Oil and gas to Mexico

Trends and opportunities

The market

Mexico is the world’s 10^th largest producer of oil and holds approximately 11.1 billion barrels of oil reserves—the 18th largest in the world. Mexico has the eight largest tight oil resources globally, with 13 billion barrels. Mexico is a significant oil producer (2.1 million barrels per day in 2017) and the third-largest in the Americas after the United States and Canada. Oil is a crucial component of Mexico's economy and earnings from the oil industry accounted for 32% of total government revenues in 2017. (Source: Mexico’s Oil and Gas Sector: Background, Reform Efforts, and Implications for the United States, congressional Research Service ).

In figures:

• Oil Reserves 7.2 billion barrels
• Oil Production 2.22 million barrels of oil per day
• Gas Reserves 200 billion cubic metres
• Gas Production 40.7 billion cubic metres

(Source: The Oil and Gas Year 2018, January 2019)

In December 2013, Mexico implemented the new Energy Reforms which allows both local and foreign private investment into the energy sector for the first time since nationalisation of the oil industry in 1938. These reforms now allow international energy companies to operate in Mexico and include provisions for competitive production sharing contracts and licenses. In addition to increasing the demand for technology and technical expertise for the development of upstream deep water and shale oil and gas fields, the energy reform also permits for greater private investment in retail fuel distribution.

Since the passage of the 2013 energy reform, a number of oil majors such as BHP, Royal Dutch Shell, BP, ExxonMobil and Total have signed multimillion dollar contracts to explore for oil in the deep waters of the Gulf of Mexico. A total of 199 contracts were signed by 125 firms as a result of six oil and three electric power auctions. As a result of the auctions, 67 private oil companies also entered Mexico. These prospects were seen to be able to generate as much as US$200 billion in investment from oil majors and Chinese firms. (Source: Adam Critchley, BN Americas, January 2018, January 2019)

The contracts of work that have secured international engagement are intended to trigger at least $US 4 billion of exploration investment and an estimated $US 160 billion of investment over the life of the contracts. (Source: Mathew Stevens, Financial Review, December 2018, January 2019)

Despite the 2013 Energy Reforms, crude oil production has been declining 4% to 5% per year over the past decade, dragging Mexico's share of global production down from 5% to 2%. Given that Mexico's natural gas extraction is associated (coming along as a by-product of crude oil production), the country's gas output has correspondingly dropped 40% since 2012. (Source: Forbes, Mexico's Renewed Focus On Oil and Natural Gas, December 2018, January 2019)

With overly limited exploration and production of new wells, proven oil reserves have declined from nearly 50 billion barrels in the mid-1990s to 7 billion today.

Mexico's oil and gas collapse is an immense problem. With a population of 135 million people and adding $35 billion in real GDP every year, Mexico's is the fastest growing OECD energy user. Expected economic growth is a solid 3% to 5% per year, and oil and gas supply 85% of the country's energy.

Mexico's new President Andrés Manuel López Obrador (AMLO) took office on December 1 and will serve one six-year term. AMLO claims that he will head the biggest transformation in the country since the 1910 revolution and energy is clearly at the top of AMLO's agenda.

In order of importance, the focus of the new President and his administration will be on oil, natural gas, and electricity. In fact, he has already identified four energy policy priorities:

• to increase domestic oil and gas production
• to refurbish Petroleos Mexicanos (Pemex’s) six existing refineries
• to construct a new refinery in the State of Tabasco
• to increase electricity generation, mainly by updating existing hydroelectric plants.

In December 2016, Australian company BHP Billiton won a majority 60% stake and the right to operate a highly prospective Mexican oil discovery called Trion, which is estimated to contain 485 million recoverable barrels of oil.

BHP won the race for Trion with a bid that could see it invest up to US$1.3 billion ($1.8 billion) in pre-production assessment programs and a total of US$11 billion in investments for the development of the project, US$8.5 billion of this corresponding to CAPEX. BHP’s success case should give Australian suppliers some confidence that they will be able to develop commercial opportunities in this sector in Mexico, although it could be a decade or more from offering commercial scale production.

