2014-03-28 12:14:04 - Fast Market Research recommends "Mexico Oil & Gas Report Q2 2014" from Business Monitor International, now available
We see the recently passed Mexican energy sector reform as the start of a fundamental paradigm shift for the country's hydrocarbons sector. While it does not challenge the national narrative that hydrocarbons belong to the state, working within these constraints the landmark bill takes steps to incentivise private sector involvement through the creation of a flexible contract system. As such, although we stress that it will take a number of years before results are felt in the country's production and reserves data, over the long term we believe this will bolster investment and could reverse a nearly decade-long decline in oil production.
* Mexico has recently passed landmark energy reform, which we believe is likely to begin to revive the
long-moribund sector over the long term. Mexico's hydrocarbons production has long been hamstrung by the resource nationalism engrained in the country's energy policy. At the heart of the problem lies the wording of the constitution which, reinforced by the Petroleum Law of 1958, clearly identifies the Mexican nation as the sole owner of the country's hydrocarbons, and leaves little room for the private sector. While the new reform does not challenge the idea that the oil belongs to the state, it does take aggressive steps forward to open the sector to greater private investment. Specifically, it allows for the creation of a multi-tiered system in which a range of contracts, from profit sharing to licences, can be granted.
* There are still a number of questions yet to be answered, with the creation of secondary legislation over the coming months likely to have an important impact on the implementation of the reform. That said, overall, the bill's passage has encouraged us to take a more positive stance on Mexican liquids production over the long term. Indeed, after a steady decline in crude, natural gas liquids (NGL) and other liquids production, from 3.79mn barrels per day (b/d) in 2003 to an estimated 2.87mn b/d in 2013, we forecast output will begin to stabilise over the coming years, hitting a low of 2.85mn b/d in 2016 before bouncing to 3.19mn b/d in 2023. Meanwhile, we see reserves expanding from 10.26bn bbl in 2013 to 10.40bn bbl in 2018 and 10.59 in 2023.
* We believe one of the main new drivers of reserve and production gains will likely be increased exploration in deepwater and ultra deepwater. After many years of failed efforts, in recent quarters Mexico has had a number of successful hits in the Gulf of Mexico's Perdido Fold Belt. Moreover, whereas we had previously highlighted that the state-owned company's inability to quickly and effectively monetise its resources as a reason for significant caution toward the future of Mexican oil reserves and production, we see now see increased scope for an influx of foreign capital, suggesting greater upside potential. Indeed, combined with the recently passed US-Mexico Transboundary Hydrocarbon Agreement and a number of recent finds on the US side of the Gulf, helping to further derisk investment in the area, we believe this suggests scope for significant investor interest in Mexico's deepwater acreage, buoying long-term production potential.
* We also believe that Mexico's natural gas production will expand, though note that the recently passed reform may offer less momentum to gas than oil. For example, while the country has massive shale gas potential, there are a number of obstacles, ranging from security concerns and a highly arid climate in the region where the shale resources are thought to be located, to the high cost of bringing shale gas wells in Mexico online given a lack of sufficient infrastructure. Perhaps most important, with Mexican gas prices linked to the US benchmark, Henry Hub, which is still quite low by historic standards, this favours continued imports rather than a massive uptick in natural gas production.
* That said, we expect consumption of natural gas will remain robust. Not only do we believe the Mexican economy is set for substantial growth, which should buoy demand, but we have seen increasing efforts to bolster gas-fired generation capacity. There is, though, some downside risk to our view, which could temper the expansion of gas consumption. With natural gas demand far exceeding production - a trend likely to continue throughout our forecast period - we have seen a rapid build-up of pipelines to ensure greater access to US suppliers. However, with the infrastructure not yet completed, Mexico has been forced to import substantially greater LNG cargos in recent quarters, and even still, there have been a substantial number of 'critical alerts' and shortages. While several new linkages to the US should be completed in the coming years, should there be any substantial delay to the midstream infrastructure coming online, this could weigh on consumer and industrial ability to access gas, hindering greater growth.
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