ENERGY MATTERS © VOL. 10
an opinion editorial written exclusively for ANZMEX
19 November 2019
By Chris Sladen
Energy matters – 2020 Vision; Staying focused
I was asked the other day ‘What do I expect to happen in the energy sector next year?’ The following is my summary of key features anticipated in both the world of energy, and for energy in Mexico in 2020.
Oil prices are likely to remain flat at around US$ 60/barrel, barring major global supply disruptions and conflicts. Stable oil prices should ensure most oil developments can deliver decent, though not stellar, commercial returns. At US$ 60/barrel, the industry is ‘in balance’ – the oil & gas producers can make money, the oil services sector can make money, refiners and product retailers can make money, and governments receive lots of tax income.
Global energy consumption is expected to grow driven by demand in China and India, as well as overall growth in the population. Emissions continue to edge upwards despite increased efforts to curb output. Extreme climate events – floods, forest fires, heatwaves – will continue and bring further focus onto solutions for limiting emissions, how to fund the energy transition and how to speed up the transition. Electrification continues apace globally with renewables prominent and offshore wind growing rapidly. The energy transition will continue to be driven by changes in the global oil majors search for ‘more energy with less carbon’ and in some countries driven by consumer attitudes and governments committed to aggressive targets.
What happens in the US both economically and politically will continue to be the dominant external factor impacting Mexico. By mid-year, in Mexico there will be an intense (daily) focus on US elections. Across Latin America, a variety of elections in Guyana, Suriname, Venezuela, Peru, Brazil and Trinidad could indicate significant shifts in regional geopolitics. Regime change in Venezuela and Bolivia would likely impact oil & gas producers and refiners across the region. Elsewhere, many governments will be preoccupied with their own challenging issues, for example in Europe (Brexit), the Middle East (armed conflicts & terrorism) and China (trade policies).
Mexico’s economy is expected to continue to weaken with possibly zero growth and recession, and domestic consumption slowing. Mexico’s country risk and credit ratings are weakening; further downgrades are quite likely. Growth will likely come from agriculture, air travel and medical sectors whereas difficulties in the mining, metals and construction sectors are set to continue.
Security problems, gang violence and high profile security incidents in Mexico will again feature, plus increased frequency and severity of both cyberattacks and piracy, as well continuing theft of fuels from pipelines and trucks. Potential for civil unrest is based around socio-economic issues, perhaps ignited by local security, infrastructure, poverty, health, environment and pensions issues. There is the possibility for many people to slide back into poverty.
The austerity cuts to Mexican government staffing will continue to create issues both at home and abroad. Pursuit of corruption and embezzlement cases will continue but only occasionally become headline news. Only slow progress is expected with Mexico’s transformational infrastructure projects; the difficulties of delivering on time will become apparent as more and more socio-environmental issues emerge. Mexican local elections in mid-year will be closely watched for any shift in political allegiances and sentiments.
Many companies in Mexico will remain ‘hunkered down’ hoping for better times and postponing spend where possible. The exodus of trained and well-educated Mexican professionals (‘brain drain’) will continue, targeting Canada, Europe, Australia, New Zealand and the USA. Those companies that can adapt to the new political attitudes, behaviours and language, and those prepared to accept the increasing country risk, will seize significant business opportunities.
Looking back over the last 12 months for energy in Mexico, negative news appears to outweigh the positive; for every positive item there are often two negative items. This theme is expected to continue.
Weakness in Mexico’s oil & gas production will continue through 2020 until new developments bring new reserves onstream. Incentivised service contracts (often called CIEPs) will be launched for some of Mexico’s largest mature oil fields in an attempt to prolong and stimulate oil production. Possible bright spots could come from results of exploration and appraisal drilling in offshore blocks won by companies in previous E&P bid rounds 1, 2 and 3. A resumption of E&P bid rounds is unlikely, and Mexico is no longer considered attractive compared to other E&P opportunities in the region – Brazil, Guyana, Surinam, Trinidad.
Fracking will remain suspended and Mexico’s vast unconventional shale gas and liquids resources will stay under the ground. Power generation will remain heavily dependent on US gas imports. Some midstream and power generation investments may be put on standby pending US election results.
Weakness in Mexico’s refining sector will persist. Progress with building the new Dos Bocas refinery in Tabasco will be keenly watched. Mexico’s liberalised gasoline market will be ever more competitive in 2020. Customer loyalty programs for gasoline brands will become increasingly sophisticated. Several private midstream fuels projects are due to start operations which should add capacity and relieve the pressure on the State-owned infrastructure. Fuels distribution by rail will continue growing. Higher gasoline prices in Mexico compared to the USA will continue to weigh upon economic activity and push some of Mexico’s poor into energy poverty. Lubricants businesses are likely to have zero growth with tight margins and companies targeting increased market share and reduced costs.
The goal of Mexico reaching zero net emissions of greenhouse gases is still decades away. Progress on reducing emissions in 2020 will be very limited. Plastic recycling and waste to energy will gather pace as operational problems with increasing landfill grow.
The potential for natural disasters is always there – earthquakes, hurricanes, tsunamis, volcanic eruptions, wildfires & droughts – and the risk remains that a disaster, or combination of disasters, causes a major disruption in Mexico’s energy production, distribution and supply. This weighs heavily upon an industry that has had a poor safety and accident record in recent years.
Overall, my 2020 expectation is for a grinding year; a lot of oil and gas will be produced, a lot of power will be generated and consumed, a lot of refined products will be transported, marketed and sold, but there will be few bright spots and a growing nervousness about US elections as the year progresses. Even so, Mexico will remain a giant economy and continue to be a country full of business opportunities for those capable of navigating a complicated landscape and who stay focused.
Lastly, my best wishes and season’s greetings for 2020. I hope that my articles on energy matters over recent months have been interesting to read, thought provoking, stimulated discussions and been informative. Feedback is always welcome.
About the author:
Chris Sladen runs an advisory service offering insights to inform, shape a decision, policy & regulation, and guide the next steps for energy ventures, acquisitions & divestments, energy transition and climate strategies. Chris has a unique global experience having worked in over 40 countries. This is underpinned by extensive knowledge of petroleum systems and where best to find oil and gas, notably in the Gulf of Mexico & nearby areas, Europe and NE & SE Asia, as well as the development of midstream, downstream & renewables investments in many emerging economies. Chris has extensive experience acquired on the Boards of companies, subsidiaries, business chambers & organisations. Chris has a career of over 40 years in the energy sector, living in Mexico (2001-2018), Russia, Vietnam, Mongolia, China & UK. His contributions to the energy and education sectors have been recognised by the UK Government with both an MBE and CBE, and also the Aztec Eagle from the Mexican Government – the first foreigner in the energy sector to achieve this award. Chris has published extensively over five decades. Chris’ articles for Energy Matters reflect his experience and enthusiasm and are not paid for in any way.
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ANZMEX ORG A.C. is a politically neutral business council with no political affiliation. The views expressed in this column are not necessarily representative of the official views of ANZMEX or any of its officers or staff.