Mexico oil output 'likely to drop before it rises'

Friday, December 16, 2016

Mexico's recent deepwater auction was a success and showed the international interest in the country's oil and gas industry. But even with more auctions to come, it will take time for oil and gas production to rise, which was the main objective of the energy reform, according to Ángel Navarro, an energy consultant and former engineering professor at Mexico's national autonomous university UNAM.

BNamericas: The deepwater auction this month was deemed successful, with eight of the 10 blocks on offer awarded, but some analysts had expressed doubt there would be such interest, given the low price of oil. Were you surprised? 

Navarro: I thought it would likely be successful, given the number of firms involved in the bidding process, and given that it will be several years before those fields are in production, by which time oil prices will likely have significantly recovered. The government had adjusted the terms and conditions of the auction, and delayed it a little, and the auction result was a significant achievement and shows that there are many opportunities in Mexico for global oil companies, both on their own or in JVs or partnerships, and that's good news for Mexico and [national oil company] Pemex, and is a sign that the energy reform is bearing fruit.

BNamericas: How do you view Pemex's five-year business plan, launched in November and aimed at ramping up production while trimming losses?

Navarro: The plan makes a lot of sense, but it contains a couple of surprises. Firstly, the plan to reactivate the Ayatsil-Tekel complex, of extra heavy crude. Ayatsil is one of the most important discoveries of the last 15 years but current low oil prices and high recovery costs mean that its development is stalled. The successfully awarded partnership contract for the deepwater Trión block [to Australian firm BHP Billiton] sets a precedent, as the business plan envisages auctioning more fields as farm-outs, and we'll likely see five or six more fields or blocks put out for auction in 2017, such as Ogarrio and Cárdenas-Mora, and also some shallow water and onshore fields, such as in Chicontepec, where development has been stalled since 2012. That will contribute to boosting production, which was the whole premise of the energy reform.



BNamericas: How quickly are we likely to see an increase in production, which is currently around 2.2Mb/d?

Navarro: It will take time. In fact I think production will likely drop before it rises, with estimates that next year it may drop below 2Mb/d. But once production begins at Trión and at the shallow water and onshore fields auctioned off in the three auctions in 2015, we'll see it slowly begin to climb. 

BNamericas: Much attention has been paid to deepwater, with the government calling those fields "the jewel in the crown," but are the onshore and shallow water fields equally important to boosting output? 

Navarro: The government put a lot of emphasis on the deepwater assets because Pemex cannot go it alone there and needs the expertise and investment of foreign firms. But there are plenty of opportunities onshore, for example, although some would require fracking, which is very controversial, and will likely face stiff opposition. And, again, it will take time for production to begin.

About Ángel Navarro

Ángel Navarro is a freelance energy adviser to private companies engaged in Mexico's oil and gas auctions and is a former doctorate professor in energy at the engineering faculty of Mexico's national autonomous university.