Survival: times to change threats into opportunities

Posted in Global Energy March 2020

A glance at any national or international newspaper gives us a shocking global panoramic. The world is becoming day after day in a place that not only worried us, but terrified us. The pandemic of the COVID19 has been like a final blackout, to remain in something similar to a cave, in the darkness, where nobody knows where we are, nothing is glimpsed, and there is no clear vision of what is coming.

We could say that, within this toxic cloud or polluting fog, is the oil industry or the world of hydrocarbons. If the market was already showing some volatility, it had lowered prices below $ 50, as a consequence of the reciprocal attacks between the USA and Iran. Now there is the breakdown of the agreement between Saudi Arabia and Russia to keep the 1.5 million barrels per day of production closed, and the desire of the Saudis to open even more production, as their potential and handling capacity allow it, practically declaring a supply war, which has evidently thrown prices to the floor, because overnight they have fallen in the order of 30% with an immediate impact on the main economic indexes in the world, and affecting stock market transactions on the different exchanges of the world.

The term “perfect storm” may well apply now to this crisis; it seems that the most adverse conditions have been brought together to affect economies globally, and in particular the hydrocarbon business. Searching for the reasons to explain this “nonsense” of the Arabs and the Russians, becomes an extraordinary exercise of trial and error or cause and root analysis, which always at the end will always leave doubts of its certainty.

A price of the order of 50 dollars or less, requires operating companies to strictly manage their portfolios and their budgets, to reduce the risks of making the increase in the development of alternative energies attractive, and increase the volatility or vulnerability of the hydrocarbon business. However, the reality we are facing forces hydrocarbon-producing companies to open their portfolios to alternative energies, and seriously consider these as a competitive option to dedicate part of their research and development (R&D) budgets. The transition from hydrocarbon-producing companies to energy-supplying companies is a reality rather than a strategic option and look now as a must be.

Regardless of that reality, the question that we keep asking ourselves at this moment is related to the time vector: How long will this last? and the answer involves many variables, in a complex equation that incorporates issues such as risk, fear, uncertainty, health, work, the economy, and especially politics and geopolitics in the top places.

How many basins, fields or reservoirs in the world are viable to produce with prices below 30 dollars a barrel? Not many; in addition to some fields in the Middle East: Saudi Arabia, Iraq, Iran and the United Arab Emirates, some fields in Russia associated with the Siberian basin and shallow waters in the Gulf of Mexico. Mexico has these fields in the shallow waters of Campeche and the Tabasco Littoralt, so it can compete in that market and become a country with an energy future, even in critical market conditions.

Will the production of these fields provide the volumes required by the demand of hydrocarbons, associated with the economic growth forecasts that are planned for the world this year? Probably not, and both Arabia and Russia are betting on it, by breaking the agreement that they wisely had, and that had allowed a very important recovery of the price in the market. Taking advantage of the cut in production due to the closure of many fields that could not be competitive at less than $ 30 a barrel, was a big opportunity for Arabs and Russians to make the movements as partners to close in production and create the crisis situation in the market.

About 3 years ago, the Arabs tried similar play trying to stop the development of shale formations in the United States, and impact the midterm  objective of the North American country, to achieve its self-sustainability in hydrocarbons supply. After six months of that intent, they gave up, as the technology developed by the shale producers allowed them to be competitive in a market below $ 40 / barrel. So they decided, together with Russia, to close about 1.5 million barrels per day of its production, and when those barrels left the market, prices returned to the path of growth until they reached $ 60 per barrel again.

How does Mexico look in this difficult environment? Complicated; the country was already suffering with the fall in prices, despite the fact that Pemex and private companies have been making efforts to change the downward trend in production. In the case of Pemex, it has a great challenge of being efficient in drilling wells that allows it to incorporate production from the four or five new fields they are trying to develop. The coordination of the effort with the companies that are drilling wells under “turnkey” contracts must improve, and these companies must take advantage and become really an alternative as service partners for Pemex E & P..

However, the contraction of markets and prices – because this is happening – will have another big impact on the finances of Pemex and the country. This issue brings a serious situation for the government social commitments, because of the investments reductions, that private companies will have to carry out to adjust their economics and value creation balance sheet for their shareholders. Although the Finance Ministry has maintained the oil cover program that gives a relative safety margin on a portion of the income, it will not be enough to fill the gaps that will be opened in the federal budget.

In this sense, the situation created by the federal government’s decisions on energy issues, combined with the international impact of COVID19 on world economic growth, means a very strong punch to the realities that the country must face. It is undoubtedly, time to change the political message and use a call for unity and trust,  so that an investment plan can be materialized in energy projects that strength the sector and once again attract a smile on the sad faces of investors, and institutional officials, who continue to bet on the future of a competitive Mexico in energy matters, with secure sources of supply, and above all to support the national government in its development plans that signify sources of employment and increase in GDP for the country.