It has been asserted that the most profitable business in the world is a well-managed oil company and the second-most profitable is a poorly managed one. This phrase, attributed to the early oil tycoon John D Rockefeller, underscores the idea that an oil company may thrive even if inefficient.
Recently, Mexico has made a giant stride towards enhancing and opening its hydrocarbons industry, which was nationalised about 75 years ago, just as Abu Dhabi’s first concession was being awarded to international oil companies.
The Mexican Congress in December approved the energy bill to change Articles 25, 27 and 28 of its constitution, allowing both domestic and foreign private companies to invest in the energy sector.
Because of the radical changes in the constitution and expected massive economic benefits, many energy experts and economists call the coming period for Mexico the “Second Mexican Revolution”.
Inspired by the success stories of Brazil and Colombia, which liberalised their industries in 1997 and 2003 respectively, the Mexicans are hopeful that the proposed reforms will make a step change in their sector.
Mexico’s national oil company, Pemex, has been the sole operator in the country since the late 1950s, dominating all parts of the industry from upstream down to petrochemicals.
The BP Statistical Review 2014 shows that Mexico has more than 11 billion barrels of oil in reserves and some sources estimate that the country's recoverable shale oil and gas resources are more than 100 billion barrels, a figure that is in the same range as Kuwait's proven conventional reserves.
However, in the past 10 years, the Mexican hydrocarbons industry has struggled. Although Pemex is the seventh-largest oil and gas producer, its oil production (including natural gas liquids) peaked in 2004 at 3.8 million barrels per day and has gone down to below 2.9 million bpd by the end of last year. The domestic consumption for the same period, on the other hand, has been almost constant, averaging about 2 million bpd.
Although the country is a net exporter of crude oil, it is a net importer of petroleum products, which amounted to 480,000 bpd last year – a situation some of the Middle Eastern hydrocarbon-rich countries have found themselves in and others are trying to avoid.
With limited refining capacity and price restrictions, Pemex is forced to subsidise the refined products – buying high from international markets and selling low on the domestic market.
According to some industry observers, if the country fails to invest sufficiently in upstream activities using advanced technologies (which it does not possess) and the economy and population grow at realistic rates, it could even become a net importer of oil within the next 10 years.
The situation would seem even more complicated if we consider the ambitious plans of the government to reach the production target of 3 million bpd in 2018, a target many industry experts think is terribly hard to achieve without inviting outside participation.
In the past decade, although natural gas production has increased by about 30 per cent, consumption has shot up by more than 60 per cent, making it more difficult for the government to arrest the ever-growing gap. Hence, the country has to satisfy one-third of its gas demand using imports, which are expected to grow as new importing capacity is constructed.
It is worth mentioning that as the contribution of the oil products to the country’s exports has decreased, the weight of the manufactured goods has increased. However, there are doubts as to how much the manufacturing base will continue to grow, especially when considering that energy prices for the industry are a lot higher than those in other countries – 75 per cent higher than those in the United States, for instance.
It’s true that Pemex is a symbol of national pride for the country. Its significance goes beyond that for the Mexican government, as it is considered the cash cow that provides more than one-third of its revenues – representing 90 per cent of the company’s income.
According to Froylán Gracia Galicia, the executive chief of staff to the director general of Pemex, the company has been focused on generating revenues to fund the government’s programmes without investing enough in future production growth.
He has stated that if nothing dramatically changes to increase the reserves and production, the country will be a net importer of energy and lose this essential source of revenues soon.
Mexico is trying to tackle the big challenges to ensure sustainable economic growth and continuation of hydrocarbons revenues to its coffers. The constitutional change is only a step towards improving the performance of the sector. The success of these efforts will depend largely on how effectively the country will establish and implement the secondary laws and make the change happen on the ground.
Ebrahim Hashem is a strategy adviser at an Abu Dhabi-based company. He can be contacted via twitter @EbrahimHashem
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