Emilio Lozoya Austin, Pemex CEO (image courtesy of Red Política)

Emilio Lozoya Austin, CEO of PEMEX
(Image courtesy of Red Política)

Farm-outs, joint-ventures, and the fresh rendering of Mexico’s hydrocarbon sector backed by the Energy Reform have caught the attention of the international oil and gas industry, where the unprecedented changes in the country are a simmering reality that has kept the expectation at a constant high. Time is only ticking for the first set of Round One’s exploration areas and production fields to be released and such a short step away from capitalizing on Mexico’s potential, one could only expect the private sector to continue to be driven by the blooming opportunities finally at the tip of its fingers.

PEMEX’s eighth quarterly loss report in a row is still not inspiring for any reader regardless of the way in which the numbers are looked at. Declining production levels endorse a grim outlook for the common eye and challenging times for the soon-to-be Productive Enterprise of the State. However, what do all of these factors mean in the context of plunging oil prices internationally? PEMEX is in desperate need of investment on the order of billions of dollars to finance its ambitious strategy to recover from its stagnant production outputs to plateau just over 3 million b/d by 2025. Handling the oil price nose-dive is already being taken care of by Mr. Lozoya Austin, PEMEX’s CEO. While he highlighted in an interview with Bloomberg [http://bloom.bg/10yFDip] that these short-term impacts will most certainly not affect the Productive Enterprise of the State’s strategic decision-making in the long-term, it is evident that this current slump will surely have an effect on the global investment community’s outlook on the feasibility of their involvement in Mexico. Putting off investment could mean that PEMEX’s optimistic plans for a sunny transformation will perhaps have to be reviewed.

Producing at US$22 per barrel is roughly what Lozoya believes is a great advantage for PEMEX in the time being, and he is right. The NOC has been characterized internationally by boasting low production costs and the possibility to still work with these profit margins at US$80 per barrel is definitely an attractive option for any company. Round One’s first set of areas and fields will be released in shallow water and extra-heavy oil assets, luring experienced operators to take advantage of the country’s offshore “easy oil” potential. Following the first bidding round, Chicontepec and onshore fields are set to be released by the beginning of next year. Some say this will perhaps continue to feed the “easy oil” trend that has long positioned Mexico as a country with vast proven resources that have simply not been tapped into yet; considering its attractive nature when compared to other oil countries, investors may simply see the decline in oil prices as an irrelevant factor in their decisions. However, in technical terms the likelihood of developing unconventional and mature fields may not be aligned with this tendency.

Image courtesy of Vértigo Político

Image courtesy of Vértigo Político

Similarly, deepwater production is evidently not among the “easy oil” assets that the country has to offer. Given that these developments require a high CAPEX due to the lack of existing infrastructure and paired to the fact that the production costs are much higher than in onshore fields, challenges lie ahead in Mexico’s last set of bidding rounds set for March of next year. A number of IOCs and prominent NOCs will probably draft their most attractive bids for their participation in these developments; nonetheless, devising profitable schemes for the government to approve will surely become a critical obstacle that not many will be able to attain and cheap oil is not a factor that helps. Another thing that might influence the interest of these large oil companies is the attractiveness of Mexican deepwater projects when compared to other regions elsewhere, such as Angola or Malaysia. Choosing Mexico as their best choice in the crowd is another factor at play that the current administration must be aware of, and if oil prices continue to decline, IOCs will perhaps not be interested in expanding their portfolios just yet under these conditions. Additionally, government bodies must consider the long-term implications of the continuous decline of oil prices in each bid and the possible repercussion this may have on a project’s development timeline and its continuity.

There are many elements at play as opportunities unfold in the Mexican oil and gas industry, and oil prices will impact the course of the bidding rounds and resulting developments, it is just a matter of seeing which route each of both parties involved will take. Government and the private sector will certainly have to understand that these conditions may or may not be here to stay and devise the most suitable long-term equation for the current situation.

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