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Lopez Obrador needs support from private companies to boost Mexican oil production: execs

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Lopez Obrador needs support from private companies to boost Mexican oil production: execs

Mexico City — President-elect Andres Manuel Lopez Obrador needs support from the private sector if he wants to boost oil production in Mexico, particularly to levels seen at the start of the century, according to industry leaders.

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Mexico requires upstream investment of more than $20 billion/year to once again produce 2 million b/d, Carlos Morales Gil, the CEO of Petrobal, a Mexican upstream company, said during a panel discussion at a Forbes forum in Mexico City Monday.

"Who is going to shoulder this investment? This is the message we are taking to the government," said Morales, who was Pemex's exploration and production director between 2004 and 2014.

"Without a doubt, an important share of this will come from Pemex, but private investment will also be decisive," he added.

Lopez Obrador has been a historic opponent of private participation in Mexico's energy sector. However, he has softened his position after winning the election, moving away from holding a referendum on scrapping Mexico's historical energy reforms to reviewing existing contracts for corruption.

Mexico's oil production had decreased to 1.8 million b/d by July from a historic high of 3.4 million b/d in 2003. The incoming president has pledged to raise oil output to 2.6 million b/d by 2024.

To achieve this, Lopez Obrador will increase Pemex's exploration and production capital budget to $11 billion in 2019 from $7 billion this year.

The first four projects awarded at hydrocarbon auction round 1.1 and 1.2 are expected to supply 400,000 b/d by the end of the next presidential term, Morales said.

These projects are Talos Energy's Zama, Eni's Amoca, Pan American Energy's Hokchi and Fieldwood Energy's Ixakil shallow water fields. "These projects alone represent $10 to $15 billion in investment in the development phase," Morales said.

PEMEX CANNOT RAISE OUTPUT ON ITS OWN

Enrique Hidalgo, a board member of AMEXHI, the Mexican association of hydrocarbon producers, said Mexico requires private operators to return to its prior production levels.

"We, the private operators, see ourselves as natural allies of the state. Our goal is to boost investment in the industry like the next administration seeks to do," Hidalgo told the Forbes forum.

In the 1997 through 2014 period, Pemex invested up to $15 billion in the upstream segment, a level similar to the spending from Shell, ExxonMobil and other major international oil companies, he added.

"The investment of only one company isn't enough to raise output. The investment needed is too large," said Hidalgo, who also leads ExxonMobil Mexico's exploration and production division.

Hidalgo said that the most conservative outlooks expect Mexico's oil output to decrease to 1.6 million b/d by the end of the incoming administration, he added.

The capital-intensive and high-risk nature of the upstream sector raises the need for collaboration between multiple companies on boosting Mexican crude output, Morales said.

"Mexico especially requires private participation to develop risky operations such as deepwater and shale projects," he added.

LOPEZ OBRADOR: IDEALIST VS. PRAGMATIST

Claudio Gonzalez, Kimberly-Clark Mexico's board chairman, is optimistic Lopez Obrador's administration will balance pragmatism and ideology.

Critics of Lopez Obrador have accused the president-elect of being a left-wing ideologist sympathetic to populist policies enacted by the likes of the late Venezuelan strongman Hugo Chavez.

"We still have to see if [Lopez Obrador] will be a pragmatist or a preacher. He will have very pragmatic moments because without them Mexico won't be able to go forward," Gonzalez said.

After winning the election, Lopez Obrador has shown himself to be a pragmatic leader, supporting retention of the North American Free Trade Agreement and the army being on the streets fighting drug cartels, he added.

Both were issues he strongly opposed during the presidential campaign, Gonzalez said. "Having a balanced approach between pragmatism and ideology will be key for Lopez Obrador's success," he added.

Balance will be key as Mexico will not be able to attract investors without fostering an environment of trust and public fiscal discipline, Gonzalez said.

The Kimberly-Clark executive said the continuation of the energy reforms are critical for Mexico to keep growing, and he hopes Lopez Obrador will continue with them.

-- Daniel Rodriguez, daniel.rodriguez@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com