We’re Settling In.

As we enter the back-end of the first quarter of 2019, we are starting to get a feel for the direction of the new AMLO agenda. As the presidential campaign, election, and early presiding noise has subsided, we have started to witness a period of quiet, with not a lot of corporate or political announcements hitting the headlines. So, what’s really going on behind this veil of silence? Get the latest right here.

OPERATION: Increase Production

One of the on-going proclamations from President Lopez Obrador around restoring Mexico and its energy industry’s prominence is to ramp up the crude production levels coming out of Mexico.  Pemex has suffered decades of year-after-year declines in crude oil production due primarily to a restricted drilling program by way of a heavy-handed taxation policy by the federal government.  It is undisputed that Mexico is rich in natural resources, but extracting those resources takes commitment, and President Lopez Obrador set a target of reaching crude production of 2.4 million bpd by 2024, a task that won’t exactly be a walk in the park to achieve.

With 2018 production wrapping up at 1.9 million bpd, the task of returning domestic production back to 2.4 million barrels on the surface sounds attainable.  It’s just half a million barrels, right? It seems like Permian production grows half a million barrels overnight, but a slightly deeper look makes the task seem more daunting.

Let’s start with the fact January 2019 production levels only yielded 1.6 million barrels per day! Given that the existing production profile has been sliding by approximately five percent annually, playing out that decline through 2024 translates into the current wells producing only 1.2 million barrels by 2024.  Meaning Mexico isn’t looking to add half a million barrels per day but actually needs a full 1.2 million to have total production of 2.4 million by the deadline.  Pemex needs to get busy drilling to meet AMLO’s production goal.

Let’s Make A Deal

Pemex has just announced two new partnerships with German entity DEA Deutsche Erdoel and Egypt-based Cheiron Holdings Ltd. on the drilling side.  Combined, the deals will invest a total of $250 million in capital. Expectations are that the two deals will add approximately 10,000 bpd in crude over next two years. While small in size and impact, these deals signify a willingness of the administration to work with outside partners.

The market is also re-engaging on the asset side.  Monterra Energy recently announced that Total Atlantic Trading Mexico and Repsol have signed up as anchor tenants for the Tuxpan International Fuels Terminal (TIFT) with expected activities to begin in the second half of 2020.  The initial commitment is for limited space (200,000 barrels) however expansion is possible with a total capacity capable of reaching 2 million.

As for previously announced projects; Glencore is expected to continue with their investment in a marine storage facility located at Tuxpan, though not expected ready until 2020. Valero has also continued their push to secure market share in Mexico and expects to have storage capacity available at the IEnova facility located at the Port of Veracruz in the second half of 2019.

These coastal storage facility investments are a much-needed step in delivering refined products into Mexico but are also only the first piece in the overall infrastructure puzzle. Much more investment will be needed to develop the pipelines, rail, and truck handling components to alleviate the pressure points that currently stress the system.

Just A Little Patience, Yeah?

Perhaps the most important and central message that has been conveyed out of the AMLO administration has been a call for patience. President Lopez Obrador ran on a ticket calling for a tough stance on the well-known challenges inside of Mexico namely, corruption, organized criminal activities and the beleaguered energy sector. As I’ve written many times, these are monumental issues and will not be corrected with short-sighted actions.

The aforementioned problems are in many ways intertwined and unraveling the mess is incredibly complex. But I will give credit to President Lopez Obrador in his tempered approach. Yes, he has mis-stepped in testing solutions. He rocked the markets with the revoked airport contract. And yes, shutting down the national pipeline grid caused substantial market issues. Shrinking an already tight energy infrastructure IS NOT the answer.

But AMLO has assembled a team of diverse advisors that are dedicated to looking for real solutions. His senior confidants are hosting meetings to listen to ideas and proposals on how to avoid the pitfalls of corruption and self-dealing that have led to bad deals and overwhelmed the profitability and economic well-being of Pemex. The administration is seeking ways to reverse the course of self-destruction and return the country and the national oil company to a position of strength and positive self-esteem.

Navigating this monumental resurrection will take extreme diligence. Finding opportunities and deals that benefit Mexico and Pemex will not be the challenge. Choosing the best deals for Mexico over the deals that most favor those in charge of signing the contracts is where the true test of the future success of the administration lies.

Inspired to jump into the Mexican fuels market? Click here to contact our international markets team.

Best,

Chad Smith
Senior Vice President of Terminal Services