Sense of Reactivation in Mexico Oil and Gas, Industry Leader Says

After a down period in the Mexico oil and gas industry, exacerbated by the Covid-19 pandemic, there’s a renewed push for exploration and drilling activity given the elevated hydrocarbon price environment, Marco Cota, CEO and founder of Talanza Energy, told NGI’s Mexico GPI.

“We’re seeing a lot of drilling plans for this year and next year in deep and shallow waters. There’s definitely a feeling of reactivation,” Cota said. “There’s a lot of movement among the principal natural gas transporters, particularly in regards to methane and developing new projects. I’m really seeing encouraging activity in the midstream.”

Cota founded Talanza in 2017, where he and his team assist international energy companies to design and implement strategies for regulatory compliance from a solid risk management perspective. Talanza worked with the United Nations Environment Program to reduce methane emissions and acts as a special advisor to the Colombian government for the design and implementation of methane emissions regulations.

Previously, Cota worked as Director General of Exploration and Extraction of Hydrocarbons at Mexico’s Energy Ministry (Sener), where he participated in the design and implementation of the current Mexican energy model, its secondary legislation creation, contracts, regulation, and the design and development of the national bid rounds. He also served as the Director of Data Analysis at the Comision Nacional de Hidrocarubros (CNH) and as Director for Investment Project Assessment at the Finance Ministry,

Cota holds a B.A. in Economics from the Mexican Autonomous Institute of Technology (ITAM) and a Masters’ degree in Public Policy from the University of Manchester.

NGI: Oil and gas prices have boomed in recent months. How does that affect Mexico, both at a macro and consumer level?

Cota: The impact is really strong because Mexico is a net importer of hydrocarbons. If you look at the balance of hydrocarbons, such as the imports and exports of crude, gas, and petroleum products, we have a deficit. It’s often thought that, as a country that exports crude, we’re a country that has a hydrocarbons surplus. But that’s not the case. If you look at the balance of the amount of money we generate via exports, versus the cost of crude, natural gas and petroleum products we import, we have a deficit. We import more than we export and, as a result, the recent spike in hydrocarbon prices has a negative effect on the country. 

We’re charging more for what we export, but also paying much more for the hydrocarbons we import. Last year, for example, we had a negative balance in terms of petroleum revenues. From an international trade point of view, we have a commercial deficit in hydrocarbons.

Secondly, for the size of the Mexican economy and how it’s structured, high petroleum prices are unfavorable. Even when we had a surplus in our trade balance, the economy and economic activity was affected by increased prices in general terms, such as higher natural gas, higher fuel and gasoline costs, and increased electricity prices. 

So the economy as a whole is impacted. And, when there is significant volatility in prices in Mexico, the Finance Ministry intervenes to stabilize prices, which is seen as a positive, though in the long term, it has a very high cost. Why? Because it subsides the consumption of fuels at a time when demand would typically decrease. 

This of course provides a temporary benefit and support to the economy, for both the rich and the poor, though it provides a more long-term benefit to the wealthy. It’s not a good mechanism in terms of distribution of wealth, and the existing inequality is exacerbated by this type of subsidies. In the short term, everyone in the economy benefits and feels relief as a result of the Finance Ministry support, but the truth is that it actually leads to more inequality in the country. That’s the impact on the consumer side.

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NGI: What about the impact on producers, such as Petroleos Mexicanos (Pemex) or private oil and gas companies?

Cota: In theory, an increase in hydrocarbon prices would be beneficial for Pemex when selling crude exports, but the problem is the money earned from those sales is used by the government for various purposes, such as to subsidize gasoline, which is imported. So, the truth is that Pemex also doesn’t benefit from increased hydrocarbon prices. Even with the price of oil at $100/bbl and with an increase in exports, the revenues generated are used mainly to subsidize gasoline.

So, I think Pemex Exploration and Production, PEP, is in an almost no-win situation. As hydrocarbon prices increase, the company makes more money that is immediately spent on gasoline subsidies and, at the same time, oil service companies and upstream providers charge more, which means Pemex liabilities increase. So, I think the effect of increased hydrocarbon prices is highly negative for Mexico in many aspects. Mexico really should have a better strategy in place to be able to respond to these types of fluctuations in prices, which is a common occurrence in the industry.

