Energy reform could increase Mexico long term oil production by 75%

Mexico’s President signed into law legislation that will open its oil and natural gas markets to foreign direct investment on 11 August, effectively ending the monopoly of state owned Petroleos Mexicanos (Pemex). These laws follow previously adopted changes in Mexico’s constitution to eliminate provisions that prohibited direct foreign investment in the nation’s oil and natural gas sector.

As a result of the above developments, the US Energy Information Administration (EIA) has revised its expectations of long term growth in Mexico’s oil production. Last year’s International Energy Outlook projected that Mexico’s production would continue to decline from 3.0 million bpd in 2010 to 1.8 million bpd in 2025 and then struggle to remain in the range of 2.0 – 2.1 million bpd through 2040. In contrast, the forthcoming Outlook, which assumes some success in implementing new reforms, projects that Mexico’s production could stabilize at 2.9 million bpd through 2020 and then rise to 3.7 million bpd by 2040 – approximately 75% higher than in last year’s outlook. EIA highlights that actual performance could still differ significantly from these projections because of the future success of reforms, resource and technology developments, and world oil market prices.

Since 2008, the contract structure for any private company partnering with Pemex was a performance based service contract, which offered financial incentives to private contractors working in Mexico’s upstream sector. These contracts also included penalties for environmental negligence or failure to meet contractual obligations.

Mexico’s legislation introduced three new contract types that will provide more opportunity for foreign investment in its energy sector:

• Profit sharing contracts allow companies to receive a percentage of the profits resulting from oil and natural gas development. While companies entering into these contracts would not own the resources being developed, they would be allowed to include revenue from their part of the estimated future profits.
• Production sharing contracts allow companies to own title to a percentage of resource volumes as they are produced.
• Licenses allow participating companies to be paid in the form of oil and natural gas extracted from each project.

According to the EIA, production sharing contracts and licenses will effectively allow foreign companies to account for reserves, which is a particularly attractive incentive for investment in Mexico’s energy sector. Different contract types will likely be applied according to the degree of risk associated with specific projects. For instance, licenses will likely to used for projects that are very capital intensive and high risk, requiring advanced technology, like oil shale or ultra-deepwater projects. Less risky onshore and shallow offshore projects would more likely use profit sharing agreements.

Adapted from a press release by Emma McAleavey.

Read the article online at: https://www.oilfieldtechnology.com/drilling-and-production/26082014/mexico-oil-production-1176/