DW: Expectations need to change for operators to splash budgets offshore Mexico

After almost eight decades of Pemex monopoly, the Mexican energy sector is entering a new era of foreign oil company participation, Douglas-Westwood (DW), an energy intelligence group has said in its DW Monday report. 

As DW elaborates, decade of steady decline in domestic oil & gas production has incentivised the Mexican government to lift the regulations and allow international companies to start developing offshore projects in Mexican waters. The government is keen to attract private investors to its energy sector with the hope of kick starting its struggling economy.

According to DW, over the last decade Mexico’s oil production decreased at a compound annual growth rate (CAGR) of -3.3%. This was driven by a drop in drilling activity, which declined at a CAGR of -2.7% 2005-2014. In spite of the country’s offshore potential, DW continues to take a conservative view on the country’s future oil production. DW estimates that, whilst the drilling activity is expected to soar over the balance of the decade at a CAGR of 13.3% (as a function of Pemex offshore projects that are expected to come on stream in next years), Mexican production is expected to grow only at a modest CAGR of 0.3% through to 2020. Operating fields are mature and additional drilling activity is only expected to offset the loss in production.

Despite the low oil price environment, the government has remained committed to auctioning its offshore blocks, keen to drive international investment. However, DW says that recent tenders failed to meet government expectations; out of 14 shallow water exploration blocks only 2 were awarded to a consortium of Sierra Oil & Gas, Talos Energy and Premier Oil, leaving the pre-qualified majors without new acreage despite previous recorded successes and infrastructure already in place.

Following a disappointing result in the first upstream tender for shallow water exploration, lessons have been learned. DW says that raising the domestic flagging oil output is President Peña Nieto’s key economic target.

The energy intelligence group emphasizes that the Mexican government will need to revise its expectations if it is to see more success for its subsequent auctions. Although it has been reported that the contract terms and requirements for future tenders have been improved, DW concludes that it remains to be seen if those are attractive enough for operators to splash their exploration budgets in Mexican offshore projects.

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