2015 was very eventful in the oil and gas industry, filled with unexpected turns, be they for the best or the worst. The Energy Reform took effect in 2014, when President Enrique Peña Nieto amended the constitution, opening the country’s energy sector to private investment for the first time in decades. One of the main goals of this endeavor was to increase the country’s declining oil production and to develop its natural gas industry in order to allow the country to maintain its position as one of the world’s leaders in the hydrocarbon sector.
Expectations for the reform, however, were halted, when early in January 2015, the price of oil suddenly dropped, responding to the combination of an oversupply driven by America’s shale oil producers with a dip in demand, caused by the slow-down of the global economy. This led Mexico to revise its Round One offering, eliminating the bidding round for unconventional oil and gas until the price of oil justifies the production of these resources – although certain experts claim 2016 will see the price of oil go back up, there is no solid proof for this yet. Nonetheless, in mid-December 2015, the authorities brought a significant modification to the components of Round One, re-including the previously frozen unconventional resources phase 5.
July was not the country’s best month. The first phase of Round One, tendering shallow water exploratory blocks was disappointing. Only two blocks out of 14 were allocated, a success rate of 14%, much below the 30% success rate hoped for. Not wanting to jump to conclusions too quickly, President Peña Nieto hailed it as a “learning experience”, which the Mexican authorities should use it to improve the probability of success of future phases. And in truth, present facts show that the President’s refusal to claim defeat until seeing future results was a very wise decision.
Phase two of Round One occurred in September and returned to investors and the Mexican nation the hope lost in the first bidding round. Three of the five blocks offered were awarded, reaching an allocation rate of 60%. Speaking on behalf of the Mexican government, Juan Carlos Zepeda, President Commissioner of CNH, referred to the results as satisfactory, and confirmed the successful advancement of the Energy Reform. In preparation for the second phase of Round One, the authorities made certain modifications to the contract types and requirements, to all appearances successfully boosting the attractiveness of the blocks.
The third phase of Round One was a resounding success, ending the year with a bang. On December 15th, authorities proudly announced the awarding of no less than 100% of the 25 fields tendered. Most of the value of these fields will be captured directly by Mexico, as 22 of them were won by Mexican companies, while the three remaining ones were allocated to Renaissance Oil Corp., a Canadian company. Following the outstandingly successful tenders, Peña Nieto tweeted that “despite the globally low oil prices, trust in Mexico and in the future of its energy industries was confirmed.”
The national oil company, too, was hit hard by the sudden drop in oil prices, but unlike the reform, experts insist there is no sign of recovery so far. The parastatal was left with a massive hole of US$87 billion in its budget, defaulting on payments, and having to ask its contractors to delay the due dates. The company also returned 95 fields awarded in Round Zero by SENER, claiming a lack of resources. Luckily, PEMEX is a central actor in the Mexican oil and gas industry, the success of which is still heavily reliant on the NOC, meaning contractors – and the authorities – have no choice but to accept its terms. Nonetheless, after months of losses and image tarnishing accidents, the end of year has also brought some good news for PEMEX, with Peña Nieto announcing an investment amounting to US$23 billion earlier in December. Although a tax relief may be more effective to keep the parastatal afloat in the long-term, this mostly private financing will serve for the flourishing of the company’s green projects. In addition to this, PEMEX also marked a milestone in its history by opening its first refinery abroad, choosing Houston as the test market for expanding out of Mexico.
The least that can be said is that 2015 was a year full of turmoil. Outlooks for 2016 remain filled with mixed expectations. While a series of joint ventures may improve PEMEX’s financial standings, its debt is expected to sink further, nearing US$100 billion, and the future of oil price remains as unpredictable as ever. With regard to the Energy Reform, the last phase of Round One is expected to be a success, given it has raised the most interest, and the Mexican authorities seem to finally have found the recipe for success in terms of bidding rounds. The unfreezing of phase 5, which concerns the development and production of Mexico’s many unconventional oil fields, brings even more hope for the country’s energy future, possibly allowing it to compete with the global shale oil champion, the US, in the long-term. If we were to keep only one thing in mind for 2016, it should be that only good things can come from economic, financial, and business analysts recently crowning Mexico the new leader of Latin America.