 hours If hydrogen is the answer, you're asking the wrong question
  • 4 days Oil Stocks, Market Direction, Bitcoin, Minerals, Gold, Silver - Technical Trading <--- Chris Vermeulen & Gareth Soloway weigh in
  • 6 days The European Union is exceptional in its political divide. Examples are apparent in Hungary, Slovakia, Sweden, Netherlands, Belarus, Ireland, etc.
  • 23 hours Biden's $2 trillion Plan for Insfrastructure and Jobs
  • 5 days "What’s In Store For Europe In 2023?" By the CIA (aka RFE/RL as a ruse to deceive readers)
Oil Riches Fuel Heated Dispute Between Venezuela and Guyana

Oil Riches Fuel Heated Dispute Between Venezuela and Guyana

Tensions are escalating between Venezuela…

Exxon Threatens to Derail Chevron's Acquisition of Hess

Exxon Threatens to Derail Chevron's Acquisition of Hess

Exxon is challenging Chevron's acquisition…

Biden’s SPR Gamble Sparks Debate Over U.S. Energy Security

Biden’s SPR Gamble Sparks Debate Over U.S. Energy Security

The Biden Administration has significantly…

Viktor Katona

Viktor Katona

Viktor Katona is an Group Physical Trader at MOL Group and Expert at the Russian International Affairs Council, currently based in Budapest. Disclaimer: views set…

More Info

Premium Content

Should Energy Investors Fear Mexico’s 2018 Elections?

Within a few months, Mexico will have a new President. With the incumbent Enrique Peña Nieto barred from running, the most likely winner is Andrés Manuel López Obrador, leading his newly created National Regeneration Movement (MORENA) to a long-sought victory. Obrador, or AMLO as he is most often abbreviated, started his career in the Institutional Revolutionary Party (PRI) which dominated Mexico’s 20th century politics and continues to be a leading force in the 21st, became the leading voice against the PRI and after two unsuccessful attempts he is on the brink of a breakthrough. This is especially pertinent in view of Mexico’s opening up of its upstream sector to foreign investment which AMLO has promised to wind back. But just how far can he go?

To put the stakes in perspective, one has to look at the history of Mexico’s oil industry. Following a 1938 nationalization of the entire industry, for 76 years only the Mexican national oil company PEMEX had rights to develop fields both onshore and offshore. Ironically, the same party (PRI) which initiated the nationalization in the past has pulled the plug on it in 2014 – cognizant that Mexico had significant reserves which were not utilized due to PEMEX’s inability to cover all projects duly at the same time. The Peña Nieto Administration has also made PEMEX more autonomous in that it has done away with the burdensome government approval mechanisms. Notwithstanding the success of the oil reform, the PRI stands to lose.

The reasons for a potential failure of Peña Nieto’s successor (José Antonio Meade Kuribreña, former Secretary of Finance and Public Credit) are manifold. Although the economy grew by an annual 2-2.5 percent throughout Peña Nieto’s tenure, its USD-denominated GDP fell by 20 percent. Corruption remains rampant in Mexico – in fact it had permeated the political classes to such an extent that 8 former PRI governors have been arrested or investigated on charges of corruption under the incumbent President’s watch. The taint reached the President, too, having had to apologize for his wife buying a house from a government contractor, Grupo Higa. Moreover, a plethora of smear campaigns have backfired for the ruling PRI – warnings that AMLO might turn Mexico into another Venezuela fell flat against the background of spiraling crime rates (more than 29 000 murders in 2017).

Related: Why Is The WTI-Brent Spread Shrinking?

Obrador has worked hard to make sure his bid is successful the third time, he toured every single municipality of Mexico ahead of the 2018 ballot. AMLO has been a vocal opponent of the state of things in Mexico’s oil sector, he rose to national prominence as the defender of Mexico’s indigenous people vis-à-vis PEMEX-caused pollution. Upon the Peña Nieto Administration announcing the opening up of Mexico’s upstream, AMLO promised widespread protests but a sudden heart attack prevented him from staging anything. Yet he never renounced the idea, pledging to roll back the energy reform, however, with time, his stance became more subdued – he ruled out authoritarian action on the issue and promised to hold a referendum to see the vox populi.

Why should it matter anyway, one might ask. Well, because Mexico’s shelf remains one of the few remaining oil-producing provinces still capable of unearthing massive discoveries. The Mexican and US Gulf deepwater has been one of the rare solid performers in terms of new finds, albeit with different quality parameters – the likes of the deepwater light 42° API Maximino (recoverable reserves of 146 million barrels and 314 BCf of natural gas) and Nobilis (110 mln. barrels and 179 BCf) or the shallower heavy 11° API Ayatsil-Tekel (453 million barrels and 40 BCf) or the 10° API Utsil field (104.1 million barrels and 12 BCf of gas) all make part of the last 10 years’ discovery list. In order to succeed in developing these fields in a timely manner, PEMEX has expressed its willingness to farm out these fields.

Thus, Mexican authorities try to push the energy reforms through before the new presumed Administration of AMLO takes over. After Mexico organized for PEMEX Round Zero, whereby the national company could bid for most of the nation’s proven reserves, it held Round 1, then Round 2.1 (shallow water acreages), as well as 2.2 and 2.3 (onshore blocks) in 2017. The auctioning did not end there, this year Mexico already held its first deepwater acreage auction, Round 2.4, but also intends to hold Rounds 3.1 and 3.2 in March and July, distributing remaining shallow water and onshore blocks, correspondingly. Apart from maximizing the effects of crude oil auctions and streamlining farm-out procedures, the Peña Nieto government also wants to liberalize the domestic jet market and have power supply auctions, too, before it is forced to leave office. Related: What’s Really Happening With Venezuela’s “El Petro?”

The latest auction, Round 2.4 exceeded the expectations of oil market observers, in that 19 out of the 29 deepwater blocks offered were awarded amongst high competition (the Government expected that only seven will be distributed). This would translate into roughly $90 billion in investments over the lifetime of the contracts – no wonder this auction was deemed the most important, incorporating acreages from the deepwater Perdido Basin, the Mexican Ridges, as well as from Campeche/Salina. Royal Dutch Shell was particularly aggressive in its bidding, taking up 9 out of the 19 blocks, followed by Petronas (6 blocks) and Qatar Petroleum (5). To further emphasize the bids’ importance, it should be noted that the total production capacity of the blocks auctioned in Round 2.4 is almost equivalent to the amount of oil Mexico produces currently – 1.9 million barrels per day.

The Peña Nieto Administration will push ahead with the two remaining auctions this year, which will most likely result in similarly high interest from international majors. The reason is simple – apart from genuine reserves in place, Mexico is offering competitive E&P terms which are bound to worsen as a more statist leader is expected to take the helm. It is unlikely that López Obrador will continue with acreage auctions, therefore it would be politic to invest now for those who are interested. Disentangling the changes would become a slow and increasingly painful process for AMLO, for he needs to amend the Constitution to reverse the changes – a Sisyphean task. Deepwater, despite higher complexity and bigger costs, is a more sensible investment target as the development of onshore fields would be fraught with many unnecessary roadblocks – siphoning, blackmail and murder are just a few of the regular phenomena occurring.

By Viktor Katona for Oilprice.com

ADVERTISEMENT

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News