Country Focus: Changes to Mexico’s energy policy driving development

Mexico’s shale gas and oil sector could be about to take off, as the country’s first, keenly anticipated, shale auction could take place later this year or next.

However, remaining upbeat in the face of low oil prices, Mexico has not only announced a successful licensing round for onshore oil blocks, but announced its intention of offering plum Gulf of Mexico blocks “by the third quarter of 2016”. The upstream industry changes are a highly visible part of the energy policy shift that is driving investment throughout the oil space.

For the onshore round, Mexico’s third, the winners of which were announced in mid-December 2015, included proven areas in mature fields containing ‘tail-end’ reserves and the intention was to give a fillip to Mexico’s indigenous oil and gas industry. Local companies won 20 of the 25 licence blocks on offer. During the 77-year Pemex E&P monopoly, no other Mexican companies were allowed in the sector.

In the promised – and highly anticipated — deepwater offshore round, a total of 10 blocks is expected to be offered by the country’s Ministry of Energy. It will be Mexico’s fourth auction of oil and gas blocks since an energy reform in 2013 opened up the sector to foreign and private Mexican companies.

Among the potentially rich pickings to be included will be four blocks in the Perdido area near the median line with the US. Royal Dutch Shell is the operator of a major Perdido area project in the deep US waters on the other side of the line. Other partners in that include Chevron and BP.

Should commercial quantities of hydrocarbons be found in the Mexican offshore, it is expected that the energy ministry would offer for any potential development either a licence contract similar to the one used in the US, or a contract based on production-sharing or profit-sharing.

For the Mexican offshore licensing rounds, local companies had been required to form joint ventures with experienced international companies since the blocks on offer were said to have greater technical requirements. For the onshore mature blocks, Mexican companies were not required to have foreign partners, though there was an industry experience requirement.

Midstream, downstream, too

The energy policy changes have not just boosted offshore spending, but also investment in the midstream and downstream.

In the petrochemical sector, substantial growth is predicted once additional feedstock from a new $3 billion ethylene/polyethylene plant, a joint venture between Braskem of Brazil and Mexico’s IDESA, works through the system. Its annual capacity totals 1.05 million tons of polyethylene. Start-up of the plant, located in the state of Veracruz, was announced by Braskem IDESA in end-March 2016.

“The changes in Mexico’s energy policy are already driving private investment in the energy infrastructure necessary to transport US natural gas to Mexico,” said Rina Quijada, senior director of consultants HIS Chemical.

The Los Ramones Phase I pipeline, which came online in December 2014, added 2.1 billion cubic feet a day (bcf/d) of gas import capacity from Texas. Additional projects totalling 3.45 bcf/d of cross-border gas capacity are currently being developed.

“For Mexico, that gas means access to abundant, competitively-priced feedstock for petrochemical production. Just as important, it can be used for production of reliable, cost-competitive electricity, which is absolutely essential to grow the entire manufacturing base in the country and to make Mexican petrochemical production competitive.”

Port expansion programme

At the same time, the Mexican government is to invest $5 billion into 25 new projects at its network of 117 ports. It plans to improve their efficiency by viewing them as a single logistics chain, according to Guillermo Ruiz de Teresa, general coordinator of Mexico’s ports and merchant marine fleet.

As a first step in setting up Mexico’s “two-port system”, he said, tariffs have been equalized across the board. The ports will be regarded as one “articulated port system” for the Pacific coast and one for the Gulf coast.

A major part of the government investment will go into a project to upgrade the port of Veracruz, to deal with the increase in maritime traffic resulting from the country’s energy reform. The number of oil rigs operating in the Gulf of Mexico is expected to rise from 32 at present to around 100.

Building a new terminal at Veracruz will triple the port’s capacity over the next 25 years and quadruple its cargo handling capacity. The first phase, a new sea wall, is expected to be completed in 2016, with the second stage not finished until 2030. In total around $2 billion is scheduled to be spent at Veracruz, Ruiz de Teresa said.

Other key port projects in the pipeline include new dock construction and other improvements at Seybaplaya port, Campeche state, at Altamira port the construction of deep harbour oil platforms and extensive modernisation at the port of Ciudad del Carmen.