Mexico: New Government Oil prospective (*)

This is a version for English of the article written for Global Energy Mayo 2018

Mexico´s economy has been steady during the year, in spite of the political tensions created with the government of the USA, mainly because the immigration issue. However some cloud appears in the sky. The first one is related to the NAFTA renegotiations; the process has been slow and also turbulent. The second is the oil market, prices and its impact, and the third have to do with the electoral process undergoing to elect Mexico´s next president and its expectations and results.

The difficulty on NAFTA negotiations have three possible scenarios at the moment: the best would be its conclusion during this month of June; the next considers that it extends to July – August, and the most conservative would be that the discussion be extended until 2019. Several analysts grant a very good probability that an agreement will be reached in the short term, meaning to say this year. It is understood that the main obstacle to solve is the rule of automotive origin. This issue is extremely delicate for Mexico, because it touches on the central issue that is related to the increase of wages in this important sector, and with this there is a risk that the assembly companies review investments in the country and reduce their workforce.

Mexico offers great benefits for the automotive sector of the region, compared to what the other two members may offer, since each vehicle produced by a company in Mexico is on average 4 thousand dollars cheaper compared to the US and a significant percentage of this benefit has to see with the labor cost. Although Mexico and Canada has agree in this particular theme, USA does not, and therefore the discussions are frizzed for a while,

Oil prices around the world are at one of their best levels since 2014, and could rise above USD 85 per barrel next year as global inventories decline. The triggers of these increases have been, two issues: the impact of the decision of the President of the United States to impose sanctions on Iran, and the fall of Venezuelan production. Once again, the geopolitical issues are at the center of this situation, which could be transitory, since it depends on how strict the commitment of OPEC and Russia is, to maintain the volumes closed since mid-2017.

Crude oil has risen to its highest level in 3 years as a result of the impact of these two issues, which threaten to adjust a market with few stocks due to strong demand. This geopolitical conjuncture has caused that USA operators of unconventional fields – shale – are increasing their production as prices rise. In addition to the well-known Eagle Ford and Permian fields, from Oklahoma to North Dakota, companies are increasing their investment in mature or inactive oil fields that lost competitive several years ago. These fields are now rejuvenated by the technology that drives the search for more shale formations, while the prices of 70 dollars per barrel make competitive again, horizontal drilling and hydraulic fracturing – fracking – in other places not yet exploited.

For Mexico, this price increase has a double impact: positive, because this recovery generates more income to Pemex and the Treasury, and negative, because high prices means higher gasoline prices and the import of this product already represents more than 500 bpd of oil, meaning to say extra budget from the state, to buy and also to subsidies. So far this year, the price increase of the Mexican mix has increased 13 %, and in the last week, it reached 63 dollars per barrel, its highest level since November 2014.

The third very sensitive issue for Mexico is represented by the presidential and legislative elections that will take place next July. The electoral process has been loaded with a strong populist content, which also includes reference to the process of reforms carried out by this administration, especially the Educational Reform and the Energy Reform. There was also a strong discussion between representatives of the private sector and one of the candidates leading the surveys. In that sense we must insist before the political world, that this diatribe is already beginning to have an impact on the issue of currency volatility, which has devalued by more than 6 percent in the last two months, which sends a message clear of the investors: “the investment does not reach a country if there are no conditions of trust and respect for the law”.

So far the external reading of the country has been quite good despite the security issue and the noise about corruption that the Odebrecht issue -mainly- has brought to Latin America. However, a fair evaluation of the management of this administration indicates that in just over 5 years a positive balance can be seen of the progress that the country has made, with a greater proactive investment in several fields, especially communications and infrastructure, and the commitments made by foreign companies and investors as a result of the execution of the Energy Reform.

In this issue of the reform, and specifically related to the hydrocarbon sector, exists a proactive attitude from the companies that won the first bid of deep-water oil contracts in Round 1.4. The seven winning operators of each of the license agreements committed investments of more than 800 million dollars for exploration over the next four years. These activities include the drilling of six wells in the Cinturón Plegado Perdido and the Salinas Basins of the Gulf of Mexico.

In another good news for the sector, the National Hydrocarbons Commission approved the call and bidding rules under the license modality, for the selection of partners for Pemex Exploration and Production in seven land contracting areas, located in the states of Veracruz, Chiapas and Tabasco (farm outs). The call is made up of the Artesa, Bedel-Gasifero, Giraldas-Sunuapa and Juspí-Teotleco, Bacal-Nelash, and Lacamango areas, which include exploration and extraction activities with a maximum duration of 40 years, and Cinco Presidentes, which only considers activities of extraction.

So we are living a moment just before the elections that we could qualify as extremely important.
On the one hand, an important group of international and national investors, – more than 70 companies – have signed more than 100 contracts with the State and have committed investments that exceed 2 billion dollars in the next 10 years and on the other hand, an electoral process that in the middle of his diatribe seeks to lay the foundations of the future of Mexico. We hope that the rationality of the leaders and the patience of the electorate, allow us to decant emotions and measure the reality of the national and international environment, and then bet on the offer that best qualifies their ideas.

(*)Note: this article was published a month before the Election Day