Mexico upstream – hot as a habanero

The latent potential is already becoming apparent. In the northern part of the Gulf of Mexico, in the deepwater Sabina Rio Grande play, PEMEX has already made a series of discoveries in the Perdido area, on trend with commercial fields on the US side of the border.

Each may hold up to 400 million barrels of oil. Further south in the Salinas Sureste basin, US independent Talos (with Premier) last year found oil at Zama (500 million barrels); Eni has quadrupled its oil reserves to 700 million barrels.

In the Tampico Basin, also in the south, explorers are attracted by structures offshore, on trend with material onshore discoveries and which may be prospective for giant light oil or gas finds. Mexico also has big IOR and unconventional opportunities.

Second, Mexico recognised that it needed to attract external capital to revivify its industry.

Oil exports’ contribution to Mexico’s GDP has halved from 6% in 2004 when production peaked at 3.8 million b/d to just 3% today. Oil production this year will be 2.1 million b/d on our forecasts, and still in decline into the early 2020s. PEMEX was not in shape to turn things around on its own.

The dominant former monopoly is the most financially stretched NOC in our Corporate Service coverage. Despite spending cuts and the government injecting cash and taking US$10 billion of pension liabilities off the balance sheet, principal analyst Ruaraidh Montgomery estimates PEMEX will generate US$15 billion of negative upstream cash flow through 2022.

Third, regulation and fiscal terms.

The government has created a competitive fiscal regime, shaped in part through engagement with the industry. The 2013 Energy Reform was a critical step, opening up Pemex’s monopoly to private investment. One measure of success is the number, quality and range of companies now active in the country's upstream space.

Fourth, politics.

Domestic political stability under President Pena Nieto has been a key factor in the progress achieved. This year’s election in July carries some risk of change in governing party, but the Energy Reform is now written into the constitution. Removal would entail a major legislative process; whereas any new government stands to reap the benefits of the coming investment wave.

Last, geopolitics and market visibility.

Oil and gas companies have to be mindful of risk profile and financial markets – on the latter, publicly listed ones in particular. Mexico has two factors which play to its advantage: geopolitically, there are much riskier places; the proximity to Wall Street’s gaze is a positive compared with other, more distant and exotic locations where explorers drill. Just so long as some degree of commercial success is forthcoming.

A nice line in one-upmanship and a true story: At a lunch party in rural Scotland two decades ago, we were bidding farewell to a Scottish friend celebrating a promotion and an exciting new life in Mexican oil and gas. A neighbour joined us, also British but whom we barely knew, and declared: ‘my grandfather discovered Mexico’s oil’.