President strengthens state influence on oil and gas industry
961% – this is how much the budget of the Mexican Ministry of Energy under new President Andrés Manuel López Obrador (called AMLO) has increased in 2019. The Ministry will, however, keep only a small part of it: energy Minister Rocío Nahle must hand over US$1.2 billion of the total budget of US$1.4 billion to the state oil company Pemex. The Ministry’s payments make up only a small part of the total Pemex budget, but the process shows how much the new government is counting on the state-owned company, after the previous administration had continuously withdrawn funds from it.
AMLO’s predecessor, Enrique Peña Nieto, initiated a comprehensive energy reform in 2012 which broke Pemex’s monopoly over the entire value chain. The company was awarded large parts of the known oil wells, but private companies came into play in subsequent tenders for new areas. Over the entire term of the contracts, these have committed around US$220 billion in investments.
Mexico: Oil production (in millions of barrels per day)
|Baseline scenario 1)||1.8||1.6||1.3||1.0||0.8||0.7||0.5|
|Government forecast 2)||1.8||1.8||2.0||2.1||2.2||2.3||2.5|
Notes: 1) taking into account spending only on operational costs and maintenance, 2) including planned investments in Pemex
Source: Plan de Hidrocarburos 2018-2024
In the future, there is no way around the state-owned company
The new government will not dissolve these treaties – as initially feared – but there will be no way around Pemex in the future. The open award rounds 3.2 and 3.3, as well as seven cooperation projects, were postponed for the time being. Pemex will become capable of acting alone once again, with the total budget of the oil giant rising by 14% to US$23.1 billion in 2019. Around US$13.5 billion of this is earmarked for investments, representing an increase of 28.5% over 2018.
The government is, of course, expecting something in return: oil production is to reach 2.5 million barrels per day (bpd) by the end of 2024. Currently the figure is only 1.8 million bpd. One obstacle is Pemex’s poor financial situation, as its debt (the equivalent of US$100 billion) exceeds its assets. Since around 80% of the debt is in US dollars, a devaluation of the Mexican peso carries a great risk. Also, Pemex is currently engaged in a battle against fuel thieves who are tapping pipelines on a large scale. In recent weeks this has led to delivery bottlenecks and long queues at gas stations all over Mexico. A pipeline leak also caused the devastating explosion in January 2019 with many dead in the small town of Tlahuelilpan in the state of Hidalgo.
Difficult business partner for foreign companies
For foreign technology providers, Pemex’s politically motivated resurgence is double-edged. On one hand, government investments are pushing new projects for which equipment is needed. On the other hand, cooperation with Pemex is considered difficult due to lengthy decision-making processes, the poor financial situation and compliance issues. Usually, however, the state-owned company does not carry out projects entirely on its own, but in the past has frequently commissioned private companies such as Alfa, Grupo R, Grupo Diavaz, Oro Negro and Carso Oil & Gas.
Upstream: Investments against lower production
Pemex mainly operates in mature oil fields that already have exceeded their production peak. Not investing would inevitably result in less oil being produced. Accordingly, most investments in 2019 will flow into exploration and production. The state is providing US$10.5 billion, mainly for drilling in coastal waters. Over the course of the year, Pemex intends to outsource the exploitation of 20 fields to private companies.
The first fields will be Esah and Xikin. In the Esah complex alone, Pemex is investing US$1.1 billion, including five production wells. The contracts are awarded in restricted tenders with three invited companies each, allowing Pemex to bypass the open tenders foreseen in the energy reform. In addition to Pemex’s activities, the exploration contracts of private oil companies that were awarded in recent years are continuing.
Midstream: Fight against fuel thieves requires additional funding
In 2019 the budget of Pemex Logística, the Group’s midstream arm, will increase by 46% to just under US$2.4 billion. According to the original plans, however, investments in this area were cut to US$60 million, most of which is earmarked for the monitoring and control system. Projects planned by the previous government such as the purchase of fuel trucks, maintenance of pipelines and installation of security cameras were initially discontinued.
However, this has changed as of January 2019 due to the fight against fuel theft. As part of the so-called “Plan vs. Huachicoleo,” the AMLO government intends to purchase 500 additional fuel trucks. This became necessary due to numerous pipelines being temporarily closed to prevent theft. The safety systems of the pipelines and pumping stations also must be improved.
Downstream: New refinery Dos Bocas to deliver on campaign promises
Through higher downstream investments, AMLO intends to fulfil its ambitious election promise to become independent of fuel imports by the end of 2021. Currently, 70% to 80% come from abroad, predominantly from the USA. But due to the sluggishness of Pemex and the investment backlog of recent years, experts consider this target to be too optimistic.
In 2019 the government will provide Pemex with an investment budget of US$2.9 billion for oil processing, more than twice as much as in the previous year. A total of US$2.5 billion is earmarked for a new refinery. The plant is to be built within three years near the port city of Dos Bocas in the state of Tabasco, projected to cost US$8 billion.
Additionally, the existing refineries in Cadereyta (Nuevo León), Tula (Hidalgo), Salamanca (Guanajuato), Minatitlán (Veracruz), Salina Cruz (Oaxaca) and Ciudad Madero (Tamaulipas) will be modernized. These refineries are experiencing frequent production stoppages due to technical problems. As in the midstream sector, however, the new government will not continue all the projects of the old administration. For example, it is abandoning projects aimed at making better use of residual materials and improving the quality of diesel produced.
|Secretaría de Energía||http://www.gob.mx/sener||Mexican Ministry of Energy|
|Petróleos Mexicanos (PEMEX)||http://www.pemex.com||State oil company|