Mexico must tolerate Foreign Oil Drillers or go Bankrupt

The attentive reader might have come across various articles about Mexico’s numerous discoveries in the past months, especially after the imprisonment of El Chapo Guzman.

Heavily indebted, mired in a myriad of corruption cases and facing the prospects of terminal (albeit gradual) output decline – Mexico in general and PEMEX in particular needs positive market stories that it can embrace as its narrative, a version of its future that does not necessarily mean to obsolescence.

Yet upon closer inspection, much of the articulated narrative might seem rather counter-intuitive. If anything, Mexico’s future seems to be tilting towards natural gas and light sweet crude, moreover, its future would be tangibly hit should foreign drillers be limited in their possibilities.

The pre-election pledges of President Lopez Obrador to increase Mexican crude production to 2.6mbpd by 2024 have so far remained a pipe dream, seemingly everything contributed to the opposite recently.

On the other hand, participating in the OPEC+ cuts has cooled the narrative of Mexico’s continuously decline, now PEMEX’s production has been stagnating at 1.67mbpd (the average of Q2 2020 volumes) despite recurring bad weather conditions like the Cristobal and Amanda tropical storms that have brought about a series of field shut-ins.

Interestingly, Mexico remains a participant to the OPEC+ agreement concluded in March 2020 when It promised to cut output by 100kbpd to 1.686mbpd – meaning that Mexican producers have under-performed the quota by almost 20 000 barrels per day.

Mexico’s exports, however, have been experiencing a much more significant downward slide. The crux of the matter lies in AMLO’s pledge to maximize domestic refinery output whilst bringing light crude imports from the USA to a halt.

For this reason, PEMEX is building the 340kbpd Dos Bocas Refinery aiming to keep Mexico’s flagship crude Maya at home.

This in itself will decrease Mexico’s exports in the post-2023 horizon, so not only are PEMEX’s current export volumes jeopardized by the ongoing corona virus nightmare and the investment curtailments that it has entailed, there will most probably be no rebound for the better.

This is an especially noteworthy development for US refiners as Mexico’s other grades (Isthmus, Olmeca) have all but disappeared from the American market and Maya remains the only major stream.

Unexpectedly, the COVID-19 market slump has left an indelible mark on Mexico’s upstream segment, too. Of the 19 exploration wells that the National Hydrocarbon Commission (CNH) approved in Q2 2020, only 11 were drilled and just 5 resulted in discoveries.

PEMEX remains the main driller in the country as 60% exploration wells and 96% of production wells were spudded by the national oil company.

Concurrently to cutting exploration wells, PEMEX has cut back on using private drilling rigs – according to media reports the total number that they have renounced on stand at 76. Interestingly, Mexico’s legacy fields Ku-Maloob-Zaap and Cantarell will also suffer the fate of many other offshore fields.

Oil Price.com / ABC Flash Point Oil & Gas News 2020.