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Mexican energy industry's growing pains hampering producers

Mexico's recently opened energy sector is enduring significant growing pains, and oil and gas executives say they are feeling them as well as they attempt to get their operations off the ground.

The appeal of Mexico to foreign companies is obvious: the national oil company, Petróleos Mexicanos SA de CV, or Pemex, once produced more than 2 million barrels of oil per day. It is clear oil and gas reserves are plentiful in the country, and more are likely to be found. But in order to succeed, producers will have to deal with a regulatory system that is in its infancy, a fairly hostile government and the reality Pemex still receives preferential treatment.

Jaguar E&P has purchased a total of 11 blocs of acreage across Mexico in recent years as one of the nation's first private oil and gas producers. With gas and condensate holdings in the north of Mexico and oil in the south, the company has achieved its goal of having a diverse asset base. What is has not achieved is the ability to operate in all areas where it holds leases, as only five permits have been approved with another six still caught up in the bureaucratic process.

"The reform is not even five years old, so the entities and the regulators are brand new," former Jaguar CEO Javier Zambrano said May 22 at AIPN's 2019 International Petroleum Summit. "The operators are learning with the regulators … It has been very challenging, getting the permits for the 11 blocs onshore."

Dealing with the new regulatory body, Comisión Nacional de Hidrocarburos, or CNH, has been equally frustrating for Murphy Oil Corp. CNH, like many federal agencies around the world, is being operated by those with the right connections who may not have the same level of experience to match.

"They've appointed people who lack the technical expertise but are aligned with the government," said Gabriel Gomez, Murphy's country manager for Mexico. On the positive side, producers are seeing CNH adapt and become more willing to work with them. Original exploration plans, which were required almost immediately after an acreage purchase was approved, were initially considered permanent with no room for adjustment.

"Your crystal ball is only so good. Now, they're allowing for modifying the plans," Gomez said. "Our original plans [in one case] had one exploration well for us to drill, and we did that and now we could do nothing."

SNL Image

Mexican President Andres Manuel Lopez Obrador wants swift results from foreign oil and gas producers, but Mexico's own energy regulator is slowing down the process.
Source: Associated Press

CNH's willingness to adapt has come as somewhat of a pleasant surprise, considering Mexican voters ousted former President Enrique Pena Nieto — who pushed for opening Mexico's energy sector to foreign investment — in favor of Andrés Manuel López Obrador, who campaigned strongly against it. After Lopez Obrador's landslide victory, private companies were worried their contracts would be voided and they would be told to leave. Instead, the new Mexican administration has toned down its rhetoric while still demanding results.

"After the election, after him becoming the president-elect, he started changing his speech a little bit, and said that they'd honor the contracts. He … became a lot less antagonistic," Gomez said. "A year ago, we went from the fear of being able to stay in the country to thinking we would be able to get through the contracts, but the thing he said was he wants results."

Unfortunately for private producers, the promises made by Pena's administration to the Mexican public put companies in a difficult position.

"The expectations were too high; the burden, the paperwork is just too much to meet the timeline [set for production to begin]," Zambrano said.

Gomez agreed, saying the assurances made by the former administration allowed the current one to unload on producers for an alleged lack of effort.

"It was easy for the new government to come in and say, 'You aren't keeping your promises,'" Gomez said. "But they're not production contracts. They're exploration contracts. We're in the mode of tapering their expectations, and they're allowing us to get on with it."

One company not facing heavy pressure is Pemex, which retained most of the nation's best oil and gas assets in "Round 0," a bidding round where only it could compete. Zambrano said Jaguar may have more than one million acres in its portfolio, but they were in mature plays "that Pemex overlooked." Even though it is no longer the only player on the field, Gomez said Pemex continues to act that way. It also has the backing of López Obrador, who announced a $5.6 billion bailout for the company shortly after taking office.

As a result, some of the country's best plays are being underdeveloped.

"They can partner with people … but there isn't a framework that's viable," he said. "They're going to benefit from the skill set we provide and sharing the costs as well. That's something they haven't grasped ... that it'll be for the benefit of the country."