No excitement around Pemex
President Sheinbaum unveiled a new plan to attract billions in investments into the energy sector through 2030. While the plan continues to be relatively short on details (sector veterans will undoubtedly miss the level of involvement the private sector enjoyed during the Peña Nieto administration), it nonetheless provides further insights into how her administration sees the opportunities in the upstream segment, and how gradually but steadily the Sheinbaum team shifts away from the strategy followed by former President López Obrador, without directly pointing out the mistakes made by AMLO’s team.
For starters, Pemex no longer talks about “garden exploration”, which called for drilling in near-areas where the company already had discoveries, operating wells, and production infrastructure. Former CEO Octavio Romero turned to this approach, supported by the major investments made between 2008 and 2018 on unconventional areas —shale basin Chicontepec and ultradeep-water zones in the Gulf of Mexico— but for the most part came up with very poor results in terms of new production. In fact, Romero’s strategy would have been a complete failure if not for two honeypots, Quesqui and Tupilco Profundo, which saw their output go from near-zero in 2020 to almost a quarter of Pemex’s total production in 2022 (though large output was so light, closer in density to cooking oil, that it significantly altered Pemex’s overall crude mix, which tends to be heavier and with higher sulfur content).
Pemex will now focus on exploring some blocks with high levels of reserves —like Yaxche, Kayab-Pit or Tekel— and some blocks located in northeast Mexico in the Burgos Basin. According to the most recent plans approved by regulators, Pemex plans to drill in that area but without using fracking techniques, which have been largely disregarded by López Obrador and Sheinbaum. At this point, it is not quite clear what Pemex will try to do there should fracking remain off limits (this newsletter highlighted a couple of weeks ago that this might be a source of controversy).
The state-owned company is also planning to drill around 2,000 wells to produce crude oil and 1,000 to extract natural gas over the next six years. Does that mean Pemex wants to drill 3,000 wells? Without a detailed plan, it’s not possible to know, and analysts find it hard to work on those kinds of figures. Pemex drilled 1,125 wells between 2019-2024, and 1,912 between 2013-2018. Is the company going to beat those numbers under Sheinbaum?
Oil services companies do not share this optimism at this point. Companies including SLB, Baker Huges and Weatherford are warning their investors that their business in Mexico is set to drop between 30% to 50% this year. Their 4Q24 results were already significantly impacted by the deceleration in work in Mexico during Sheinbaum’s first months in charge, with no signs of improvement anytime soon.
And then, of course, is the matter of the new energy reform. Will the new legal framework that the government is developing succeed in fostering upstream activity in the months and years to come? For now, most market participants are skeptical, with multiple concerns around the bills like the greater role Pemex is going to play in any partnership between the company and the private sector. The new hydrocarbon sector law offers some options to award blocks, but in the end, in any of those the government would have the option to give Pemex a share in the project. This would be a deal-breaker for many private companies.
Oil royalties would be also high for private-sector companies if they partnered up with Pemex in a mixed-contract because they would be paying them as Pemex does now: 30% off gross income, without considering taxes or other deductions. Companies in the upstream sector in Mexico now pay around 12% to 15% in offshore projects under the current legislation, so the new mixed-contract figure loses attractiveness as projects become more challenging in terms of technology and costs if the royalty is paid before costs deductions.
As with other recent reforms, there has not been any indication that Congress is willing to make major changes to the president’s proposal, with lawmakers said to be planning to approve it by the end of this month. On the bright side, the bill does open the door to more options, including oil tenders: while the administration has told the market that the 2013-2014 reform and its oil tenders are about to die, there is a chance that the energy ministry could reactivate them, under new terms. Still, analysts caution that we are months, perhaps even a year, from watching the new, new energy reform kicking off.
Further details on Pemex’s investment plans
Pemex will focus on 12 areas that will concentrate almost two-thirds of its crude production during the Sheinbaum administration, and other six to incorporate new reserves. Pemex’s stated goal is to have reserves for at least 10 years of consumption.
“We will be producing no more than 1.8mn b/d of liquid hydrocarbons throughout the six-year term,” said CEO Victor Rodriguez during the presentation last week. “We are going to have 12 strategic projects that are going to contribute more or less 61% of the production.”
