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EPRINC Assessment on Mexico’s Oil and Gas Challenges by Rafael Sandrea

Mexico is an essential piece of the North American petroleum production platform, and Mexico’s oil and gas reserves and production are at a critical crossroads. Oil reserves would be exhausted in ten years and gas reserves in six without massive new capital commitments. Of a total of 465 oil fields discovered, today a handful of ten currently account for nearly two-thirds of all domestic production; likewise, of the 700-plus gas fields discovered, ten account for almost half of all gas production.

The energy reform measures implemented in Mexico over the last few years, also known as the New Energy Model, offer considerable potential to lift oil and gas production, increase employment and deliver technological advances, and additional revenues for Mexico’s federal, state, and local governments. The New Energy Model has brought new investment into Mexico’s petroleum provinces, and there has been significant investment in seismic surveys and commitments for new wells. This expanded activity in the petroleum sector, entirely from private investment, has led to new discoveries.

Mexico’s new president, Andrés Manuel López Obrador (often referred to as AMLO), has expressed skepticism towards the energy reforms of the previous administration and has halted most initiatives to bring new private capital into the development of Mexico’s oil and gas resources. Although Mexico has not had a full public debate on all aspects of AMLO’s criticism of the New Energy Model, this EPRINC assessment demonstrates that without massive new commitments of capital for petroleum development, Mexico’s oil and gas future is grim.

The Spanish-language version of the assessment can be found here.

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Revisiting The Strategic Petroleum Reserve (SPR)

The prospect for conflict in the Middle East, pending collapse of production in Venezuela, and turmoil in North Africa all remind us the world oil market still faces substantial threats of disruption. The North American petroleum renaissance, which has lifted U.S. oil production to the point where net exports are rapidly moving into positive territory, has also opened opportunities for Congress to sell off a substantial volume of strategic stocks to fund a range of domestic programs. EPRINC has argued that while some adjustments to the reserve size may be justified, on balance, it still plays a critical role in the security of the United States and decisions on the size of the SPR should take the long view. The SPR remains an important strategic asset.

Given the current geopolitical environment, we are highlighting some previous EPRINC papers published on this topic. In addition, our friend and colleague, Dr. Carmine Difiglio, has shared with us his insightful analysis of the value of strategic stocks in sustaining economic growth. Professor Difiglio, formerly with the U.S. Department of Energy, is Director of the Istanbul International Center for Energy and Climate (IICEC) at Sabanci Univerity.

For links to the reports on the SPR, click here

John Shages, former Deputy Assistant Secretary for Strategic Reserves, writes on Policy Challenges in Managing the Nation’s Strategic Oil Stock (July 2014).

For access to the report, click here

Lucian Pugliaresi of EPRINC and Fred Beach of UT, Austin debate the value of the SPR in the Wall Street Journal (November 2015).

For access to the report, click here

Larry Goldstein and Lucian Pugliaresi of EPRINC comment on Congress’s initiative to fund health care by reducing the size of the SPR in Politico (July 2015)

For access to the report, click here

Carmine Difiglio’s extensive analysis of the negative consequences of world economic growth from oil supply disruptions. Oil, economic growth and strategic petroleum stocks, Energy Strategy Reviews (2014).

For access to the report, click here

Michael Lynch, EPRINC Distinguished Fellow and President of Strategic Energy and Economic Research, Inc. presents a retrospective on the 1979 oil disruption and the role uncertainty and hoarding can play is amplifying the cost of an oil supply disruption. The article was recently published in Forbes and can be found here

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EPRINC Releases Report on Mexico’s Petroleum Future

The energy reform measures implemented in Mexico over the last few years, also known as the New Energy Model, offer considerable potential to lift oil and gas production, increase employment and deliver technological advances, and crucially additional revenues for federal, state, and local governments. These reforms, if fully implemented, will also enhance long-term energy security for Mexico and North America. Energy reform in Mexico is contributing to the likelihood that North America will become a sustained net exporter to world markets in both petroleum (crude oil and refined products) and natural gas in the coming years. In a just-released EPRINC assessment, Michael Lynch, EPRINC Distinguished Fellow, presents his findings on the economic value to Mexico of the energy reforms in the petroleum sector. A link to the full report can be found here. A Spanish translation of the report will be posted on the EPRINC’s website in early January 2019.

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The Permian Basin Produces Gas, Too

This report by EPRINC Non-Resident Fellow Trisha Curtis is part of the Energy Policy Research Foundation’s multi-year research program evaluating the scale and scope of the North American petroleum renaissance. As U.S. producers expand production to meet domestic requirements and the rapidly growing market for pipeline exports and Liquefied Natural Gas (LNG), it is essential that policy makers have a full understanding of the sustainability of the U.S. natural gas production platform. This report addresses the range of challenges and opportunities for expanding U.S. production of natural gas for both domestic uses and export markets through an in depth look at North America’s most prolific oil and gas basin, the Permian. The report can be found here.

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Hedging Haircuts and Big Basis Moves

EPRINC trustee Ben Montalbano and non-Resident Fellow Trisha Curtis, both co-founders of PetroNerds, have just completed an assessment of oil hedging positions of 25 major oil producers in the Permian Basin. Hedging is a valuable tool for distributing risk and allowing producers to protect revenue streams from price volatility. Hedges protect producers revenues when oil prices fall, but also limit gains when prices rise. In addition, when oil prices rise it may limit the supply response if a large volume of unconventional production is hedged. Ben and Trisha’s assessment shows the percent of total production that producers hedge varies, but heading into Q1of 2018 producers hedged about 20% of total output. A copy of their assessment can be found here.