On December 2018, AMLO confirmed the suspension of tenement auctions for a three year term. The President committed not to cancel the deals already made with international hosts, however he urged Mexico's international partners to stop speculating and to start drilling. "We can't keep on giving out territory for the extraction of hydrocarbons if there is no investment and there is no production," the President told local media. (Source: Mathew Stevens, Financial Review, December 2018, January 2019)

BHP and other international oil companies identify the President's intervention as an opportunity to show what they can do. In shutting the door to new auctions the President has urged acceleration in exploration and production.

Gas

For natural gas, falling production has meant a strong dependence on US shale gas. Over the past 10 years, the strategy has been to displace fuel oil in power generation with natural gas. Today, gas accounts for over 60% of the country's electricity. And Mexico gets nearly 65% of its natural gas from the US and the consumption is expected to increase by 64% for the 2013-2027 period.

Since 2010, Mexico’s gas imports from the USA have grown by 300%, and the US Energy Information Administration predicts they will double by 2019. (Source: The Oil and Gas Year 2018, January 2019)

Mexico has an estimated 17 trillion cubic feet (Tcf) of proven natural gas reserves. Natural gas is increasingly replacing oil in power generation. However, higher levels of natural gas consumption will likely depend on more pipeline or liquefied natural gas (LNG) imports from other countries.

Regarding technically recoverable shale gas resources, Mexico is the sixth largest in the world with an estimated 545 Tcf. However, the true potential of accessing and developing shale gas in Mexico is stalled by the low availability of required technology and water resources, as well as government policies currently devoted to increasing the supply of low-cost natural gas from the United States. (Source: US Energy Information Administration, Mexico International energy data and analysis, September 2015 ).

Oil

Mexico is a traditional oil-producing and oil-exporting country. For the last 78 years, the sector has been dominated by state-run energy company Pemex, which took over all upstream and downstream oil and natural gas operations, as well as transportation, sales, exports and imports. This long-standing monopoly has resulted in a chronic deficit of investment and lack of access to more efficient technologies, bringing about continual decline to Mexico's hydrocarbon reserves and production. (Market Watch, Mexico Oil & Natural Gas Sector Report 2018/2019, January 2019)

When it comes to refining capacity, Mexico is looking to update its capacity. PEMEX refineries typically operate at 66% of capacity. The country’s refinery issues are made obvious by the fact that Mexico has been forced to export its own crude to the US Gulf Area, have it refined, and then import it back again as gasoline. Mexico produces plenty of oil to meet its own needs, but still illogically accounts for 60% of all US gasoline exports. The US has 2.5 times more people than Mexico, but it has 25 times more refineries. (Source: Forbes Mexico's Emerging Oil Opportunities Are Great, June 2017, January 2019)

Despite the 2013 Energy Reforms, AMLO has pledged to halt oil auctions and to build more refining capacity within Mexico. The President seems determined “to bring production back home” so that oil never “falls back into the hands of foreigners.”

López Obrador has confirmed a 26% increase in Pemex's exploration and production budget in order to increase production by 52% to 2.6 million barrels perday by 2024. His administration will build a new oil refinery in Tabasco with an investment of 160 billion pesos (US $8.6 billion) over three years and will also invest 49 billion pesos (US $2.6 billion) over two years to revamp the six refineries that are already in operation.

Mexico completed its 2019 oil hedge at an average of US $55 per barrel for its 2019 oil exports.

Opportunities

Mexico's oil and gas industries’ current problems include: a lack of security, field mismanagement, corruption, water shortages for shale, infrastructure deaths, and pipeline bunkering (theft) just to name a few, but the opportunities are massive.

