Mexico’s energy reforms have opened the door for outside investment. At the same time, mandated clean energy goals are changing the shape of the nation’s energy structure. What opportunities do these changes portend?
Despite 1,743 miles of coast embracing the oil-rich Gulf of Mexico, as well as abundant onshore deposits and tropical sun, Mexico has been a sleeping giant in energy circles—until recently. Now, with changes in the Mexican constitution, Pemex, the government monopoly in oil production, refining, and marketing, has taken on a new role, in which it partners with outside investors in oil and gas endeavors. Likewise, the Federal Electricity Commission (CFE), which also held a state monopoly for more than 80 years, has been unbundled into six different operating entities and opened to much-needed private investment and modernization.
Until recent reforms, Mexico’s energy sector consumed capital but fell behind the metrics of many other nations in terms of production. In oft-cited examples of bureaucratic stagnation, production from Mexico’s most prolific oil field, the Cantarell, plummeted 80 percent after 2004, while domestic electricity costs rose to double or more than that of the United States.
Energy scholar Richard Vietor noted in early 2017, “As a country rich with sunlight, wind, geothermal and water resources, Mexico has significant potential for the development of renewable energy.”
REFORMING ITS WAYS
Facing needs for large amounts of capital to upgrade its stagnating energy sector, in 2013 Mexico amended its constitution and embarked on the widely hailed Reforma Energética, which opened the sector to foreign investment and competition. In addition, Mexico moved to include environmental concerns in its energy development plan and to import larger amounts of cleaner-burning and inexpensive natural gas from the United States.
And so the stage has been set for a second revolution in Mexico, of large-scale capital investment in ramped-up oil and energy output, cleaner energy, and a modernized and enlarged infrastructure to handle increased production of oil, electricity, and natural gas imports. Mexican energy experts are largely very positive about the changes: “The energy sector in Mexico—it’s as if you were a treasure hunter, and this is the last treasure in the world,” observes Luis Vielma Lobo, President and CEO of CBM Exploration and Production. He notes that the nation is perhaps the last large country left in the world with well-known resources to open up.
It is a brave new world for Mexico’s energy sector, but on the oil side, the opening scenes have been framed by faltering crude prices, and the short-term outlook does not fare much better. Oil prices breached US$147 a barrel in 2008, a year when the meme of “peak oil” framed investors’ perceptions of the energy sector. As late as 2013, the year of Mexico’s energy reforms, the annual global price for oil was still north of US$90 a barrel.
But the higher oil prices brought consequent crude conservation and development of alternative fuels, as well as rising production of U.S. shale oil. As of early July 2017, oil was trading under US$45 a barrel, despite production ceilings agreed to for 2017 by OPEC and Russia, the world’s second-largest oil exporter.
Yet due to the reforms, the Intenational Energy Agency (IEA) is very bullish on Mexico oil production and predicts a robust 70 percent hike in crude and natural-gas distillates output, to 3.4 million barrels per day (mbd) by 2040, up from a low point of 2.0 mbd in 2020. The IEA predicts that enlarged Mexican oil production will come from enhanced oil recovery techniques in existing fields; an increase in shallow- and deepwater production; and the development of shale deposits onshore, as well as the heavy-oil Chicontepec field northeast of México City.