Mexican Oil Market — Are Times Changing?

Craig Dempsey  |

Home to the fourth-largest oil producer in the Americas, Mexico is one of the most exciting and lucrative oil industry players, but tapping into the sector and making a success of a venture can be tough, especially with government-controlled resources and refineries.

Since 2015, the country has held two four-tender rounds to offer private companies the ability to compete and extract oil, and whilst three more tenders were expected in 2018, they were postponed to 2019 following Andres Manuel Lopez Obrador’s election. That meant that, for the majority of 2018, major oil and gas companies looking to expand into the region were only able to do so as retailers, and could not extract gases and oils in the country.

Considering Mexico has a growing demand for natural gases, with consumption expected jump to 10.4 billion cubic feet per day by 2029 (up from 7 billion cubic feet/day in 2013), it is clear changes are needed to appease demand and reduce the levels of crude oil imports, which Mexico has done since 1998, despite being a major exporter of oils around the world. In 2018 alone, energy companies in the US exported US$3.7 billion of natural gas to Mexico, encouraging the government to expand its natural gas pipeline network and reduce imports.

This year, the government’s Five-Year National Integrated Natural Gas Transportation and Storage Plan 2015-2019 comes to an end as we enter changing times in Mexico, where businesses can see light at the end of the tunnel for investment and growth, and President Andrés Manuel López Obrador takes responsibility for Pemex with a possible floatation…

Growing Investments

Perhaps one of the biggest barriers to entry for businesses considering expanding into the Latin American oil market is Pemex, the government-owned petroleum company. However, since changing legislation and the liberalization of fuel prices across the country, which was completed in late 2017, many foreign companies, like ARCO, BP  (BP), Chevron  (CHV), Shell  (RDS.A), Exxon  (XOM), and Sunoco  (SUN), now sell gasoline and diesel under their own brands in the country. The new administration has been able to create an environment where fuel retailers can succeed and help to diversify the market, though only in terms of retail and not in crude oil extraction.

As we have seen in industries around the world, increased competition means a better level of service for consumers, and a price war that encourages innovation and efficiencies. In a market that has long been dominated by very few players, a resurgence in foreign brands is a good thing and holds government-owned businesses accountable for the wider sector.

These investments come at a time when Mexico’s President Andrés Manuel López Obrador considers listing Pemex on the local market, or issue a new bond, to raise funds for the oil firm, which is currently in more than US$106 billion of debt. In February, the government said that it would inject more than US$3.6 billion into the company by refinancing debt and cutting taxes and that it was committed to Pemex’s role in reversing the downward trend in oil production in the country. Indeed, 2018 production at the firm averaged 1.8 million barrels per day, down from the 2.4 million barrels per day produced in 2014. By the end of 2024, however, Obrador hopes to rejuvenate production to 2.4 million BPD under a strategic plan, announced in December, to guarantee “the country’s energy security and sovereignty.”

Building New Refineries

Although President Obrador’s stance on the country’s oil industry is clear - make Pemex more profitable and efficient - most agree that foreign direct investment and private oil firms will be required to help the country get out of its huge oil deficit. According to Energy Minister Rocio Nahle, bidding documents for the first new oil refinery in Mexico in decades could be revealed in the coming weeks, with Nahle telling CERAWeek attendees that the country has a “severe dependence” on foreign fuel. Mexico today imports 80% of gasoline and diesel, and it is hoped it can reduce the deficit by increasing production at its six refineries, all currently owned by Pemex, and by building a new refinery that could produce 340,000 BPD.

For businesses looking for LATAM investment opportunities in offshore oil and gas, there is a positive sign of change. Indeed, the country will look to appoint experienced companies to maintain and increase the efficiency of their current refineries, and receive bids from refinery builders to award a contract and begin construction as soon as physically possible. With 14 consecutive years of falling production and a decline in refinery throughput of more than 40 percent in just ten years, Mexico is hedging its bets on innovative companies with crude oil refinement technology to transform its industry and help it return to its former glory, but that may take time and require hundreds of millions of dollars' worth of investment to succeed.

As part of a new refinery, the Mexican government hopes to make gasoline prices more affordable, which will likely bring down the number of crimes in the Mexican oil sector. Over the past decade, corruption and organized crime in the sector has risen to new heights, and the country’s new President launched an ambitious plan to stamp out fuel theft and return Mexico to order. Thieves work by tapping into the gas and diesel pipelines in the country and siphon fuel that they can sell. According to Pemex, more than US$3 billion worth of oil and gas was lost to thieves in 2018, highlighting the sheer scale of the black market operation.

New International Players

As companies from the United States, the United Kingdom, and the Netherlands enter the Mexican oil market, entrepreneurs from further afield are also discovering opportunities, including Indian businesses expanding into Mexico’s oil sector. Indian-Mexican relations have been on the increase for many, and with India set to become the world’s second-largest economy by 2050, it is clear that relations are on the up. India spent more than US$2.5 billion on Mexican crude oil in 2017 alone, and bilateral agreements make trade a simple and straightforward process. In the coming years, as global demand for crude oil remains high, perhaps Asian businesses will be the key to increasing efficiency and capacity in Mexico, allowing them to capitalize on Mexico’s lucrative - and enormous - 10.3 billion-barrel reserve of crude oil (data provided by the US Energy Information Administration).

Based on what we are seeing at the Biz Latin Hub it is clear that Mexico is heading into new times and is looking both locally and internationally to realize its ambitions in crude oil. As well as increasing crude oil exports, the country needs to reduce its crude oil deficit, and foreign investment will likely be the key to such growth.

DISCLOSURE: I have no financial interest in any of the companies mentioned, unless otherwise stated.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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