Lack of oil investments, aging oil fields trouble Mexican oil sector

The U.S. has long been dependent on Mexico for its crude oil requirements. However, with the current situation, Mexico may soon step down as one of America’s biggest oil suppliers due to dwindling output.  The culprit – continued lack of oil investment and depleting oil fields.

About four years ago Mexico’s crude output reached 3.2 million bpd but, a year ago, it had declined to below 3 million bpd, based on data from the Energy Information Administration (EIA).

Oil specialists opine that Mexico should encourage foreign oil investment if it wants to stimulate additional production. The EIA, however, estimates that, based on present policy, the country will have to purchase crude from abroad starting 2020.

If outputs continue to decline, Mexico may lose its share of the U.S. oil market to Saudi Arabia and Canada. Canada is the top crude supplier to the U.S. followed by Saudi Arabia and Mexico. On the other hand, this decline could also lead to a surge in global crude oil prices.

Oil experts point to Mexico’s oil sector and its current organization as the source of Mexico’s woes.

In the late 1930s, the country’s oil sector was nationalized and PEMEX has since taken the lead role in the oil business while foreign oil giants, like Royal Dutch Shell, Exxon Mobil and BP, were allowed very little participation despite having available funds to invest in oil exploration.

PEMEX is touted as of one of the world’s biggest oil companies. However, the EIA disclosed that a large chunk (about 30 percent) of the firm’s earnings is just ploughed back to the state. Unfortunately, the latter seems hesitant to “give back” as it consistently fails to release fresh funds which could finance new exploration ventures by PEMEX.

Jose Valera, an associate at Mayer Brown law firm, observed that there’s significant disparity in oil drilling stats by the U.S. and Mexico. The U.S. has been successfully producing oil from the Gulf Of Mexico and Texas, while Mexico couldn’t even get close to what the U.S. has achieved so far without significant foreign investment.

Valera said that the root of such disparity is not geological, and he isn’t convinced that oil reserves are more abundant in America’s section of the Gulf. Mexico, he said, hasn’t actively explored its rich reserves to gain substantial output.

Oil expert Alejandra Leon of IHS CERA Mexico City, said that oil is a “touchy” political issue in Mexico.

Foreign firms willing to invest in oil exploration ventures with PEMEX should be allowed higher stakes in the company if it really wants to step up oil production and arrest declining outputs.

Nevertheless, it’s a tough decision as PEMEX liberalization continues to be a sensitive issue among union workers, local agencies being sustained by PEMEX earnings, and consumers who enjoy gas appropriations.