Mexico Oil & Gas Report Q2 2016 - New Report Available

Mexico's historic energy sector liberalisation mark s the start of a fundamental shift for the country's hydrocarbons sector. Although it will b e a number of years before results are felt 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.

Latest Updates And Key Forecasts

Weak fundamentals combined with bearish speculative positioning have depressed 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 have therefore reduced our growth figure for total liquids production this year from a previous average of -4.3% to -6.9% y-o-y implying a further reduction of 93,000b/d. This compares to a decline of 6.1% y-o-y in 2015 and extends Mexico's overall losses for a 12th consecutive year.

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Mexican national oil company (NOC) Pemex affirmed its plans to modernise the country's downstream sector over the next three years through a USD23bn spending plan in December 2015. While lower oil prices called into question the company's plans earlier in the year, we believe the Fibra E investment vehicle launched in November will provide a significant boost to its spending plan.This will offset declines in government spending and supports our positive outlook within the sector.

On December 15, Mexico's National Hydrocarbon Agency (CNH) held the third tender of Round One auctions, launched to maximise investment into Mexico's underdeveloped gas and liquids sector. Having assigned all 25 of the blocks on offer, the latest tender significantly outperformed the expectations of both the energy ministry (Sener) and the CNH which had anticipated a 20% success rate. This suggests that the most recent regulatory changes provided sufficient incentives for private exploration and production firms (E&Ps) to participate in the reform process highlighting the importance of an open and attractive regulatory regime.

Advancement of Mexico's historic Round One licensing process into deepwater acreage marks the start of a highly-anticipated phase of development. Immediately following the onshore licensing round in December, the CNH announced it would tender licenses to explore 10 blocks in the Gulf of Mexico by year-end 2016. A largely unexplored region within the country, its size and proximity to the US has long supported our view that this will be the area with the greatest investment potential.

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