Domestic demand potential is particularly strong. While over-reliance on fuel oil in the power sector has reduced and natural gas has overtaken petroleum, oil is still 50% of Mexico's total energy usage. This is nearly double the OECD average. It is also predicted Mexico's oil production could double to 5 million barrels per day by 2030. (Source: Forbes Mexico's Emerging Oil Opportunities Are Great, June 2017, January 2019)

The oil potential is immense. The mighty Eagle Ford shale play in south Texas runs into Mexico, and there are shale oil (and gas) opportunities in the nation that will only increase as prices rise.

Mexico’s significant oil reserves will drive investments from the private sector and offer Australian companies opportunities, either as project developers, operators, contractors, sub-contractors, or suppliers of equipment and/or technology in the Mexican market. This level of production and expanded exploration and drilling plans drive new opportunities for Australian exporters of oil and gas equipment and service companies in the upstream segment of the sector.

There are relevant opportunities across the entire oil and gas value chain.

• Upstream opportunities: for deep-water oil and gas, conventional and unconventional plays including shale.
• Midstream opportunities: in order to develop the required pipeline, liquefaction and port facilities are needed to bring the new products to market.
• Downstream opportunities: the need to refine and market finished products.

Offshore

Deepwater exploration and production is an area that requires technical skills, engineering capabilities, and significant and sustainable capital spend. Pemex has been unable to exploit its vast resources in the Gulf of Mexico because of capital and technical constraints. In the new model Pemex and the Mexican government will be able to partner with companies, such as supermajors, national oil companies, and independents that have the technical expertise and balance sheets needed to fully exploit the opportunity.

Shale

The majority of Mexico’s shale prospects lie in the north and northeastern sections of the country, where infrastructure is often largely undeveloped. This means that in order to tap the country’s bounty of shale oil and gas, infrastructure such as roads, housing, rail, pipeline and many others will have to be built first. The ability to develop a suitably skilled workforce will be essential to long-term success. Security issues must also be addressed. (Source: Thomas Tunstall, Shale Magazine, Shale Oil and Gas in Mexico, Accessed on February 2019)

Pemex does not have the technical and operating expertise to develop all of these resources — nor the financial resources — and this remains largely untapped.

Existing fields

The many innovations in oil and gas exploration and drilling in the last decade have allowed for new techniques to further exploit existing conventional oil and gas assets. Deploying new technologies may help these older fields become more productive. Successful partners for these plays will either have superior recovery technologies or the right operating margins to be profitable with brownfield economics.

Midstream

Rapid expansion of the oil and gas market can lead to infrastructure challenges. Mexico will need substantial infrastructure to produce the new resources. Increasing demand and the very limited transport capacity provide a major opportunity for midstream companies to actively engage in developing the logistics and distribution requirements across the full supply chain. This will create many opportunities for midstream companies to collaborate with the government and/or private companies to build this infrastructure.

Downstream and petrochemical

For decades, the Mexican Government has burdened Pemex with funding the current retail price subsidies and as such, Pemex did not have the funds to invest in expanding or properly maintaining refining capacity to meet the increased demand. The reform is unburdening Pemex from funding the retail subsidy directly, so Pemex will be able to reinvest in their downstream infrastructure. As a side benefit, making the retail subsidy system transparent and funded directly by the government could motivate Mexican and international companies to invest in refining.

Additionally, as shale production comes on line, Mexican refineries which are well suited for shale oil, will be able to process shale more efficiently. The combination of the shifting of subsidies and the new source of supply should help Mexican refineries become profitable again.

The reform will also transform the petrochemical industry in Mexico. Less expensive input costs from new fields, new partners with technical expertise and capital, and new transportation infrastructures should open Mexico's petrochemicals business to both domestic and export opportunities. In fact, Mexico could become the dominant petrochemical player in Latin America.

