Mexico’s crude production decline may be irreversible

29 October 2018 (Last Updated October 29th, 2018 15:39)

Crude oil production in Mexico declined at a steep annual rate of 10% between 2016 and 2017.

Mexico’s crude production decline may be irreversible

Crude oil production in Mexico declined at a steep annual rate of 10% between 2016 and 2017. By the end of 2018, domestic production is expected to drop an additional 3.3% or 64 thousand barrels per day (mbd). With the current league of planned and announced fields, this decline will be mitigated by the additional domestic output but this will not be enough to reverse the declining trend. New production from fields awarded during previous bidding rounds and from Mexico’s national oil company (NOC) Petroleos Mexicanos’ (Pemex) own planned assets would account for a production upside of 267mbd by 2024.  On top of this, the recently announced Pemex shallow water discoveries are expected to contribute 208mbd within the same time frame.

Production scenario for long term strategy

Boosting production in the short term will have to rely on inactive fields or discoveries located nearby existing infrastructure. Coincidentally, Pemex recently announced the imminent development of six shallow water discoveries in the Southeastern Basin which could potentially produce an additional 208mbd by 2020 but will require an estimated $8-$10bn in capital expenditure. Further to the six recent discoveries, a portion of an estimated 1,400 abandoned wells may undergo reactivation by means of recompletions and sidetracking if at least $1.2bn were invested.

For long term production targets to be met, the Mexican government must consider integrated strategies in the upstream sector where production growth is diversified amongst the NOC and a large pool of participants. Such a strategy should ideally resume with the pending bidding rounds together with developing the recent offshore discoveries and reactivating mature onshore areas in the Southeastern Basin. Long term production will depend on successful exploration which will ultimately depend on effective block awarding through bidding rounds.

The stability of future production post 2024 will depend on exploration being carried out soon and continuously. Given the uncertain and expensive nature of these activities the best strategy is to diversify risk and increase competitiveness through the bidding rounds and farm-outs of Pemex’s key blocks.