Oil is a crucial component of Mexico’s economy. Mexico is one of the largest oil producers in the world (1.9 million barrels produced daily in 2021), and the fourth-largest in the Americas after the United States, Canada, and Brazil. In 2021, Mexico ranked 12th globally in crude oil production, 21st in crude oil reserves, 16th in refined capacity, and 5th in logistics infrastructure.

Moreover, in 2021 the United States imported over 212 million barrels of Mexico’s heavy crude and exported over 1.6 million barrels per day of refined petroleum products to Mexico (this represents more than 70% of Mexico’s domestic gasoline, diesel, natural gas, and jet fuel consumption). Earnings from this industry accounted for around 16% of total government revenues in 2021 according to Pemex and the Secretariat of Treasury and Public Credit.

Significant oil reserves have also been confirmed by major oil and gas companies operating in Mexico, and efforts to upgrade existing logistics infrastructure will likely drive private sector investment and provide opportunities for international energy companies as contractors, sub-contractors, or suppliers of equipment and/or technology.

Mexico has an estimated 17 trillion cubic feet of proven natural gas reserves. Natural gas is increasingly replacing oil as a feedstock in power generation. However, higher levels of natural gas consumption will likely depend on more pipeline imports from the United States or Liquefied Natural Gas (LNG) imports from other countries.

Mexico has an estimated 545 trillion cubic feet of technically recoverable shale gas resources, the sixth-largest in the world. The true potential of accessing and developing shale gas in Mexico is hindered by low availability of the required technology, and the accessibility of low-cost United States natural gas. However, Mexico has encouraged domestic natural gas production by inviting private companies to bid on new natural gas pipelines and storage facilities for imported United States natural gas. 

The demand for imported upstream oil and gas equipment and services increased by 1.5% from 2021 to 2022, with a 4% increase in United States exports, given COVID-19 impacts on GDP and low oil prices. Private oil and gas contractors will drive market growth in order to comply with the award schedules set by the Energy Regulatory Commission (CRE) for shallow water, onshore, deep water, and heavy oil and gas projects.

In the next few years, there will be opportunities in the upstream sub-sector for companies to sell technology and services to the major oil companies that have bid on the shallow water tenders. Equipment needed includes derricks for oil and gas fields, drilling equipment for oil and gas fields, Christmas tree assemblies, drilling rigs, oil and gas field drilling machinery and equipment, as well as engineering services.

Pemex and international companies

Pemex operates through 2 main divisions: Pemex Exploration and Production and Pemex Industrial Transformation. Pemex Industrial Transformation controls the national gas, refining, and petrochemical businesses and affiliated companies (drilling, logistics, fertilizers, ethylene, and cogeneration and services). Pemex International (PMI), Pemex’s international business development subsidiary, purchases and sells fuel and basic petrochemicals, but not equipment.

As of May 2022, PMI had over 9,000 registered suppliers, over 70% of which were United States firms. A number of private sector oil and gas contractors that were awarded land, shallow, and deep water projects contracts from 2015 to 2018 started implementing their investment plans in 2021 and have continued in 2022, including: BHP; BP; Shell; Murphy Energy; Chevron; ExxonMobil; Diavaz; Grupo R; Inpex; TotalEnergies; Premier Oil; Petrobal; Hunt; Grupo México; Jaguar; Petrofac; Lukoil; and Hokchi Energy. These companies will invest an estimated USD $18 billion from 2021 to 2024 to purchase seismic services, exploration, drilling and extraction equipment, including platforms and related services for 794 wells. Talos Energy won a crude oil field contract to drill the Zama Field (Gulf of Mexico) in 2015, but continues in discussions with Pemex for the operation of the field.

Regulatory authorities

The National Hydrocarbons Commission (Comisión Nacional de Hidrocarburos or CNH) is responsible for regulating, overseeing, and evaluating all hydrocarbon exploration and production activities in the country. The CRE is responsible for granting permits for importation, commercialization, transportation, and storage of crude oil, gasoline, diesel, lubricants, and new gasoline stations. The Safety, Energy and Environment Agency (ASEA) is responsible for approval of the environmental and land use permits before exploration, drilling, and extraction activities can begin, including the construction of new gasoline stations and natural gas infrastructure. The Secretariat of Energy (SENER) is responsible for processing social impact assessments, which are mandatory for most major upstream, midstream, and downstream activities, including the construction and operation of pipelines, storage facilities and refineries, as well as retailing and distribution.

