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Shock waves are going through the global oil and gas markets. Oil prices have received a substantial low-blow over the past month and today the WTI sits just under US$6 per barrel, the Brent is at US$69 and the Mexican crude oil basket hovers at US$59.

Evidenced in EIA’s Short-Term Energy Outlook published this past November 12, world production is almost at par with consumption; while the increase from 84.5 million b/d in 2009 to 92.5 million b/d today is significant, mainly due to the US stepping up shale production, consumption has maintained steady matching production levels. Claims of reduced demand from Europe and China are considered as a factor that is driving the recent drop in oil prices oil prices. However, it is a bit more complex than that.

OPEC-leading Saudi Arabia appears to be determined to challenge the US shale oil and gas boom. Overall, leading OPEC members do not need oil prices to go up in the short term as their economies supported by US$2.5 trillion of solid savings from oil revenues that allows these countries to take a long term perspective. According to the Wall Street Journal, oil prices need to fall US$20 per barrel more to dramatically reduce US oil and gas output. However, one must consider the fact that many of the companies that have strengthened the US’ position as an important crude oil producer over the past years are relatively smaller operators in three prolific shale basins, Eagle Ford, Permian and Bakken, which are destined to take a blow if prices continue to drop.

While Mexico’s Energy Reform is unfolding and Round One is set to attract plenty of international attention through 2015, the country’s shallow water and onshore assets are still drenched with potential. In the case of working under a US$70 per barrel scenario, Mexico still sits calm with a significant advantage, meaning that PEMEX’s conventional reservoirs will continue to be profitable at over US$30 given that PEMEX’s exploration & development as well as production costs have only modestly increased since the 2011 cost of US$16.13 for exploration & development and US$6.12 for production. Paired to PEMEX’s cost advantage, in an interview with MVS Noticias this past November 28 [], SHCP’s minister, Luis Videgaray stated that the country is at no current check, given that it has hedged its oil production at US$79 in order to ensure steady revenues from oil sales. By protecting itself at US$79 per barrel from a continued drop in oil prices, at a total hedging cost of US$770 million, Videgaray points out that Mexico will not have to worry about fluctuations in the near future. In addition, as this hedge guarantees a revenue of US$79 per barrel through 2015 while current production hovers around 2.5 million b/d, the SHCP will be able to pay off this investment in no time; a smart move to dodge low oil prices.

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SHCP Minister, Luis Videgaray Caso
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In terms of developments in deepwater and unconventional assets, it is evident that plunging oil prices will have an effect on the attractiveness of these costly and capital-intensive assets.  Considering the opening to 4.8 billion boe of prospective resources in 28 fields located in the Mexican Gulf’s deepwaters and another 142 million boe of prospective resources in shale reservoirs, the appetite of Round One’s contenders will perhaps not be substantially affected next year. Moreover, the International Energy Agency’s (IEA) chief economist has recently insisted that there is an anticipated increase in demand over the coming years and thus investment must be put forth in new developments, which in return could also help prevent significant fluctuations in oil prices in the future. In the IEA’s World Energy Outlook 2014 published this past November 12, demand is estimated to reach 104 million b/d by 2040; a 14 million b/d increase over this year’s demands that will be largely driven by Asian markets. Mexico has already been preparing to cater to these through a variety of strategic moves to export more to giants like China; keep in mind that the country’s third most important buyer today is India.

All in all, Mexico is positioned at an advantage. Not only is it driven by low conventional production costs, but the SHCP’s recent move has also made maneuvering through sinking oil prices an easier ride. However, other factors may impact the country’s post-Energy Reform development. While Round One’s first bidding terms for shallow water were set to be released earlier this month, the private sector is still waiting for the terms to be posted. Delays in the country’s first bidding round will perhaps make the private sector handle its ambitions in Mexico with care. At the same time, internal strife related to the lack of transparency in the current administration’s practices may also make the private sector rethink if bidding processes and other legally-bound aspects will adhere to the international best practices they are accustomed to working with worldwide.



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