Pemex expects to drill 2,036 wells to extract crude in blocks Burgos, an onshore area in the Northeast of Mexico; onshore oil-condensate and gas field Ixachi; and offshore fields Zama, Yaxché, Ayatsil, Bakte, Teckel, Kayab-Pit, Maloob, Cantarell, Lakach and Trion. The company expects to invest MXN 1.6tr (~US$ 80 bn) in these projects over the next six years. The six exploratory areas are the basins Proyecto Integral Veracruz, Cuichapa, Comalcalco, Uchukil, Chalabil and Campeche Oriente, located in the states of Veracruz, Oaxaca, Tabasco, Chiapas, and Campeche. Three of them are onshore and the other three are offshore. Pemex’s goal is to incorporate 2bn barrels of crude in these areas with an investment of MXN 220bn (~US$ 11 bn).
Salty crude or salty suppliers? Pemex downplays crude quality issues
Following media reports that US refineries were complaining about the quality standards of Pemex’s crude, specifically elevated levels of salt and water, the administration acknowledged the issue, but denied that this has caused rejection of cargos from international buyers. “It is not that crude contains water and salt and spoils, no, there are technical mechanisms that allow us to remove the salinity from the water and allow it to enter any refinery,” said President Sheinbaum.
According to industry participants, the high level of salt and water in some of Pemex’s crude production is most likely linked to the company’s delay in payments to its suppliers, which are understood to have cut off or reduced access to the necessary chemicals. These suppliers are understood to be Honeywell UOP and Química Apollo. As with any commodity, there are acceptable levels of impurities in crude oil, with specific levels established in each contract (generally, the acceptable level of salt is between 10 and 20 pounds per thousand barrels, or about 30 to 60 mg/L; for water, the typical acceptable range is less than 0.5% of the volume).
Feeding a refinery crude with too much salt and water results in the accelerated deterioration of equipment, explains an industry source. It is not uncommon for crude to exceed the established parameters, which require refiners to treat the crude, recouping this added expense through discounts from the oil company. This would explain why there have been no cargo rejections, as the president stated; it is not known what level of discounts, if any, Pemex has had to accept because of this.
Another potential explanation, related to domestic crude consumption, would be that Pemex is facing problems in the facilities where it performs the desalination of its offshore crude production in the Dos Bocas terminal, the same source said. However, this is seen as a less likely explanation, since production at Dos Bocas is understood to be at minimal levels.
In other energy news…
- International oil services company Weatherford expects its business in Mexico will decrease by 30% to 50% this year because of the slowdown in activities at Pemex. “I talked about a decline in activity of 30% to 50%. That is very, very significant. And so, we are not assuming a dramatic ramp up in the second half from Mexico,” said Girish Saligram, Weatherford president and CEO during the company’s 4Q24 earnings call. “We have actually taken what we believe is a very prudent approach, and it is a conservative approach to Mexico.” Weatherford’s international revenue in the quarter closed at USD 1.08bn, a 3% decrease year-over-year, with the Latina America region falling by 13%.
- Pemex could become less transparent if the new regulation eliminates its subsidiaries, said panelists at a webinar held by the Natural Resource Governance Institute (NRGI). “Eliminating Pemex subsidiaries could benefit Pemex operations, although its financials and information would become less transparent,” said Fernanda Ballesteros, Mexico country manager for NRGI. Under this new arrangement, it’s unclear if the company will keep posting its results by business, said Rosaxa Muñoz, senior VP and senior analyst at ratings agency Moody’s. The proposed modifications would make less clear for investors which areas of the company are profitable and which ones are bleeding money, she added. On the other hand, the elimination of the subsidiaries would not automatically mean more opacity in the company’s performance, as the company and the government could be still willing to present the information by business, said former Pemex board member Fluvio Ruíz at the same event.
- Mexico’s hydrocarbon regulator CNH has suspended deadlines contained in exploration and production (E&P) contracts as it prepares to cease operations. The four commissioners unanimously approved the measure to “stop the clock” on contract terms, ensuring that companies holding E&P contracts under the 2013-2014 energy reform are not affected by the regulator’s dissolution.
- Pirates held up workers and stole equipment from Pemex’s Zaap-D satellite platform in the Ku-Maloob-Zaap (KMZ) oil cluster, its largest crude production area, the company said. On February 13, around 10:30 pm ET, “a group of approximately eight individuals unrelated to the company illicitly boarded the Zaap-D platform,” Pemex disclosed on Monday. “The attackers stole radio devices, various tools and scuba gear.”
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