Economics: Pemex and the state of the industry
The recovery in international oil prices bolstered Pemex’s sales and short-term financial situation in the third quarter, but its operating results leave much to be desired.
The company’s oil production continues to plummet owing to deep cuts to Pemex’s exploration budget that led the rate of proved reserve replacement to plunge from 71.8% to 17.5% in the past decade. Pemex estimates the industry requires as much as USD4 bn in exploration investments per year, but is only allotting USD1.7 bn; even when we add the USD 1 bn private firms committed to exploration there remains a USD1.4 bn shortfall.
Between 2007 and 2012 exploration investment per barrel produced increased to 1.5 dollars, with the 3P reserve replacement rate surging from 37.6% to 106% on average during that same period. Exploration investment has risen to as much as 1.8 dollars per barrel extracted during 2013-2018, although that turned out to be insufficient given the higher cost of the more recent discoveries, with the rate of 3P reserve replacement already falling to 80.3% on average. The average exploration investments of the main private companies exceed those of Pemex, with the leading private companies investing on average 3.2 dollars per barrel produced compared to Pemex’s 1.6 dpb.
Critics of the energy reform object to the lack of industry progress to date, but fail to recognize that the very first trickle of exploration contracts were awarded in 2015. The resulting production will only get underway in the coming years, but it will be essential to the country’s effort to gradually regain the output levels of years past.
President-elect Andrés Manuel López Obrador recently told private players in the sector that their contracts are secure, in a meeting in which it was agreed that the private sector will be producing 500,000 b/d by 2022. But Pemex continues to set the industry pace, and there are currently no bid rounds pending, and in the case of pipelines, several tender offers have been suspended. Further complicating the outlook is AMLO’s refusal to allow fracking while 53.3% of Mexico’s total reserves are located in shale fields.
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