Downstream retail

There is a real opportunity for retailers to enter the Mexican retail market and they will be able to brand their sites since Pemex will no longer be the only brand of retail gasoline in Mexico. According to Forbes magazine, there are 10,000 service stations, and no Mexican group owns more than 400 stations. The market is fragmented and consolidations in the market are likely (Source: Mexican energy reform, Opportunity knocks – Deloitte, 2014 ).

Skills development

Many new oil companies, utilities and service providers are expected to enter Mexico and compete for talent in the coming years. New and expanded government agencies will also need more skilled professionals. At the same time, as many as half of Pemex’s employees will be at or near retirement age within a decade. However, the absence of quality education at the primary and secondary levels, low enrolment in energy-related higher education programs and weak industry-academia ties mean not enough graduates are prepared to work in the sector.

Practical training

Mexico has no shortage of skilled workers, but needs to better align the qualifications of its graduates with the needs of the energy sector. A lack of English language skills is one of the barriers that can constrain Mexicans from working in international companies. A shortage of domestic skilled labour would be particularly challenging for international companies that will have to comply with Mexico’s local content requirements (Source: Mexico’s Energy Reform: Bridging the Skills Gap, InterAmerican Dialogue ).

Education

There are more than 30 different institutions delivering academic programs related to the oil and gas industry, according to the National Network of Schools of Petroleum Engineering. The institutions include a variety of organisations, ranging from Mexico’s National Autonomous University (UNAM) to local technical institutes. Despite this investment, the skills gap for the energy sector has been estimated at 130,000 people.

According to the National Centre for Science and Technology, CONACYT, there are presently Mexican students following postgraduate studies in oil and gas in universities from Norway, The Netherlands, UK, USA, Canada and Australia with support of the Mexican Government. This is good news in terms of human capital development, but the local offer lags behind industry needs.

In a forum sponsored by the Human Resource Association for the Oil Industry (ARHIP) it was highlighted that in order to develop the skilled professionals that the industry will demand in a few years, there are multiple areas of opportunity. These include the development and updating of academic curricula in all technical disciplines related to the oil and gas industry, as well as soft skills and technical English language training.

Partnering with corporations and with foreign universities to encourage faculty development and research will be essential to reach a competitive level in mining education (Source: Human Resource Association for the Oil Industry).

Competitive Environment

By law, Pemex is prohibited from selling its state-owned property. However, the Mexican government has created a new investment vehicle called FIBRA E that could enable such efforts. Designed for investments in developed energy and infrastructure assets, this programme is modelled after the US master limited partnership (MLP) structure and provides a vehicle through which Pemex can legally sell its assets (Source: BMI Research, Americas Oil and Gas, Issue 116 January 2016 ).

Tariffs, regulations and customs

Mexican import controls have significantly eased in recent years. Most products no longer require prior import permits and import duties have also been reduced. Duties are generally assessed based on the transaction value of the products imported into Mexico.

Mexico has more free trade agreements (FTAs) than any other country in the world—12 FTAs with 46 countries—including NAFTA and FTAs with the European Union, European Free Trade Area, Japan, Israel, and ten countries in Latin America. Additionally, on 8 March 2018 the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), also known as TPP11 or TPP-11 was signed. This trade agreement represents significant benefits for Australian businesses. These relate not only to the removal of tariffs on equipment and technology, but also provide favourable conditions for Australian staff members to enter the country for work reasons.

Mexico is also a member of the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC), the G-20, and the Organization for Economic Cooperation and Development (OECD).

The government requires the importer to re-label the products in Spanish and include the relevant information about the contents and country of origin of the producer and information about the import, port of entry, etc. All imported merchandise should meet minimum sanitary and safety standards.

A wide variety of products must comply with the Mexican Standards of Quality, referred to as Mexican Official Norms (NOM). Certain imports and exports are subject to regulations by the Ministry of Environment and Natural Resources (SEMARNAT). Some imported products must receive sanitary or phytosanitary authorisations issued by the Ministry of Health. There are also rules establishing the classification of goods whose importation is subject to regulation by the Commission for the Control of Pesticides, Fertilisers and Toxic Substances (Source: PWC, Doing Business in Mexico, January 2015 ).

