The Mexico energy market has been a hot topic ever since late 2013 when the government decided to liberalize the energy sector, opening it up to foreign investment.
The reform provides an unprecedented opportunity for international companies to participate in development of the nation’s vast oil resources as PEMEX unwinds its current monopoly. Multiple other opportunities exist in the power sector, in renewables development and in the natural gas pipeline sector.
The energy reforms were largely a result of the steep decline of the country’s oil production, inadequate financial resources to turn production around and an inability of PEMEX to keep pace with the technological change taking place in the industry.
Mexico ranks sixth in the world for non-conventional oil and gas resources, right behind Canada and Algeria, but lacks the financial resources to develop its reserves. It would take US$20 billion to extract the country’s reserves over a 210-year period and $87 billion to do it in 50 years. It also would not be possible to do this with one state-owned exploration and production monopoly — this is why the reforms were necessary.
However, private investment cannot come quickly enough. Active drilling rigs in Mexico fell to 43 in February, down 43% from a year prior. Developmental rigs fell to 35 in February, down 44% from February 2015. The biggest year-on-year declines came from the Southern Region (down 15.7 rigs; 52%) and the Southwestern Marine Region (down 12.4 rigs; 56%).
In March, Pemex’s announced a $5.5 billion budget cut, and active rigs plummeted another 43%, while developmental rigs dropped to only 21. The Southern region again was hit hardest, with developmental rigs falling to seven during the month, down 55% from January.
Petroleum production is a major concern for the country, but renewables also are an important focus of the reforms. On top of having significantly large oil and gas resources, Mexico also has significant resources for renewable energy such as geothermal, wind and solar. It is estimated that current renewables generation, plus proven additional renewable resources in the country, could boost generation from renewables from 3.9% of the country’s total power generation to 9.89%.
Adding possible renewable resources to the mix could satisfy the country’s total generation needs, according to Mario Gabriel Budebo, director general of the EXI Fund: Energy and Infrastructure and former independent director of gas and basic petrochemicals at PEMEX. Budebo, who was the keynote speaker at the Platts Global Power Conference in Las Vegas in early April, also noted that significant infrastructure would need to be built to support such a major turn to renewables, highlighting the significant need for private investment to support the renewables efforts. He also gave a firsthand account of the Mexican energy landscape and the other investment opportunities the reform provides for international companies.
Investment in pipeline infrastructure also is a major need throughout the country. Just a few years ago, only 10 states had natural gas pipelines, but today 22 states have them. The Ministry of Energy estimates US$10.1 billion needs to be invested in pipeline infrastructure between 2015 and 2019 to build 3,205 miles of new pipeline, which would increase the total pipeline network to 11,081 miles.
While the country waits for the benefits of private investment in exploration and production, most of its natural gas supply to feed all the new gas pipeline and power generation infrastructure will originate in the United States. In its new Mexico Energy Monthly report, Platts Analytics said US natural gas exports to Mexico rose to more than 3.5 Bcf/d in April, prompted by a near 0.7 Bcf/d year-on-year increase in gas demand from the Mexican power sector. Greater reliance on US gas supply has reduced the need for more expensive imported liquefied natural gas. LNG imports by Mexico, despite rising to about 0.6 Bcf/d in April, were down 0.2 Bcf/d from April 2015 levels. Total non-US gas supply in Mexico was down 0.3 Bcf/d in April compared to April 2015.
Platts Analytics expects that US natural gas exports to Mexico could break above 4 Bcf/d by early summer as demand picks up and domestic supply continues to decline due to a lack of drilling activity.
Power demand is expected to increase as the country transitions to greater reliance on gas-fired generation and retires as much as 2.1 GW of fuel oil-generation plants over the next year.
However, lingering gas pipeline transportation constraints on both the north-to-south corridors (Los Ramones Phase II South) and the east-to-west corridors (El Enino – Topolobampo), may hinder exports this summer if planned pipeline expansions miss their expected in-service dates, in which case Mexico would likely increase reliance on LNG imports.
Mexico’s energy infrastructure development is behind other emerging economies, creating significant investment opportunities for both domestic and foreign companies.
By Anne Swedberg, Manager, Gas and Power Analytics
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)