Now Available: Mexico Oil & Gas Report Q3 2016

Mexico's historic energy sector liberalisation mark s the start of a fundamental shift for the country's hydrocarbons sector. Whilst it will b e a number of years before results are seen in the country's production and reserves data, over the long term t he reforms will bolster upstream activity and reverse a decade-long decline in oil production . Pemex ' s upstream activity will remain limited over the next two years amid the broad industry downturn.

Latest Updates And Key Forecasts

Weak fundamentals combined with bearish speculative positioning have sustained weakness of benchmark prices below profitable levels for Mexican crude production. Our forecast for continued price volatility over the next several months will weigh on Mexico's already downbeat outlook, limiting investment into existing projects by state-owned Petroleos Mexicanos (Pemex). We therefore maintain our downbeat expectation for total liquids production in 2016 at -6.9% y-o-y implying a reduction of 180,000b/d this year. This compares to a decline of 6.4% y-o-y in 2015 and extends Mexico's overall losses for a 12th consecutive year.

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The Mexican government's USD4.2bn bailout of Pemex underscores the state-owned oil company's continued struggles in the face of an elevated debt burden, sizeable arrears to oilfield service providers and limited liquidity. While the bailout will weigh on Mexico's sovereign credentials in the short term, we believe damage to investor sentiment will be mitigated by the government's history of prudent macroeconomic policies and Pemex's ongoing cost-cutting measures.

We affirm our long-held positive view for the accelerated development of natural gas pipelines in Mexico, with oil and gas pipelines set to continue expanding through 2017. Mexican consumption growth will remain strong over the coming years, driven by an expanding manufacturing sector and increased residential demand. We believe the major driver of this trend will be the government's efforts to expand the use of gas-fired thermal generation in the country's electricity mix, which will be increasingly fuelled by cheap gas imported from the US.

As part of energy sector liberalisation, Mexican officials have renewed their commitment to draw investment into the country's unconventional assets. The National Hydrocarbons Commission (CNH) will reportedly offer sections of the Burgos Basin - an extension of the vast Eagle Ford play in south Texas - as part of the Round One licensing process late this year or early 2017. We maintain our long-held view that Mexico's shale resources will fail to generate significant investor interest, delaying any production beyond our 10-year forecast period.

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