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The Mexican energy sector: The movie we all want to watch

guillermo bilbao | petroleo & energia | 24 july 2015

When Birdman swept The Oscars away this year, I couldn’t help feeling happy for Mexico, and this made me think: I always end up watching the winning movie. Maybe not the day after the ceremony, maybe not even the next week or the next month if something gets in my way, but, still, I end up watching it.

For oil and gas investors, whether Mexican or foreign, the Energy Reform is the Oscar winning movie - the one everyone wants to watch. Temporary conditions such as the drop in oil prices, or the recent unpopularity of the Peña Nieto Administration, do not represent a holistic approach in making long-term predictions about Mexico’s fiscal future. That is not to understate the importance of short-term conditions. The Mexican government must ensure energy legislation keeps up pace, and favorable market conditions such as higher oil prices help to keep the investors’ appetite alive.

Irrespective of passing circumstance and short-term conditions, Mexico will remain a fertile ground for oil and gas FDI considering its geographic, geologic and strategic conditions.  These all make the Mexican market one of the most attractive ones in the international panorama. This is why average oil prices of $60 USD will not discourage investors or delay investment in the long run. According to Pemex CEO Emilio Lozoya, the average barrel price of Mexican oil is $23/bbl after exploration and production costs.  Further, numerous international analyses, from the International Energy Agency (IEA) to Bloomberg indicate a 2018 forecast pricing of $70 – $75  Brent.   PA Consulting Group's predictions are similar if we think of a technological buffering effect. But sixty-something minus twenty-something… it’s just mathematics that are favorable to Mexico.

Mexico is the second largest economy in Latin America, and it is liberalizing its oil and gas sector with significant proven reserves for the first time since 1938. International companies looking for meaningful return on investment will find it in Mexico’s ripe and relatively untouched hydrocarbon markets.

More evidence of the kind of investment opportunities in the Mexican oil sector came on June 10, 2015, when Pemex announced the largest oil discoveries in the last five years in Mexico. Pemex's announcement of significant discoveries of oil fields increases the interest with respect to expected earnings for Mexico, and the enthusiasm in terms of positive prospects both for Pemex and for the companies interested in participating in the domestic market. Pemex’s findings include four oil fields which, together, have more than 350 million barrels 3P oil reserves (proven, probable, and possible). The findings can help Pemex increase its oil production by more than 200,000 barrels a day and 170 million cubic feet of gas a day.

The new findings further illustrate the quality and quantity of opportunities available in the Mexican hydrocarbon sector. The National Hydrocarbons Commission of Mexico (CNH) is currently preparing its "move premiere" on  July 15th, when it will begin the process of transferring rights to private companies to develop portions of Mexican oil blocks in the first tender of Round 1 - an auction for production sharing contracts administered by the CNH.

Investors and oil companies, both international and Mexican, are already responding positively to the large number of opportunities resulting from the combination of the Mexican hydrocarbon sector and the new regulatory structure. Twenty-six companies are already pre-qualified to bid in the first auction of contracts (Round 1).

So, what will happen when the investment comes to “our movie”? Mexico will experience a GDP growth as a result of significant FDI. Thanks to the reforms in other sectors, including labor, education, finance, and telecommunications - new energy sector capital should flow into other sectors of the Mexican economy as well.  At PA Consulting, we forecast that these sectors will create a supply content worth more than 80,000 million MXN annually up to 2020. Even the most voracious would have realized that new oil production needs new engineering, transport, infrastructure and treatment, but it also needs nurturing.

Patience is key in the above described scenario. As a result of licensing oil contracts to private companies, Mexico’s GDP may see a modest boost as early as year-end 2015. The National Hydrocarbon Commission, predicts that investments for assets in Round 1 of bidding for joint ventures with Pemex, and for independent exploration and production projects, will reach over $12 billion USD per year, from 2015 through 2018. This could increase the nation’s GDP by a percentage point or two over the coming years, and help Mexico meet the forecast of being among the 10 largest economies in the world by 2050. In addition, the $12 billion figure is quite conservative when compared to the hydrocarbon sectors of other oil producing nations. For example, in the US, the exploration and production sector could receive investments of over $ 200 billion a year for the next six years, according to industry estimates.

Beyond GDP growth and investments, additional significant economic benefits felt throughout the Mexican economy may take more time. Operating in a competitive market, Pemex will have to improve in terms of productivity and capabilities. In fact, the low price of oil will be a major learning experience for domestic oil, as it will join a competitive market under circumstances that will force it to adjust faster, in a more innovative way, and adapt to advanced technology. As such, there will be increasing opportunities for young and bright Mexican graduates to take advantage of new opportunities both within and outside the oil and gas sector. Mexico’s development of competitive energy markets will translate into a healthier, more vibrant economy as a whole.  

If we take a look on the last ten Best Motion Picture award-winning movies from The Oscars, every single one of them generated revenues, and everyone who was part of them felt the benefits. The Mexican energy sector is a fair winner, indeed, it is the movie everybody wants to watch.

Guillermo Bilbao is an energy expert at PA Consulting Group

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