REINVENTING THE WHEEL: the false debate of public vs private investment

At almost 3 months from the start of the new administration, there is a worldwide concern regarding  the relationship between the Mexican oil and gas industry and AMLO’s government. However, there are  important reasons to believe that sooner than later, the new government will realize the necessity of  private sector participation in upstream activities just as the two former administrations did during the  last 12 years.

1.- AMLO’S CURRENT POSITION TOWARDS PRIVATE PARTICIPATION  IN O&G ACTIVITIES

It appears that the new government has the misconception that oil and gas public and private invest-  ment are competing forces rather than complement each other. This is reflected by the constant  complaint over the “poor” performance of oil and gas contracts, as private operators are not investing  what they promised (even though the government holds work commitment guarantees of USD$3,867  million) and by the idea that PEMEX alone can produce more and better Mexican mineral resources.


2.- THE IMPOSSIBILITY OF THE ONE COMPANY MODEL

Government is expecting to increase oil production to 2.4 million barrels per day by 2024, but this will  be impossible using exclusively service contracts. According to CNH, PEMEX requires to  invest  USD$20,000 million per year to revert the production declining trend. However, barely half of this  requirement was allocated for 2019 (USD$10,515 million). On the other hand, the following graph  clearly shows that even in times of high CAPEX (2009-2015), PEMEX was not able to stop the production  fall. This suggests that in addition to doubling CAPEX, the National Oil Company requires to expand its  operational and technological capabilities.



3.- REINVENTING THE WHEEL: THE CHALLENGE OF AMLO’S  ADMINISTRATION AND THE OPPORTUNITY FOR PRIVATE INVESTMENT

The current administration has announced a “new” plan to revert declining production with service  contracts called CSIEEs, disregarding the fact that this was exactly how the industry operated from  2008 to 2013 without any significant results. By 2013, the government realized that a major overhaul  was needed so the Energy Reform introduced a very successful bidding-round system with more  efficient contractual models like Production Sharing Contracts or Licenses and the possibility for  Pemex to farmout its Entitlements.

From the E&P Mexican learning curve of the last 10 years, we can expect that CSIEEs will be insufficient  to revert the declining production and the new government will have no other alternative than taking  advantage of the mechanisms of farmouts and bidding rounds, given that 20% of government revenue  still depends on oil rent.




Some considerations about the  inevitable decision to complement  Public and Private investment.

  • Public investment was insufficient to  fulfill work commitments of 79 of 103  exploration entitlements assigned in  Round Zero within the legal term of 3  years (Aug 2017).
  • Pemex’s financial debt is at its highest  with more than 100 billion.
  • Financial rating agencies, like Fitch and  Moody’s) have been downgrading  PEMEX’s financial position as its current  upstream business plan is insufficient to  stop declining reserves and production.
  • Credit ratings are critical to public  finances as government revenue  depends on oil rent by 20%
  • Private investment potential is key to  complement public activities mainly in  areas where PEMEX is not working. In just  three years of tenders, $3,867 million of  investment were committed. This is  equivalent to 37% of the Public Budget  allocated to Pemex’s E&P in 2019.
  • The largest potential lies in farmouts of  Pemex. Farmouts benefit is twofold as it  is the fastest mechanism to stop  declining production and it could  strength PEMEX’S financial, operational  and technological capabilities.



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