Reform lifts Mexico’s energy prospects

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Eckhard Hinrichsen Eckhard Hinrichsen
Country Manager Mexico
Mexico’s president Enrique Peña
Mexico’s president Enrique Peña Nieto sets the seal on sweeping energy reforms
Eckhard Hinrichsen analyses the race for oil and gas reserves as the market liberalizes

The Mexican energy industry is at last open to foreign companies. Investment opportunities abound as the important first licensing rounds loom.

The sweeping energy reform bill approved last summer is tipped to transform the country and boost oil production through a ‘Big Bang’ of investment in private sector exploration, development and production of oil and gas assets.

Bidding for fields begins in mid 2015. SENER, Mexico’s energy ministry, has announced that round one will include 169 blocks – comprised of 109 exploration blocks and 60 production blocks – and an additional 14 blocks which will invite bids under joint ventures with Pemex, Mexico’s national oil company. Contracts are expected to be awarded between May and September next year.

Production rise beckons

Mexico’s finance secretary Luis Videgaray Caso described it as “a true change in paradigm" for Mexican energy. The government hopes that, by 2025, international entrants and new investment will see oil production catapulted from 2.5 million barrels per day (mmpbd) in 2013 to 3.5mmpbd, a level last seen in 2004.

External analysts see oil production rising if reform is implemented successfully. In a near 75% increase on its previous forecast[1], US Energy Information Administration (EIA) has predicted that Mexican liquids production (crude oil, gasoline, heating oil, diesel, propane, etc) could stabilise at 2.9mmpbd through 2020 then rise to 3.7mmpbd by 2040.

This is in line with DNV GL expectations that private investment triggered by reform will increase gradually and surpass investments by Pemex within three to four years. There are attractive opportunities on- and offshore, particularly in deepwater, pipelines and mature fields.

Collaboration opens doors

Joint ventures are seen as the most straightforward way to enter Mexico’s newly liberalised door and to get reserves on stream as quickly as possible. For Pemex, they preserve its stake in the action. Pemex CEO Emilio Lozoya has stated already that the company intends to set up 10 different joint ventures with private firms.

While energy reform invites investment, technical information is limited. Pemex currently holds the technical and seismic data. It is being encouraged by government to share its knowledge ahead of the bidding rounds next year. Supermajors Chevron, Shell, ExxonMobil, BP and Russian company Lukoil, were said to be among those looking to firm up joint venture activity with Pemex when this article was published in October 2014.

Shale boom less sure

Despite holding the world’s sixth largest shale reserves, unconventional gas prospects are less defined in Mexico. There are approximately 600 trillion cubic feet of recoverable shale gas in the Burgos and Sabinas Basins, but the country’s energy ministry estimates that USD100 billion is needed over a decade to develop resources. Among a number of challenges are Mexico’s arid conditions, which lack water for hydraulic fracturing.

Security is a major challenge in the shale areas in northeast Mexico, where there is concern over the dominance of drug cartels and violence.

In addition, there is competition from gas pipeline projects such as the Los Ramones Frontera EPC pipeline, which will import competitively priced gas 1,200 kilometres (750 miles) from Texas, US, deep into Mexico’s industrial heartland near Queretaro.

Very little shale activity has taken place so far and good quality geological information is currently lacking. For new companies, the obstacles are not insurmountable, but cooperation with US operators would be required to make it viable.

Positive reaction

Industry reaction to reform has been overwhelmingly positive, as the scope is broader than was expected. Although there are complexities to be addressed before it can fully take effect, the energy revolution is expected to improve the long-term outlook for Mexico’s economic growth.

The potential benefits will become clearer once the the first few rounds of bidding get into full swing.

Pemex forges ahead amid reform

Mexico’s national oil company Pemex is being assisted by DNV GL to deliver a financial risk assessment of deepwater drilling activities for wells in water depths over 500 metres.

Lakach, Pemex’s first deepwater development, is well underway. The national oil company, whose 76- year monopoly in Mexico effectively ended last year, has four deepwater drilling rigs under contract for exploration and development drilling.

DNV GL is also undertaking pipeline integrity work with Pemex through a consortium.

Based in Mexico for 17 years, DNV GL has been closely involved with clients as debate over the future has given way to a sectoral revolution in the making. The organisation’s eight offices and 170 in-country staff will play their part in the success of the new legislation by continuing to support DNV GL’s partners in safeguarding life, property and the environment.

[1] EIA International Energy Outlook 2014

Eckhard Hinrichsen, country manager, Mexico, DNV GL