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Mexico's new leader puts bid rounds on hold

The new administration puts its faith in Pemex with expanded E&P budget

New Mexican President Andrés Manuel López Obrador, after a campaign that vowed sweeping changes, wasted little time in office before cancelling February's planned licensing auctions. The scheduled bid rounds have been delayed for potentially three years while the government reviews existing contracts and proof of improving production.

But investor fears of a total reversal of energy reforms have eased slightly. Existing contracts will still be respected, despite López Obrador's criticism during the electoral race of the private sector. Since 2013, the reforms have brought in investment upwards of $100bn, through sales of more than 80 blocks to 70 companies, but failed to significantly boost domestic production.

López Obrador now finds himself with a tough task. Mexico's oil production has plummeted yearly since a peak of 3.8m bl/d in 2004 and averaged only just above 1.8mn bl/d through 2018. His ambition is to cut growing imports and hit an output target of 2.6mn bl/d by the end of his term in 2024.

To achieve this goal López Obrador is banking on Pemex, the state-run oil giant. In the 2019 budget, he allocated 464.6bn Mexican pesos ($23.7bn) to the company, a rise of 15.6pc year-on-year. In total, the capex budget for the year is $10.7bn, a 24.5pc increase over the previous year.

Pemex will invest around half of the capex budget in shallow-water plays, primarily Ku-Maloob-Zaap (KMZ), Chuc and Cantarell. These fields are all aging, but López Obrador has said more oil can still be extracted from them. As of November, yearly average output from KMZ, the country's biggest combined producer, rose slightly from 806.4mn bl/d to 814.7mn bl/d, according to the National Hydrocarbons Information Centre (CNIH).

Six new oilfield projects have also been announced in the budget. Two are new discoveries in the southeast basin, Manik-101A and Mulach-1, which will add around 30,000-45,000bl/d. The other four fields include Kinbe, Koban, Xikin and Esah-1 and will in total add around 210,000bl/d of crude and 350mn ft3/d of natural gas by 2020.

Deep-water investment is largely being scaled back. Pemex chief executive Octovio Romero criticised previous governments for generous expenditure but lack of progress on deep-water projects in the past, saying "at best we [will] have the first drop of oil by 2025". Despite this, the Perdido Belt project and Holok and Han fields received some funding, while the deep-water project at Lakach, northwest of Coatzacoalcos, was the most notable beneficiary.

Onshore, Pemex is targeting production from the major Ixachi field, in Veracruz, believed to hold around 1.3bn barrels. Pemex aims to reach around 80,000bl/d in condensates and 720mn ft3/d in natural gas by 2022.

Elsewhere, the budget notably included funding for unconventional pilot projects in Sabinas, Burro Picachos, Tampico-Misantla and Burgos, despite López Obrador's previous hostility to them and his promise not to implement fracking. Projects requiring fracking, in Veracruz and Puebla, received almost 3.5bn Mexican pesos.

Refining upgrade

While López Obrador has his sights on the upstream, he also has designs on reversing the downstream strategy of his predecessor Enrique Peña Nieto. In December, the government released its national refining strategy to begin the process. Mexico's refining system was largely designed to process light crude, but needs to adapt to heavier oil as lighter deposits have steadily been exhausted.

Capacity utilisation has fallen sharply in recent years, to around 30pc in 2018, and domestic refining production has collapsed by roughly 48pc since 2013. By contrast, average yearly product imports have grown 38pc over the same time period, reaching 975,000bl/d in 2018, according to Pemex's monthly statistical data.

To reverse this trend and reach self-sufficiency, López Obrador has reserved 50bn Mexican pesos for the construction of a new refinery at Dos Bocas, in his home state of Tabasco. This will process 340,000bl/d by 2022 and add an extra 170,000bl/d of gasoline and 120,000bl/d of ultra-low sulphur diesel.

Also factored into the refining plan and new Pemex budget is 7.5bn Mexican pesos for the rehabilitation of the country's six refineries. When fully upgraded, the facilities at Cadereyta, Madero, Minatitlán, Salamanca, Salina Cruz and Tula will boost Mexico's capacity by an additional 1.54mn bl/d.

"In Mexico, consumption is circa 1.2mn bl/d so these 'six revamped refineries' plus the new refinery could produce enough hydrocarbons for Mexico consumption," says Edgar Cruz Borges, head of credit research at BBVA, a Brazilian bank.

Paying off its debt

Although López Obrador has set an ambitious strategy for Mexico's hydrocarbon sector, there are still concerns among investors over the scale of Pemex's debt. The company is the most indebted Latin American oil company, with over $100bn in corporate debt.

Despite an increased capex budget, the government will also raise Pemex's tax contributions 11pc year-on-year to $26.4bn. Since 2013, energy reforms have lessened the financial burden on Pemex. Joint ventures, such as the Trion project with BHP Billiton, helped Pemex avoid shouldering the majority of upfront costs. But with the oil auctions cancelled, and increased pressure to lift production, there are anxieties López Obrador will harm still more the company's financial fortunes.

"The government is not concerned to tackle its massive debt. That is something that worries us significantly. They are planning to keep outstanding debt as it is and there are no reduction plans during this year," says Borges.

Gasoline shortages

Mexico also suffered a self-inflicted gasoline crisis in January. Elected on a wave of anti-corruption rhetoric, López Obrador closed a number of key pipelines to prevent criminals, known as huachicoleros, syphoning off fuel to sell on the black market. In their place, tanker trunks helped supply fuel, but failed to avert widescale gasoline shortages. More than 10 states have so far been affected and military personnel posted to safeguard the pipelines until they can be reopened. The Tuxpan-Acapotzalco pipeline, supplying Mexico City, was sabotaged five times in less than a week, according to the government. An explosion on a pipeline in Hidalgo killed around 114, with 33 still hospitalised. Earlier, footage appeared to show local residents helping themselves to gasoline from the ruptured pipeline.

Despite public frustration, the mood is unlike that in 2017 when Peña Nieto raised gasoline prices 15-20pc. Nationwide protests, looting and violence erupted in the wake of the price hike.

In contrast, López Obrador's efforts to tackle corruption and criminal activity are largely popular. Nevertheless, governors from six states were pleading for the pipelines to be reopened, while many tankers were unable to offload their cargo as congestion hit the key ports of Veracruz and Tuxpan, the ship tracking website Marine Traffic showed.

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