Mexico has experienced steep oil production declines in recent years despite a constitutional amendment, legislation, and regulatory measures opening the door to foreign investment in oil and gas for the first time since the 1930s. In 2017, among the world’s major oil producers, Mexico’s 9.6% decline was second only to Venezuela’s decline of 12.6%, according to Raymond James estimates.
Under newly-elected Andrés Manuel López Obrador, a vocal critic of the country’s energy reform who ran on an agenda of economic nationalism, any real change could come to a halt, and the trajectory of Mexican oil production will be influenced by his administration’s decisions.
Some inside Mexico are less than pleased with results thus far. “The concept of ‘the oil is ours’ is a very nationalistic position that many Mexicans support,” Vera De Brito de Gyarfas, a partner at King & Spalding told OGJ. De Brito de Gyarfas, who specializes in transactions involving energy projects in Latin America and Africa, said the drop in oil prices after reform enactment—coupled with the fact that positive results of E&P activities take time to emerge—has caused the average Mexican citizen to reject the reforms. “The positive economic results of the energy reform have not yet been seen or felt by the people,” she said. “The huge potential is there,” she continued, “and it is evidenced by the fact that approximately 60 companies are currently involved in E&P activities in Mexico. All the majors and a number of independent companies have decided to participate and win contracts in the E&P rounds carried out by National Hydrocarbons Commission [CNH].”
Rig count metrics also are noteworthy, Raymond James analysts said in a June 11 brief. By late 2017, the rig count in Mexico had fallen more than 90% from the peak set in 2013. The oil down-cycle beginning right as the reforms were materializing is an obvious culprit, the analysts said, “but even the oil price recovery of the past 18 months has given only a minimal boost to activity levels.”
What is the appropriate timetable for results to materialize and what happens now? The next few months will be important in determining the actual impact of the election on energy reform.
New tenders aren’t likely to be announced until existing contracts have been reviewed and accepted by the new government, De Brito de Gyarfas said. Raymond James analysts expect López Obrador to avoid the steps taken by Venezuela’s last two presidents, possibly opening the door to renegotiation or modification.
Pledging as part of his acceptance speech to review upstream license and production sharing agreements executed by CNH with private investors to ensure transparency and that such contracts benefit the State, López Obrador vowed also to respect the rule of law and work with the private sector for the economic development of Mexico, according to De Brito de Gyarfas. “The CNH contracts were awarded and executed under extremely transparent rules and the contracts are very fair, highly regulated, and create no burden on the government,” she said. “So it is unlikely that there will be grounds to sustain that they are not favorable.”
There remain, however, varying thoughts regarding the extent to which the new administration will reverse policy, and many unknowns: the appointment of a Secretary of Energy for one. And while Mexico “is not about to turn into another Venezuela,” Raymond James analysts said prior to the election results, “some of Obrador’s proposals would jeopardize the modest progress made thus far in attracting foreign investment into the oil industry. The country’s oil production is set for further declines over the next 12 to 18 months, and depending on how harsh the regulatory landscape becomes, the declines may persist for years to come.”
De Brito de Gyarfas agrees. López Obrador will have to juggle campaign promises with reality. And the reality is that “Pemex is no longer able to produce enough crude to satisfy the requirements of the Mexican market, the gasoline subsidies are not sustainable, and Pemex does not have the funds for exploration or upgrading its refineries,” she said. “It will not be an easy path.”
