Increased private investment is needed in Mexico to meet growing energy demand

With the upcoming presidential elections, Mexico faces several energy challenges, including declining oil and gas production, the need to increase exploration activities, heavy dependence on gasoline imports, limited energy supplies and public pressure to switch to renewable energy. According to the Wood Mackenzie report, all this is happening as domestic demand has steadily increased over the past decade.

“Mexico’s energy sector faces significant challenges as demand grows across all sub-segments, including upstream,” said Adrian Lara, principal analyst for Latin America upstream at Wood Mackenzie. “Regardless of the outcome of the presidential elections, the new government must reassess not only the role but also the conditions for increasing private investment in the energy sector.

Continue, Lara: “Over the past five years, the Mexican government has committed to strengthening the role of state-owned hydrocarbon producer Pemex in the energy sector. However, there are limits to what Pemex can do in terms of taking risks and financing the investments necessary to develop industry infrastructure.”

According to Wood Mackenzie’s report “Mexico’s Energy Sector Challenges for the Incoming Administration,” Mexico’s demand for oil and gas is projected to grow by 2% this decade. However, hydrocarbon production will continue to decline throughout the decade, making it difficult for the country to meet growing domestic refining demand and demand for natural gas in the energy and industrial sectors. In this situation, Mexico will not be able to limit gas imports.

“Although non-Pemex production under production sharing arrangements (PSCs) will increase by the end of this decade, this increase will not be enough to counter the downward trend,” Lara said. “There is a risk of a stronger decline in production after 2030 without major changes to the current government policy of banning new tender rounds for hydrocarbons or awarding exploration blocks.

“Mexico’s energy security requires the availability of affordable energy sources. Integration with the US energy market provides gas at competitive prices, but we believe that the new government should evaluate policies that favor the development of untapped gas reserves, Lara added.

According to Wood Mackenzie, approximately 60% of Mexico’s potential resources remain unrewarded. The country’s total prospective resources are estimated at almost 113 billion barrels of equivalent (boe), of which 67.6 billion boe corresponds to 528 uncommitted areas located in several onshore and offshore basins. Of the deposits discovered through exploration since 2020, on average only 36% were commercially viable. Currently, only Pemex and three other operators have committed a budget for future exploration activities.

“Hydrocarbon exploration since the sector was opened to private operators has had limited success,” Lara said. “Most of the key international companies awarded blocks have not achieved commercial success, and with the resumption of auction rounds still uncertain, these companies may either leave the country or seek exploration opportunities elsewhere.

“There is still a significant area of ​​undeveloped land and unallocated prospective resources in the country. Should auction rounds resume, a full review of existing fiscal conditions will ensure that Mexico remains attractive and competitive for hydrocarbon exploration. “We believe that the discovery of additional resources is necessary even to maintain Mexican oil production at its current level of 1.8 million barrels per day.”

In addition to the issue of energy rescue, domestic energy suppliers have highlighted delays in the country’s transition to renewable energy. Mexico has not yet set a time frame for achieving its net zero emissions target. At the 2015 Paris climate conference, Mexico pledged to reduce its emissions by 35% by 2030, but this goal remains out of reach.

“In an economy the size of Mexico, reducing greenhouse gas emissions by 35% requires significant financial support from both the government and the private sector to develop renewable energy supplies, infrastructure and increased energy efficiency,” Lara said.