Mexican energy reform

In December 2013, Mexico amended its constitution to allow both local and foreign private investment into the energy sector for the first time since its nationalization in 1938. The reforms permit international energy companies to operate in Mexico and include provisions for competitive production sharing contracts and licenses. In addition to increasing the demand for technology and technical expertise for the development of upstream deep water and shale oil and gas fields, the energy reform also allows for greater private investment in retail fuel distribution.

Furthermore, at the end of 2018, the SENER completed the revision of the investment plans of the 107 contracts awarded during 2015–2018 to private companies. In 2018 ASEA also completed their review of environmental permit and land rights applications.

In April 2021, the Mexican Congress modified the Hydrocarbons Law to give the Mexican government broader powers to review and suspend existing import, commercialization, and distribution permits for all hydrocarbons. Moreover, the Congress removed power from the CRE to enforce asymmetric regulation in the market, including the regulation of “Firsthand Sales” of Pemex products to competitors. Following the publication of the revised Law in Mexico’s Official Gazette in early May, a federal judge granted a provisional suspension of the Law in response to multiple injunctions filed.

The Mexican government has repeatedly emphasized its efforts to strengthen Pemex. In February 2021, for example, Mexico granted new fiscal support worth USD $3.5 billion to strengthen the oil company’s finances. In addition, in 2022, Pemex was authorized a budget of USD $38.9 billion to continue the upgrading of the 6 existing refineries which remain top priorities as well as the completion of the new Pemex Olmeca Refinery located at the Dos Bocas Port in Tabasco.

Current oil and gas opportunities

Pemex’s investment plan for 2021-2025 includes 399 new exploration, extraction, and production projects in shallow deep water, and onshore projects in the states of Tamaulipas, Veracruz, Tabasco, and Campeche including the upgrade of 25 platforms, the installation of pipelines for the Trans-Isthmus Corridor (300 kilometres from the Coatzacoalcos Port in the state of Veracruz, to the Salina Cruz Port in the state of Oaxaca); and the completion of 8 interconnections to the existing shallow water platforms in the Gulf of Mexico. These significant projects will create new opportunities for international. suppliers of relevant equipment, technologies, and services.

The opening of the upstream oil and gas market will provide opportunities to sell technology and services to private contractors and Pemex. These opportunities include: upgrading the 6 existing Pemex refineries, 77 Pemex storage facilities for crude oil, gasoline, diesel, and lubricant, and modernizing over 5,000 gasoline stations. Current Pemex tenders require a Mexican local content of 25% reaching 35% by the end of 2025; when there is no local production, the local content requirement may be waived. International suppliers and investors are encouraged to monitor progress and seek out opportunities that may include joint ventures, production sharing contracts, and/or concessions.

Equipment and services with greater demand include high pressure/high volume pumps, hydraulic submersible pumps, filter pots, auxiliary fuel tanks, seismic services, trenchers, plows, boring tunneling machinery, mud mixing systems, mud recycling systems, vacuum trucks, pile drillers, operating separators, desilting equipment, and field gathering lines.

Mexico’s renewable energy sector

In 2021, the Mexican government’s energy development plan reported power generation in Mexico accounted for 328,597.98 GWh, of which 29.5% was generated with clean energy sources, including wind, solar PV, bioenergy, efficient cogeneration, geothermal, hydroelectric, and nuclear power.

In 2020, the installed capacity of Mexico’s clean energy plants, such as hydroelectric, geothermal, wind, solar, and bioenergy, was 29,512MW, and by December 2021 there was an installed capacity of 30,812MW, which represented an increase of 4.4%t with respect to 2020, mainly coming from hydroelectric, wind, and solar power plants. According to a spring 2022 report by the National Renewable Energy Labs, Mexico’s large and diverse renewable energy resource base could support significant growth in clean generation capacity. National technical potential includes 24,918GW of solar PV, 3,669GW of wind, 2.5GW of conventional geothermal, and 1.2GW of additional capacity from existing hydropower facilities; all combined, are enough to meet the country’s electricity needs a hundred times over.

The priority of the government is to strengthen the role of the state-owned Federal Electricity Commission (CFE), so it can become, as in the past, Mexico’s primary supplier of electricity. Private companies have faced challenges in investing in large-scale renewable energy projects due to permitting delays and policy initiatives such as the 2021 Electric Industry Law, which had the objective of establishing a dispatch system to give priority to CFE’s plants, among other changes. Nevertheless, companies remain interested in participating in the conversation to facilitate and increase opportunities in this sector in Mexico in the coming years, as they see the advantages to utilize the latest renewable energy and energy storage technologies available to reduce electricity costs, to increase efficiency, and to protect the environment.

