The Fuse

With Oil Exports at Record Lows, Mexico Forced to Delay Future Auctions

by Mehrun Etebari | February 01, 2016

OSI rankings jan 2016

Mexico faces a range of challenges as it seeks to rejuvenate its beleaguered oil sector, and two headlines over the past week have brought those hurdles into sharper focus. First, there’s the revelation that state oil company Pemex exported just 1.01 million barrels per day (mbd) of crude oil in December, the lowest export figure since the company began modern record keeping in 1990. Additionally, Mexico announced that it will delay the auctions of certain territories, further delaying the long-awaited rejuvenation of Pemex.

Mexico’s crude oil production has declined for 11 consecutive years, but production declines are not the only factor behind the country’s falling exports. Deliveries to Mexico’s oil refineries have also played a role, a fact that Pemex made a point to cite.

In order to increase production and bolster the country’s export revenues, President Enrique Peña Nieto has set a goal to boost output by nearly 50 percent to 3.5 mbd by 2025—essentially matching production levels from the middle of last decade. As discussed in the SAFE Oil Security Index Quarterly Update, the ongoing auction process that would enable foreign companies to develop Mexico’s oil reserves is critical to meeting this goal. The initial signs of the auction system’s prospects have been mixed but promising. After the failure of the initial July auction, which sold only two out of 14 blocks, three out of five offshore production-sharing contracts were bought at a more encouraging September auction. Even more promising was the successful auction of 25 out of 25 smaller onshore blocks in December; while their estimated potential output was put at only 77,000 barrels per day, it served as a vindication of the decision to embark on the auction-based privatization scheme.

Clearly, the recent trajectory of the oil market is convincing Mexico that it may not be able to overhaul its production as quickly as it had hoped.

Still, the low oil price environment is forcing Mexico to alter its plans. As the Wall Street Journal reported, government officials are now planning to delay auctions of more capital-intensive oil blocks, including discovered deepwater fields and exploratory shale blocks. This decision is an acknowledgement that with oil prices currently mired in the vicinity of $30 per barrel, Mexico’s unconventional reserves are far less attractive. With more production-ready deepwater and shale resources unprofitable, the next auction will be limited to exploratory deepwater fields. Even then, the auction may not take place until the end of the year, and the National Hydrocarbons Commission will give winning bidders four years to decide whether to drill an exploratory well.

Clearly, the recent trajectory of the oil market is convincing Mexico that it may not be able to overhaul its production as quickly as it had hoped. However, as the Oil Security Index Update noted, there are other areas of its energy security that Mexico can address despite the market downturn. Bringing down its oil intensity, which at 1.26 barrels of oil per $1,000 of GDP ranks Mexico 12th among the 16 nations in the Index, would not only decrease relative domestic oil spending, but would help free up more barrels of oil for export until investment in high-cost wells becomes viable again.