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A Report on Resource Pessimism by EPRINC Distinguished Fellow Michael Lynch

EPRINC Distinguished Fellow Michael Lynch has penned a report on resource pessimism. A summary of the report is as follows:

The modern era has seen two major threads of neo-Malthusian thought: fears that agriculture cannot sustain the future population and concerns about possible scarcity of nonrenewable resources like minerals and energy. This has caused various governments to undertake population control policies, crash programs to develop substitute fuels, and even suggestions that exploitation of asteroids for their mineral resources might soon be necessary. The proposed Green New Deal was seen to be motivated in part by a concern for the finite nature of resources.

But the various apocalyptic predictions based on these theories have virtually all failed, although proponents insist that only their timing is in error, not the concept. This report finds that most neo-Malthusian arguments are based on an incorrect understanding of resource estimates, including the nature and terminology, leading to the use of woefully conservative figures which then generate the apocalyptic warnings. Combined with the assumption that, since technological advances can’t be predicted, technological progress should not be assumed, arguments that consumption must be curtailed and even that economic growth should cease are based on fallacious notions.

This paper argues that neo-Malthusians suffer from an underspecified model, not just bad input parameters but omitted variables that guarantee the pessimistic, and invalid, predictions.

Correcting these errors results in a much better understanding of resources and a more optimistic outlook for the global economy and hopefully less economic waste.

The report can be found here.

China’s Search for Blue Skies

Driven by a growing political requirement to fight air pollution, record growth has been recorded in natural gas demand in China over the past decade. China surpassed South Korea as the second largest LNG importer in 2017 and is projected to surpass Japan as the world’s largest natural gas importer in 2019. The massive scale of the Chinese energy sector matters; a small change in the Chinese natural gas demand can lead to an oversized impact on global markets. As part of EPRINC’s ongoing assessment on the future role on LNG in Asia, this publication evaluates market and policy trends placing China in a central role as the driver of world LNG demand growth. The report can be found here. A translation of the executive summary in Chinese can be found here.

EPRINC Holds Workshop on U.S. Transportation Fuels Policy

On February 20th, 2019, EPRINC hosted a workshop on U.S. Transportation Fuels Policy at the Willard InterContinental Hotel in Washington, D.C. The workshop brought together experts, industry representatives, and stakeholders to compare notes and share perspectives on the future of U.S. transportation fuels policies A brief description of the event is below, and a copy of the agenda and EPRINC’s recent paper on the RFS can be found at the bottom of this post. Also, the presentations from the event can be found here.

Since the end of WW II, U.S. policies and regulatory programs regarding transportation fuels have addressed central concerns about the safety of production, distribution, and use by consumers, energy security, and the environment. Environmental regulations have largely focused on air quality and more recently, carbon emissions. Automobile manufacturers have had to comply with a variety of increasingly stringent Federal and State requirements to meet reduced tailpipe emissions and improve fuel economy. CAFE (Corporate Average Fuel Economy) regulations were enacted in the 1970s to require higher fuel efficiency in motor vehicles. Beginning in 2005 through the passage of the RFS (Renewable Fuel Standard), increasing volumes of biofuel blending has been mandated. New regulations are also coming into force to regulate sulfur content in fuels for shipping vessels under international agreements managed by the International Maritime Organization (IMO). This EPRINC workshop covers these issues by having four panels, on the following topics: policy challenges facing CAFE regulations, risks and realities of electric and automated vehicles, the future of the RFS and the potential for a grand compromise, and implications of IMO regulations for bunker fuel costs and availability.

EPRINC Publica Su Informe Sobre el Futuro del Petróleo en México

Las acciones derivadas de la reforma energética que se han implementado en México en los últimos años ofrecen un potencial considerable para elevar la producción de petróleo y gas del país, así como incrementar el empleo, permitir la transferencia de avances tecnológicos y también, ingresos adicionales para el Estado mexicano a nivel federal, estatal y local.

Si la reforma se logra implementar adecuadamente, va a contribuir a largo plazo a la seguridad energética de México y Norteamérica. Es muy probable que la reforma energética en México contribuya a que Norteamérica se convierta en un exportador neto de petróleo y gas natural al mercado mundial en los próximos años.

En una reciente evaluación, Michael Lynch, un distinguido colaborador de EPRINC, presenta los resultados y conclusiones de su análisis sobre el valor económico que aporta la reforma energética a México en el sector petrolero. El reporte completo puede leerse aquí. La traducción al español del estudio completo será publicada en el portal web de EPRINC en enero de 2019.

EPRINC Releases Report on Mexico’s Petroleum Future

The energy reform measures implemented in Mexico over the last few years, also known as the New Energy Model, offer considerable potential to lift oil and gas production, increase employment and deliver technological advances, and crucially additional revenues for federal, state, and local governments. These reforms, if fully implemented, will also enhance long-term energy security for Mexico and North America. Energy reform in Mexico is contributing to the likelihood that North America will become a sustained net exporter to world markets in both petroleum (crude oil and refined products) and natural gas in the coming years. In a just-released EPRINC assessment, Michael Lynch, EPRINC Distinguished Fellow, presents his findings on the economic value to Mexico of the energy reforms in the petroleum sector. A link to the full report can be found here. A Spanish translation of the report will be posted on the EPRINC’s website in early January 2019.

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