Mexico's Growing Reliance on US Oil Will Continue
It has been a long and winding road for Mexico’s oil industry over the past 15 years. With the peaking of supergiant Cantarell, once the world’s second largest oil field, Mexico's crude production has been sliced in half to below 2 million b/d. Proven oil reserves have collapsed from 50 billion barrels 20 years ago to just 8 billion barrels today. Mexico’s crude oil exports to primary customer, the U.S., have been plummeting. From 2006-2018, shipments to the U.S. fell 60 percent to 720,000 b/d. After lengthy delays, Mexico in 2013 critically passed its Energy Reform to bring in outside investment and expertise to help production rebound. It remains a bumpy ride, however, and the new Andrés Manuel López Obrador (AMLO) administration has been resistant to deregulation.
In turn, Mexico has been increasingly forced to deepen its dependence on the U.S. to meet oil demand at home. Falling production has been exacerbated by a refinery shortage, surging imports of refined products. In 2018, Mexico imported 1.2 million b/d of products from the U.S., or six times more than its intake before peak oil production. The country last year imported 520,000 b/d of gasoline from the U.S., nearly a five-fold boom over the past decade.
This does help justify AMLO’s primary goal to not just grow crude output but to also build more refineries. The hope is to finally reverse the very expensive habit of shipping crude to the U.S. only to have to import it as refined product. The problem though is that refineries can cost at least $8 billion. With state-owned Pemex as a seriously indebted energy company, (over $105 billion), its ailing finances are the biggest threat to the Mexican economy.
Many in the investment community have advised Mexico to not build the refineries. It remains a chronic problem: Pemex’s profits continually get siphoned off by the government instead of being re-invested. Like those in OPEC, this is a nation that simply depends too much on oil sales. Although down from 45 percent a decade ago, oil still accounts for 20-25 percent of the federal budget.
Looking forward, Pemex faces serious obstacles now that AMLO has signaled a return to the resource nationalism that long hampered growth. Blocking an industry rebound, he has claimed no more fracking and no more risk contracts for foreign partners. He could waver because such anti-production policies will have a predictable result: more reliance on the U.S. Mexico should be aware, however, that the U.S. is the fastest growing oil exporter in the world. Many high-paying customers want growing amounts of the light tight oil flowing from America’s shale fields. In fact, the IMO 2020 sulfur rule combined with a trade deal with China could make the U.S. the largest oil exporter within the next five years.
Fortunately, Mexico has had a very successful gas for fuel oil in electricity program that has kept the country’s oil demand flat at ~2 million b/d for many years now. This should eventually change, however, as fuel switching becomes more difficult (gas already supplies 65 percent of Mexico’s electricity) and a young population gets more access to personal mobility. Overall, Mexico likely has the greatest incremental energy demand potential in the entire OECD.
Indeed, the fact that some 75 percent of Mexico’s gas production comes as an “associated” byproduct of crude is another key reason why finding and producing more oil is so critical. Potential foreign partners do realize that for better or worse the political climate can change rather quickly. Mexican presidents serve only one six-year term, with no chance at re-election. And many suggest that Brazil’s Petrobras, which could be privatized by the end of President Bolsonaro’s term in 2022, offers a path for Mexico to now follow. Ultimately, even if outside help arrives more than expected, significant deepwater and shale opportunities will likely not materialize in Mexico for another five to seven years.
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