Essential customs information and procedures to consider:

Documentation required:

• Bill of Lading
• Commercial invoice with value breakdown
• Instructions letter
• Import and broker licence
• Specific requirements according to commodity code for goods.

Customs process:

• Clearance process time depends on commodity code
• The importer must be a registered person or legal entity.

Duties and taxes for formal entry clearance:

• VAT 16 per cent
• Customs fees
• Duties depend on Harmonized Tariff Code
• Broker fee - depends on shipment value

All commercial invoices must meet the following requirements:

• Tax ID for the importer
• Full goods description and Harmonized System Code (HS) - if shipment origin is a Mercosur country it must include the Mercosur Common Nomenclature number (NCM)
• Merchandise unit cost, quantity and currency
• Applicable incoterms used.

(Source: DHL, Mexico Fact Sheet , February 2015 )

As tariffs and duty rates are subject to change without notice, Austrade strongly recommends you confirm these prior to selling to Mexico. For more information, visit the Service of Tax Administration (SAT).

Marketing your products and services

Market entry

There are more than 50,000 Mexican companies in the oil and gas sector that generate over one million jobs. And, although these companies generally lack the scale and expertise for Exploration & Production, they may be able to participate in distribution, storage, logistics, services, and petrochemicals. They also understand the political and regulatory landscape and have established relationships with government and community leaders. As foreign companies develop their plans for partnerships and alliances, they should consider these existing companies as potential partners (Source: Mexican energy reform, Opportunity knocks – Deloitte, 2014 )

Mexico's local content requirements are low compared to other jurisdictions. The local content requirement varies depending on the phase of the project:

• 13% local content during the exploration period
• 25% during the first year of development
• Increasing one% per year up to 35%.

The definitions and metrics for national/local content are as yet unclear, but IOCs should remain aware of these as the National Hydrocarbons Commission (CNH) has authority to penalise those that do not comply.

Foreign companies should be careful when developing their business models and should consider engaging Mexican partners where it makes sense in order to help them comply with local content requirements (Source: Meeting local content requirements in Mexico, E&P MAG, April 2015 )

Media

Austrade is actively promoting Australian oil and gas policy, as well as the capabilities and innovative solutions that are supporting the oil and gas sector to attain better efficiency and productivity

Some tips to help your media promotion:

• Have communications collateral available on your company in Spanish. This could be a local website and printed collateral i.e. flyers.
• Customise your value proposition and key messages pitch to match the requirement.
• Send content to industry media about your company, product and service.

Links and industry contacts

Government, business and trade

Department of Energy
Exploration Bid Rounds website
Petroleos Mexicanos – Pemex
National Hidrocarbons Commission

Media

Energía a Debate
Energía Hoy
Oil & Gas Magazine
Petroleo Energía
Revista PetroQuiMex
Revista Petroquímica, Petróleo, Gas, Química & Energía
Negocios y Petróleo

Please note: This list of websites and resources is not definitive. Inclusion in this list does not imply endorsement by Austrade. The information provided is a guide only. The content is for information and carries no warranty; as such, the addressee must exercise their own discretion in its use. Australia’s anti-bribery laws apply overseas and Austrade will not provide business related services to any party who breaches the law and will report credible evidence of any breach. For further information, please see foreign bribery information and awareness pack.

Contact details

The Australian Trade and Investment Commission – Austrade – contributes to Australia's economic prosperity by helping Australian businesses, education institutions, tourism operators, governments and citizens as they:

• develop international markets
• win productive foreign direct investment
• promote international education
• strengthen Australia's tourism industry
• seek consular and passport services.

Working in partnership with Australian state and territory governments, Austrade provides information and advice that can help Australian companies reduce the time, cost and risk of exporting. We also administer the Export Market Development Grant Scheme and offer a range of services to Australian exporters in growth and emerging markets.