I will refer to two recent studies carried out by Rystad Energy on the global oil industry. One of them, just published, reveals that it will be more difficult for all countries to attract the scarce capital that international operators will invest in exploration and production. The other, dated November 2020, speaks of the “devastating” situation that the refining industry has been experiencing worldwide. Both of them have implications for Mexico.
Oil-industry operators will be even more focused on costs and profit margins and will concentrate their activity in a smaller number of countries than before. This means that resource-rich countries will have to compete more than ever to attract investments,” Rystad says.
The analysis indicates that Great Britain, Kuwait and Canada are the countries that will offer the most attractive conditions for the development of offshore fields, but the United States, Colombia, Brazil and Argentina are not far behind. Meanwhile, Mexico now ranks among the least attractive countries, in terms of costs, margins and government take. In order to compete for new investments, governments must reduce to a minimum the royalties and taxes they charge, the Rystad analysts write.
It seems unlikely that the López Obrador government might want to resume oil bidding rounds at some point, but the comparative study among countries published by Rystad indicates that, if it does take up the bidding rounds again, it would no longer be on the same terms as in the first rounds under the 2013 energy reform, which attracted oil companies from all over the world. Going forward, the fiscal deal would have to be much more appealing.
In refining, Rystad foresees a global market oversupplied with an ever greater excess of processing capacity, due to the big drop in global fuel demand caused by Covid-19. In 2019, the discrepancy between refining capacity and world fuel demand was 3 million barrels per day. By 2025, it will increase to over 11 million barrels per day, as new refineries are expected to start up.
Last year was brutal for the industry, since 28 refineries worldwide had to shut down, due to the excess capacity and the drop in demand. This caused a collapse in margins and forced the early shutdown of older processing plants. The transition to clean energy, plus the effects of Covid-19, will continue to depress demand, but capacity will continue to grow in new plants.
“A long period of rationalization lies ahead of us, if we are ever to return to pre-Covid utilization rates and margins (…) and the least efficient and most poorly-located refinery capacity is doomed to close”, says a Rystad analyst.
In this tough global context and with a Biden clean energy agenda now added, the López Obrador government is still betting on oil. It is betting on state-run Petróleos Mexicanos (Pemex), despite it being heavily indebted and having only half of the investment budget it used to get years ago. It demands that Pemex do almost everything on its own –explore, produce, refine, transport, store and commercialize– and practically become a monopoly once again, but now with depleted oilfields and obsolete refineries.
A change of attitude on behalf President López Obrador would be required in order to open up more contracts in exploration and production to private and foreign investors. Upgrades of refineries at Pemex are not moving forward, also because of lack of budget, and the one being built at Dos Bocas, Tabasco, will be the most poorly located of all, being far away from domestic fuel markets and from all kinds of essential services and infrastructure.
Industry experts know that the Dos Bocas refinery will not be completed in this government’s six-year term, due to the magnitude of the project and to the amount of equipment and recipients that will have to be installed, connected and instrumented, also because of difficulties with the terrain, among other reasons. There might not be enough locally-produced oil to supply it. Let alone the unfavorable global backdrop and the growing global push for clean energy and sustainable electric mobility. The outlook for oil is adverse. Mexico should think of changing its priorities.