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Why Mexico’s Oil and Gas Industry Privatization Would Be Successful

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Mexico’s de-nationalization of its energy sector was said to offer a large pool of opportunities to oilfield servicing companies – after the nation’s oil company (Pemex) dropped its 77 years of monopoly in the sector. A lot has affected the swift transition expected, however, though there are good signs lately. The government has more roles to play embracing the reform.

Oil and gas statisticians in Mexico brought good news on the 23rd March: “251 million barrels of oil equivalent (Boe),” discovered by private oilfield servicing companies were included in the national reserves, according to Forbes. However, in the same month, the nation’s reserves valued to be around 8.5 billion boe suggest that the private investors are holding less than 3 percent of the confirmed oil reservoirs. Also, the National Hydrocarbon Commission (CNH) noted that last February’s reserves value was 7 percent more than that of March.

Pemex gave up its historic position as a viable option towards salvaging Mexico’s economy. Oil production in the country had suffered continual shrink since after hitting its peak in 2004 when it was recognized as the fifth largest oil producer in the world. As of December last year, CNH estimated a production volume of around 2.5 million barrels per day (mbpd), whereas its previous production is around 3.4 mbpd. It is sad to accept that Pemex found itself in a position where the state-operated oil servicing firm could not afford to invest more into the sector to improve its revenue.

Deep-water located oil reservoirs mostly in Cantarell field, having 76 percent of the country’s potential oil resources were increasingly difficult to access using the outmoded equipment Pemex could afford – oil-bearing zones became deeper and trapped within thick shale formations. And the [state-owned] company could not even afford to drill exploratory wells or risk capital-driven operations.

Until today, Mexico has awarded 107 contracts – 9 licenses with 67 percent success demonstrated by the private oil servicing firms. Is this pace enough to provide 76 percent increased production by 2040 forecasted by the US Energy Information Administration (EIA)?

While this estimation looks quite high compared to the rate of development so far, the huge interest in Mexico’s oil and gas by the foreign market looks like the only bail here. Couple with a potential oil boom which should encourage private foreign investors that are currently parading indifference. Mexico may be pushed into setting a price floor for its oil supplies sequel to the US decision to scrap the Iran nuclear deal which is currently affecting the oil price. Oil brokers and options traders are already projecting Mexico hedging to cause price undulation for Brent by next year, with Calendar prices for 2019 already averaging over $70 per barrel.

The Chairman of PetroBal, one of the first companies to acquire an operational license in Mexico’s oilfields spoke with Forbes last week Thursday, noting some of the challenges impeding quick impact by the private companies. “The challenge the government is facing is the speed of entrants from the private sector, and how to adapt to that. Farm-outs have been executed successfully but systemic problems and red tape remain,” Carlos Morales said.

“For instance, in the U.S. it took us two weeks to get a drilling permit. Such a time scale is unimaginable at the moment in Mexico. Furthermore, [state-owned] Pemex, which until 2015 had an absolute monopoly, is on its own learning curve following its loss of monopoly."

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