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Mexico took the spotlight in the midst of energy discussions
during the OPEC + meeting, playing an important role in the conduct
of the negotiations on cutting oil production. The country refused
to cut 400kb / d of its production, a clear message in line with
the current government's flag. Mexico's President Andres Manuel
Lopez Obrador has pushed to ramp up output at Pemex since coming to
power in 2018. But in many ways, the goal is proving be much more
difficult to achieve than anticipated.
The Mexican national company represents 97% of the country's oil
production, which basically comes from offshore fields. As a plan
to resume production growth, Pemex prioritized the development of
18 offshore projects for 2020. However, the company is facing some
issues with the contracts awarded to local companies with not
enough experience in the business. The low prices of the contracts
drew attention and Pemex "paid the bill". $1.7 billion distributed
in construction and drilling contracts that are now facing delays
in activities, with only 3 of the 17 scheduled wells actually being
drilled. The companies failed to deliver 6 rigs and we expect a
re-bid for this year. Priority plans that, together with IOCs'
deepwater developments, could raise the level of production and
increase investments in the country by strengthening the local
supply chain are now at a dangerous risk.
Figure 1: Drilling packages for Pemex
The coronavirus pandemic and the oil price shock stirred the
market. Pemex, facing financial and operational problems, is
already suffering from delays in its projects, and more are to
come. IOCs are reviewing their portfolios and cutting investments.
Deepwater projects, which are in the embryonic stages of
exploration, will take even longer to reach the first oil. Some
international companies, which had already hired rigs for the
exploratory program, have already postponed the start of
activities. Murphy had a contract to start in late 2020 and changed
the scheduled start date to the first quarter.
The ripple effect is a reduction on total investiments of 21%
for the period of 2020 to 2025 when compared to values of before
the crises, amounting to almost $ 5 billion. The fall in
investments gain traction mainly after 2022 as both Pemex and the
country have some economic relief with oil hedges (even if parcial)
and tax reductions, for the next 2 years. IHS Markit estimates that
demand for offshore equipment and services in Mexico will fall by
an average of 14% in this same period, with a stronger effect on
the OCTG sector, highly impacted by the delay on deepwater drilling
activities, which requires more casing and tubing mileages.
Figure 2: CAPEX reduction
Renata Machado is a Senior Associate for the Energy Cost
and Technology team at IHS Markit. Marcos Lepore is a Research Analyst for Oil and Gas Markets
at IHS Markit.
