Will Mexico”s Oil Production Gamble Pay Off?

Phil Black - PII Editor 26/09/2014

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The results of Mexico’s upcoming bidding round for 109 exploration blocks and 60 producing fields could be crucial in determining the country’s future position as an oil and gas powerhouse, according to an analyst with research and consulting firm GlobalData.

The offerings in Round 1 account for 3.78 billion barrels of oil equivalent (boe) of proved and probable reserves and 14.6 billion boe of prospective resources.

Adrian Lara, GlobalData’s Senior Upstream Analyst for the Americas, states that these assets will be important to meet the ambitious goal recently set by the Mexican government and state-owned oil company Pemex of increasing current production to 2.8 million barrels per day (mmbd) by 2018.

Lara says: “This is particularly challenging considering the steep decline in production from a peak of 3.8 mmbd in 2004 to current levels of 2.5 mmbd. The crude oil reserve replacement ratio also declined from 104.3% in 2012 to 67.8% in 2013.

“Assuming that production stabilises at current levels, the new assets will have to add approximately 300 thousand barrels per day over the next three years to align with the government’s expectation.”

The analyst notes that the first short-term test for Mexico’s energy reform will be based on Pemex and the government’s effectiveness at attracting private investors. General contract structures have been set, as have the basic fiscal terms, such as royalties, rental fees and income tax provisions. However, potential investors will have to wait until at least November to see the drafts for more specific terms, in order to fully evaluate the new regime’s attractiveness.

Uncertainty also prevails regarding how quickly prospective resources could be converted into reserves and developed for production.

Lara explains: “Based on industry standards, this lengthy process could last at least six to eight years. Regardless of this and the timing factor, the potentially large increase in Mexico’s oil and gas production is expected within the next 10 to 15 years.

“In the context of already robust hydrocarbon supply growth from the US and Canada, a significant and sustained addition of production from Mexico means there is a plausible future scenario in which North America becomes a worldwide stronghold of oil and gas supply.”