Development Program of the National Electrical System 2022-2036

On June 1, 2022, SENER published the 2022-2036 Development Program of the National Electrical System (PRODESEN). This planning document addresses electricity generation, transmission, distribution, and commercialization of the National Electric System (SEN). The 2022 PRODESEN emphasizes the need for the development of CFE’s power plants, therefore, in the mid-term the focus would be to incorporate new combined cycle plants, to rehabilitate and modernize existing hydroelectric plants, and to potentially equip others that already have hydraulic installation.

According to the PRODESEN, SENER intends to direct the planning of the SEN, guaranteeing the supply of electrical energy in accordance with the requirements of national development by coordinating the different sources of generation of the CFE and private sources.

In terms of climate change and emissions reduction, SENER proposes to increase power generation with clean, renewable energy sources. In addition, PRODESEN emphasizes Mexico’s multiple commitments to sustainable development with special attention to the Paris Agreement, indicating that Mexico ratified in 2016 its commitment to maintain the average global temperature under 1.5ºC and to reduce greenhouse emissions. In addition, PRODESEN highlights the 2030 agenda for sustainable development. In this PRODESEN, SENER also provides a status of where Mexico stands to comply with its goal to generate 35% of electricity from clean energy sources by 2024, as outlined in Mexico’s General Climate Change Law.

Renewable energy, hydrogen and electromobility opportunities

Large industrial and commercial sectors represent most of the electricity demand. Industrial manufacturing, operations, and commercial activities have been impacted by high electricity rates. Since the energy reform (2013-2014), the industrial sector has expressed high interest in renewable energy projects. However, there is recognition among the private sector that challenges to successfully developing and participating in these projects remain, including permit delays, transmission constraints, policy changes, and lack of return on investment. It is important to note that small-scale projects face lesser permitting hurdles than larger projects. Despite these challenges, the industrial and commercial sectors are an important area of opportunity for international exports. These companies are continuously looking for technological alternatives to increase energy efficiency and reduce costs.

Most recently, there is an increasing interest of companies and associations in Mexico to learn more about green hydrogen technologies and how they can be utilized in the future to increase efficiency and lower the cost of electricity. The initial conversations in the business community are starting to take place.

Another important element for renewable energy development in Mexico expected to contribute to emission reductions commitments is electromobility. The Mexican government is interested in further exploring opportunities and designing a strategy to promote the use of hybrid and electric cars and other transportation. Although there has not been any official announcement, in PRODESEN, there is a section that provides an overview of electric mobility and transportation. Mexico has developed a strong capacity for manufacturing and logistics of the automotive industry, which would be relevant to develop and achieve a National Mobility Strategy. The PRODESEN mentions a long-term scenario to have 4.9 million of electric vehicles, 32.3% of the commercialized vehicles (light, cargo, and buses), by 2036.

Mexico’s Plan Sonora

Mexico is preparing a USD $48 billion clean power and manufacturing plan for its second largest state Sonora that is meant to pave the way for an end to the ongoing United States-Mexico-Canada Agreement (USMCA) dispute with the United States.

The so-called Plan Sonora would involve strengthening the northern state’s supply chains with the United States, spurring electric vehicle production, and the construction of several large clean power plants.

According to the government, the plan is in the last stages of negotiation, and several key hurdles have been cleared. Among these is the involvement of public utility CFE, which the government insisted would have to own any power generation assets involved in the deal. United States officials agreed to that as long as the construction of the plants were assigned exclusively to North American companies.

The new solar parks will be built with United States-backed financing at preferential rates, with the debt load being taken on directly by the Mexican treasury. This will allow CFE to own new large-scale solar parks without increasing its debt.

If it happens, the plan would mark a broad strategic shift for Mexico in terms of its attitude to renewable energy. While the administration has tried so far to discourage the segment’s growth, it is now pushing for CFE to get involved directly after its first foray into the technology through the USD $1 billion Puerto Peñasco solar park, originally promoted by the Sonora state government.

The new projects could sell clean energy to neighboring Arizona, which is preparing for a large expansion of its microchip manufacturing industry with United States government support and investments by Intel and the Taiwan Semiconductor Manufacturing Company (TSMC).

A lack of sufficient clean energy production in Mexico’s north has often been cited as a concern for manufacturing firms looking to fulfill internal and national goals. As stated by the government, the new plants are seen by the government as a way to encourage “the creation of electric car manufacturing plants in Sonora”.

Furthermore, Plan Sonora would also aim to develop the northern state’s logistics by improving customs, overhauling rail lines, building new highways and expanding the port of Guaymas, as well as the Obregón and Guaymas airports.

About the Author: Felipe Gaitán Michelsen