Industry Trend Analysis - Liberalisation Efforts Slow To Take Effect - JUNE 2017

BMI View: Mexican crude production will remain in decline through 2017 as Pemex directs its funds towards its most profitable assets. A growing focus on deepwater and onshore farmouts will form the basis of future growth but will only materialise post-2020.

Upstream development in Mexico will remain weak in 2017. Though energy sector liberalisation is progressing, with the Round Two (R2) licensing phase now underway, we believe the continued dominance of national oil company (NOC) Pemex will weigh on upstream activity this year ( see ' Production Will Decline To 2017 ' , November 2 2015). This will extend crude production losses for a thirteenth year, averaging 2.0mn b/d compared to a peak of 3.4mn b/d reached in 2004.

Our downbeat outlook is supported by low levels of deployed rigs, underscoring a lower rate of investment led by the NOC. Rig numbers have fallen to record-lows in recent months, reaching a total of eight as of February. We believe the NOC will remain focused on strengthening its balance sheet in an effort to position itself as a more qualified upstream partner as sector liberalisation continues.

The Downtrend Continues
Mexico - Active Rigs
Source: SENER

Production losses have been widespread throughout Mexico's oil producing regions. However, we believe the majority of declines will continue to come from the southern region which produced approximately 16% of the country's crude in 2016. This area is made up of the Cinco Presidentes, Bellota-Jujo, Samaria-Luna and Macuspana-Muspac onshore sub-regions and generates primarily light and ultralight crudes. In 2016, the southern region experienced the strongest declines at nearly 90,000b/d, 80,000b/d of which was comprised of lighter grades.

Southern Fields Taking The Hit
Mexico - Crude Production by Region, 000b/d
Source: SENER

We believe this region will underperform as Pemex continues to reduce and refine its upstream strategy. Between 2014 and 2016, capex fell by an estimated 48.0% and will decline by an additional 22.0% in 2017 to USD16.2bn ( see ' Pemex Will Pull Down Regional Capex In 2017 ', September 21 2016). This reduction will support a more focused approach toward spending whereby the NOC will direct its more limited funds toward its most profitable fields.

At the centre of the five-year strategy is to replace the declines from the Cantarell field which once produced nearly 2.0mn b/d at its peak compared to less than 190,000b/d in February. We believe this will result in continued investment into the Ku-Maloob-Zaap (KMZ) fields in the northeast offshore region of the country. The KMZ was responsible for nearly 40% of the country's total output in 2016 and will form the base of the country's production in 2017.

However, we caution that development in the KMZ will be limited this year owning to Pemex's shifting focus toward ongoing and potential farmouts. This was evident by the limited number of drilled and completed wells in the KMZ, suggesting growth out of the broader northeast offshore region will be limited.

Limited Upside Ahead
KMZ - Drilled and Completed Wells
Source: SENER

The successful tendering of the Trion offshore project to BHP Billiton in December 2016 opened a new set of opportunities for the NOC whereby it can grow output while reducing upfront investments. We believe this will remain a focus for the company over the next several years as energy sector liberalisation progresses and oil prices stabilise.

However, we caution that the effects of these efforts will not be felt this year. Longer lead times and extensive planning will delay incremental barrels from offshore farmouts beyond 2020. We therefore maintain our more modest production forecast for the country this year.