Comment: Mexico’s energy reform takes another hit

Aug. 22, 2019
Mexico faces formidable challenges to halt the sustained decline in oil production under way since 2004. A forthcoming paper from the EPRINC presents a detailed assessment of the enormous task ahead.

Emily Medina
Energy Policy Research Foundation Inc.
Mexico City 

Mexico faces formidable challenges to halt the sustained decline in oil production under way since 2004. A forthcoming paper from the Energy Policy Research Foundation Inc. (EPRINC) presents a detailed assessment of the enormous task ahead. Mexico’s onshore production peaked at 1.3 million b/d in 1980 and is now down to 330,000 b/d. Offshore production began in 1979 and now accounts for 83% of Mexico’s crude oil output, mostly from fields in shallow water—water depths less than 600 ft—in the Bay of Campeche. Mexico’s oil output has been steadily declining for the last 15 years reaching a low of 1.71 million b/d in December 2018, a determined overall decline rate of 5%/year. 

Mexico’s new president, Andres Manuel Lopez Obrador (referred to as AMLO), is convinced that the road to recovery is not through using private capital, but instead through a program to revitalize the Mexican national petroleum company, Petroleos Mexicanos (Pemex). On July 4, a subsidiary of PEMEX, Petroleos Mexicanos Exploration & Production (PEP) informed the Ministry of Energy (Sener) that it was halting the process to open opportunities for private outside oil and gas companies to develop selected fields through competitive bidding process using farmouts. These prospects offer the potential to increase Mexican oil production by more than 600,000 b/d.

Pemex farmouts were an important piece of the energy reform that was passed in Mexico between 2013 and 2014 by then-President Enrique Pena Nieto. It was a mechanism that sought to increase oil and gas production in the country by allowing Pemex to form joint ventures with international and Mexican oil companies to participate in upstream activities. More importantly, it gave Pemex access to knowhow, technology, and capital, while helping it reduce its financial risk, and improve overall profitability.

Now that Pemex farmout auctions have been officially canceled by the National Hydrocarbons Commission (CNH), Commissioner Sergio Pimentel warned that it will be very difficult and unlikely for the country to be able to meet AMLO’s oil production targets. Lopez Obrador pledged to increase oil production to 2.4 million b/d by the end of his 6-year term in 2024 from 1.8 million b/d in 2018.

AMLO’s nationalistic approach to increase oil output to meet the targets he has set could further delay much-needed private sector investments to unleash production growth. Pemex received a larger budget this year representing a total of $14.4 billion, up from $11.1 billion last year, as well as a capital injection from The Secretariat of Finance and Public Credit to help alleviate its $106-billion financial debt. However, Pemex’s inefficiencies cannot be easily solved over the short term and it will take a lot more effort and resources than the government can offer without compromising its national economy. Decades worth of corruption and inefficiencies during its 80-year old monopoly over the oil sector make the problem harder to fix.

A total of eleven companies were registered to participate on the farmout auction to be held in October this year. The cancelation of the farmout auction, as Pimentel pointed out during the video session held by CNH, is a bad signal for investors who are already facing crippling uncertainty with other announcements made earlier this year on changes to the oil and gas bidding rounds. Furthermore, messages from the Mexican government on making Mexico energy self-sufficient by strengthening the roles of Pemex and the Federal Electricity Commission (CFE) while reducing the role of the private sector goes in opposite direction to the energy reform that aimed to increase energy security in the country by allowing private sector participation in all segments of the energy value chain.

AMLO and his cabinet continue to dismantle the energy reforms with actions like the recent cancellation of Pemex’s farmouts and with the vision of making Mexico energy self-sufficient by rescuing the previously state-owned monopoly, Pemex. At the same time, Pemex has reciprocated AMLO’s populist rhetoric by creating a slogan: “To the Rescue of Sovereignty.”

Pemex has historically been seen as a national symbol for Mexican citizens, as its creation by then-President Lazaro Cardenas represented the expropriation of all foreign-owned oil assets in the country. Therefore, it is a message that carries approval among many Mexican citizens. Regardless of the popularity that these nationalistic messages might give AMLO, increasing energy prices and shortages in some areas of the country because of Pemex’s declining oil production could have the opposite effect on AMLO’s popularity going forward.

About the author

Emily Medina is a fellow at the Energy Policy Research Foundation Inc. (EPRINC). She resides in Mexico City.