Mexico to review oil contracts for second time

Oil and natural gas exploration and production (E&P) contracts awarded in the wake of Mexico's energy reform will face a second review by a presidential administration that has criticized the market opening.

"We are going to do an evaluation of all of the contracts at the end of the year," President Andres Manuel Lopez Obrador said this morning. "We are interested in ensuring they are complying with their obligations … we are not interested in them failing or taking away their contracts."

Following the 2014 energy reform that dismantled state-owned Pemex's monopoly, oil regulator CNH has conducted three upstream rounds for onshore and offshore blocks, as well as three farm-outs in which Pemex has partnered with the private sector to develop acreage awarded under the reform.

More than 100 contracts have been signed so far with 73 companies from 20 countries, while total investment is expected to reach $161bn if all licenses prove viable, according to CNH.

The government carried out a first review of all contracts when it took office but did not provide any analysis of the nature of the review or its results.

Mexico's energy minister Rocio Nahle has said previously that the government would also carry out a review of the oil and gas contracts by the end of next year in order to assess production levels with a view to determining whether to launch new auction rounds.

Lopez Obrador did not specify the nature of the evaluation but guaranteed that his government would not seek to modify the contracts or try to litigate their terms.

"We do not want a fight, we want people to be confident that there is an authentic rule of law in the country," he said.

State-owned CFE sprung a contract renegotiation on natural gas pipeline owners earlier this year that plunged the sector into uncertainty. While contracts have been renegotiated with some of the operators, CFE is still in negotiations with Canada's TC Energy for connecting lines.

"It is fundamental to maintain legal certainty as it supports the development of the national energy sector," chief executive of pipeline operator IEnova, Tania Ortiz, said this week.

Lopez Obrador suspended all upstream auctions, farm-outs and contract migrations within a few months of taking office last December.

"We continue to maintain the same policy of not awarding new contracts until we see results," he said.

Independent operators expect to produce 50,000 b/d of crude by the end of 2019, up by 14pc on the 42,811 b/d produced in August but the president continues to criticize their efforts.

He said just one foreign company, Eni, is producing oil and that its output is only 3,000 b/d, but government data shows otherwise. Eni produced 8,191 b/d of crude and 4.59mn cf/d of natural gas in August in its shallow-water block. Of the 16 contracts that produced oil that same month, 44pc had at least one foreign company participant, according to the latest information from CNH.

Pemex has pledged to increase production to 2.6mn b/d in 2024 from 1.68mn b/d in August but while Lopez Obrador said he "would not rule out deepwater," he confirmed his government will focus on shallow-water and onshore production.

"There is enough oil in shallow water and onshore," he said. The previous administration's decision to invest in deepwater was "inefficient," because oil in shallow-water and onshore costs less to produce.

Analysts say that Pemex's focus on shallow-water and onshore is short sighted as deepwater has estimated 3P reserves of 891bn bl of oil equivalent, while unconventional resources are estimated at 9.3bn boe.