2013-03-23 08:19:21 - New Energy market report from Business Monitor International: "Mexico Oil & Gas Report Q2 2013"
BMI View: Never before has Mexican energy sector reform been both more critical and more attainable. The election of President Pena Nieto has generated renewed momentum behind reform, and he is currently in the early stages of fulfilling his campaign promises. However, it remains to be seen if Pena Nieto's legacy will include the revitalisation of Mexican oil production, or if he will instead preside over a failure to take the best chance of reversing what is now eight straight years of decline in the energy sector. Success is possible, although it will likely be a piecemeal process as Mexico edges towards a meaningful change to its production outlook over the next decade.
* We are forecasting a steady decline
in both Mexican proven oil reserves and production over the next decade, with the country likely to become a net importer rather than one of the world's largest net exporters - as is the case at the moment - by the end of our forecast period. This is on the back of eight straight years of decline in production, combined with the recognition that it will take a significant amount of time for any new production to come online, including the September 2012 Trion-1 discovery. Furthermore, the country's most productive fields, including Ku Maloob Zaap and Cantarell, are maturing at a much faster rate than the country can add to existing reserves, resulting in a steady trend of reserve depletion. We estimate 2012 oil production of 2.95mn barrels per day (b/d) and forecast 2.94mn b/d in 2013, falling to 2.6mn b/d in 2017. Production will end our forecast period in 2022 at 2.2mn b/d.
* Gas output is forecast to increase modestly over the coming years, with cheap US gas deterring significant investments into domestic gas production. Gas production is projected to expand from 46bn cubic metres (bcm) in 2012 to 49.83bcm in 2017. This will do little to reduce import needs, however, as consumption is forecasted to rise rapidly from 62.15bcm in 2012 to 80.02bcm in 2017, implying an import requirement of approximately 30.00bcm by 2017, more than double the country's current import requirement.
* Our bearish view of Mexican oil production is reinforced by several interconnected fundamentals, including Pemex's relative inexperience in deepwater drilling, as well as ongoing financial troubles in the form of rising capital expenditures amid a 2013 budget that remains stagnant at US$25.6bn. The inability for the company to work with foreign partners also prevents it from spreading capital risk, while also not being able to capitalize on foreign expertise and technology. Indeed, the US-Mexico maritime border has seen an average of 100 wells a year drilled by more than 24 oil companies. For its part, Pemex has only been able to drill an average of two wells a year since 2006.
* The stakes for energy sector liberalisation have therefore never been higher. Indeed, the negative trajectory of the sector is a dramatic reversal of the country's fortunes, particularly as the potential of its still-untapped resources - including in the deep waters of the Gulf of Mexico (GoM) and the Chicontepec basin - are undeniable. Should our forecasts play out - something that seems increasingly likely - it will not be because the country does not hold significant below-ground potential, but because Mexican politics has proved too tough of a barrier to achieving the necessary modernization of the sector. President Pena Nieto remains a strong advocate of energy sector reform, and has made repeated promises that it will remain high on his agenda. However, reforming the constitution to address current problems faced and liberalising the sector will require a two-thirds majority in the legislature - not an easy goal for most governments, let alone in Mexico. We therefore maintain that constitutional reform of the energy sector could indeed fail.
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Mexico's dependence on oil prices leads to high volatility in the country's export revenues. We are forecasting for crude prices to fall in the coming years, with our OPEC basket forecast of US$104.40 in 2013 falling to US$101.00 in 2014. Similarly, we are forecasting WTI to average US$92.00 in 2013, and declining to US$91.0 in 2014.
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