Infill drilling and recent sanctioning reverse Mexico’s production decline

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Mexico’s oil production has been in decline for years and is expected to average around 1.7 million barrels per day (bpd) in 2020. Over the next couple of years, the country has potential to keep oil output relatively flat thanks to already sanctioned discoveries. This article assesses the outlook for oil production in Mexico, illustrated by three key drivers: production, breakeven prices for new projects, and capital spending.

Output has been in continuous decline, driven mainly by the country’s super-giant offshore oil fields Ku-Maloob-Zaap, Cantarell and Abkatun Pol-Chuc (Figure 1). This year the decline is expected to halt with oil supply stabilizing compared with 2019 at 1.7 million bpd, mainly because of increased infill drilling activity. In the short term there is potential to keep output stable thanks to already sanctioned fields that are expected to come online over the next couple of years. Fields in Area 1 – the Crudo Ligero Marino, Litoral de Tabasco and Ichalkil-Pokoch projects – could add up to 200,000 bpd of oil supply up to 2025 provided they come on stream as scheduled. In the medium term, however, the uncertain market environment and a forecasted Brent oil price of $50-55 per barrel means that yet-to-be-sanctioned fields are not expected to contribute to production until after 2025.    

Yet if Mexico manages to keep sanctioning activity up over the coming years, there is potential for increased oil production in the longer term with volumes returning to current levels by 2030. 

Looking at Mexico’s top 10 oil discoveries expected to be sanctioned over the coming decade, we see that three of them have breakeven prices of less than $45 per barrel, including the largest one, and another two have breakeven below $50 per barrel (Figure 2). The field holding the largest economically recoverable resources of around 675 million barrels is the Zama discovery operated by Talos Energy, discovered in July 2017 and forecasted to be sanctioned in 2022. The field is estimated to have a breakeven oil price of $32.8 per barrel. The more expensive fields to develop at a breakeven of over $50 per barrel are the deepwater fields, Pemex-operated Puskon with resources of 155 million barrels and Maximino with resources of 140 million barrels, and Repsol’s recent Chinwol discovery with 140 million barrels.

Capital expenditures in Mexico’s oil industry collapsed during the previous downturn, slumping 80% from the $13 billion level reached in 2013 (Figure 3). Spending has picked up to over $5 billion in 2019–2020 with about 30% of all capital directed at new sanctioned fields, but total investments are still less than half of what was spent back in 2013–2014. Given the prevailing oil price and market environment, investments are expected to enter a period of decline again over the next couple of years, with total spending likely to hover below $3 billion. Assuming improved oil price dynamics, we anticipate a rebound in Mexican spending from 2023 onwards, with currently unsanctioned fields getting a substantial influx of capital. The largest part of total capital investments is expected to be directed into the Trion and Zama fields, which are planned to reach final investment decisions in 2022–2023.

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This year marks a turning point for Mexico’s oil supply. The decline over the past five years, driven largely by decreasing production from large mature offshore fields, has been mitigated by infill drilling activity and contribution from recently sanctioned discoveries. These new fields, such as the 2017 Ixachi discovery and the Amoca and Mizton fields in Area 1, are expected to support Mexico’s oil production outlook in the medium term. Although a recovery in capital expenditure is expected in the next five years with investments in fields currently awaiting sanctioning, these fields’ contribution to the country’s production will be not be significant until at least the late 2020s.