Mexico's declining crude oil production could ruin dream of energy independence

Mexico's next president, Claudia Sheinbaum, will likely face a new challenge to fulfill the dream of energy independence that led her predecessor to spend $17 billion on a new refinery: a shortage of domestic crude oil supply.

The country is a major crude oil producer, but production from older oil fields, mainly in the Gulf of Mexico, has fallen to its lowest level in more than four decades.

Without significant spending on exploration and production, Mexico could find itself importing crude to feed its expanded refinery capacity over the next decade, an unprecedented change in direction for the major global exporter.

For years, Pemex, the state-owned company, has been unable to meet local fuel demand because its outdated refineries could not process the heavy Mayan crude it predominantly extracts.

This left Mexico exporting crude oil while having to import gasoline and diesel, mostly from the United States. The outgoing president, Andrés Manuel López Obrador, promised to change what he saw as a humiliating dependence on imported fuels.

He commissioned a new 340,000 barrel per day (bpd) refinery in his home state of Tabasco to cover the fuel supply deficit caused by Pemex's six refineries that had gone decades without sufficient investment to operate at full capacity.

López Obrador's Olmeca refinery at Dos Bocas is over budget and behind schedule, but once fully operational, Mexico could come close to supplying the fuels it consumes for a few years.

Previously unreported projections from the energy ministry suggest that such a period would be short-lived, and Pemex would likely have to start importing crude as production will decline rapidly from 2030 onwards. Pemex, the energy ministry and the presidency office did not respond to requests for comment for this story.

Zama, a shallow-water field on the verge of being a deepwater field, and Trion, an ultra-deepwater field, would temporarily increase production to nearly 2.247 million bpd in 2028 from around 1.8 million bpd now, showed the middle scenario of three put forward by the energy ministry.

The most optimistic scenario sees production at 2.390 million bpd, and the most pessimistic at 2.164 million bpd.

All scenarios, which include some new discoveries, project a rapid decline in production from 2030 onwards.

That means Mexico would have to start importing crude as early as next decade if it wants its refineries to operate near capacity, said an energy ministry source familiar with the projections. In addition, it would no longer export crude.

"Proven reserves give us the most realistic picture of what's out there," he said. "I don't see a big discovery, one on the scale of Trion or Zama, anytime soon."

Zama and Trion could also disappoint, the source said, adding that other recent discoveries have done so.

UNEXPLORED POTENTIAL

Alma America Porres, who served two terms as a commissioner at the hydrocarbons regulator, including during the historic energy reform that sought to open up the sector a decade ago, said Mexico's proven crude oil reserves suggest that shortages could come even sooner.

Earlier this year, Mexico reported that its proven crude oil reserves had fallen to 5.978 billion barrels from 6.155 billion barrels a year earlier. However, its total proved reserves increased thanks to natural gas.

Production from older fields, including the Cantarell field, once the second largest in the world after Ghawar in Saudi Arabia, has declined rapidly in recent years. Newer fields have failed to compensate.

López Obrador has invested heavily in the six refineries, increasing processing to about 1 million bpd. Still, his outdated refineries produce record amounts of fuel oil instead of the needed fuels.

With the start of operations of the Olmeca refinery and repairs to the older ones, the energy ministry forecasts that they will process 1.6 million bpd of crude, closer to but still below consumption levels of around 1.7 million bpd, according to data from the International Energy Agency.

Experts have said that the huge sums spent on the Olmeca refinery could have been better invested in oil field exploration and production, and diversification into renewable energy sources.

Lopez Obrador, a resource nationalist, has not held auctions for areas that could encourage other oil and gas companies to explore and invest in deepwater and onshore shale production, where Pemex lacks expertise and money.

The legal framework to allow the participation of companies to operate fields on their own, or in association with Pemex, remains in place even after López Obrador pushed through other reforms that prioritize Pemex.

"The exploration part requires a lot of investment, investment that Pemex doesn't necessarily have the money to make," said Carla Gabriela González, another former senior official at the hydrocarbons regulator.

"And that is where the private companies added value: because they invested in exploration, and that investment did not cost the Mexican state anything. On the contrary, these companies paid the Mexican state for the right to explore."

Three Pemex engineers in the company's exploration and production arm and the energy ministry engineer agreed that the state-owned company could benefit greatly from private sector participation.

"What we need is a massive exploration strategy, just like Petrobras in Brazil had, rather than one that focuses on increasing refining capacities," the energy ministry source said.

Pemex puts Sheinbaum at a crossroads: she has positioned herself as the guardian of her mentor's nationalist legacy of resources that require investment while others are diversifying into renewable energy sources.

Sheinbaum has proposed spending more on wind and solar energy infrastructure for electricity generation. Her plans for Pemex remain uncertain and her team did not respond to a request for further comment.

With a PhD in energy engineering from the National Autonomous University of Mexico, Sheinbaum was a lead author of the industry chapter of the UN Intergovernmental Panel on Climate Change in 2014.

One of Sheinbaum's energy advisors said there would likely be some collaboration with private companies during her presidency to increase exploration and production, giving preference to those already operating in Mexico.

Collaboration: Grupo Auge | Reuters (International).