NGI: When you mention a new strategy, what about natural gas? What could Mexico do to strengthen its natural gas industry so that it wouldn’t be forced to spend so much on natural gas imports and be so exposed to unexpected price swings?

Cota: I think that the wave of efforts to substitute imports that began with the current administration, specifically regarding the Dos Bocas refinery project, would have been much more effective and beneficial to the country if those resources were committed to increasing the production of natural gas. Why? Because it seems likely that in the medium term, gasoline will be phased out and substituted, and that the planet will begin to use transportation modes powered by electricity. So, the Dos Bocas investment might be futile in a few decades.

That’s not the same for natural gas. Given that natural gas is considered to be a transition fuel, it seems likely that natural gas will be here for many more decades to come. It’s possible that we’ll always need natural gas in some form, while it seems that’s not the case for gasoline, which is more probable to be phased out. So, I think the strategy to prioritize a refinery instead of natural gas development was unfortunate in terms of a mid-and-long-term vision. I think Dos Bocas could end up being a stranded asset, whereas natural gas would benefit both mobility and the national electricity grid, given that more than half of the current matrix is fueled by natural gas.

Increased production of natural gas is something this country needs, independent of if it’s in this administration or future governments. Mexico needs to produce gas to fuel the industrial sector, for mobility and to generate electricity. 

We have a significant trade deficit with the U.S. in natural gas and the U.S. continues to see more opportunities to export gas to other parts of the world through liquefaction projects or via compression. There’s been a lot of new opportunities that have opened up in recent years for the U.S. gas market and there will certainly be more in the future. If Mexico, which has significant reserves of gas available for production, developed these resources, similar opportunities could emerge for the country.

NGI: In your work at Talanza Energy, the company has specialized in methane leak reductions and improving natural gas efficiency. Where do you see opportunities to reduce emissions and natural gas leaks in Mexico?

Cota: The problem in Mexico is that its principal company, PEP, has not controlled its gas leaks. They continue to emit large quantities of natural gas and methane. So, what can we do to improve this situation?

The first thing that needs to be done is to implement controls to limit Pemex’s gas emissions, such as leaks and venting. Currently, around 35% of methane emissions come from leaks alone. That means that operators don’t even know where the leaks are located, given that gas doesn’t smell and can’t be seen. You can smell gas in your home, but you don’t smell it in upstream or midstream projects. It doesn’t smell and can’t be seen and it is a massive amount of gas that is lost simply as a result of leaks. Companies are aware of their emissions, but leaks are an international issue. It’s an issue across the oil and gas industry globally.

One thing that Mexico could do to improve its overall position and efficiency in terms of natural gas is to control leaks. Mexico has good regulation in place in terms of methane emissions, but it doesn’t have a lot of teeth. And the principal problem is Pemex, which is the biggest emitter of methane in the country. 

In the short term, the solution is to incorporate and involve teams and programs to detect and repair these leaks, particularly in PEP. There are plenty of international companies that have signed net zero agreements and are committed to reduce emissions by 2050, but Pemex isn’t one of them. To date, Pemex hasn’t committed at an international level to reduce these emissions and leaks.

NGI: Last question: How do you perceive the current mood of the Mexican energy sector?

Cota: I think that there’s a sense of revival and of encouragement. With our clients, we’ve been really pleased to see that there is renewed activity and interest in compliance and advisory services as their exploratory and development plans move forward. 

We’re seeing a lot of drilling plans for this year and next year in deep and shallow waters. There’s definitely a feeling of reactivation. I honestly think that the industry went through a down period where it was paralyzed, though I think that actually had more to do with Covid and the pandemic than anything else.

We’re seeing similar movement with clients that work in natural gas. There’s a lot of movement among the principal natural gas transporters, particularly in regards to methane and developing new projects. I’m really seeing encouraging activity in the midstream. It’s understood that natural gas is a long-term fuel and that is being reflected in midstream activity.

Even though the oil and gas auctions are not going on currently, the size of the surface area that was tendered for exploration is immense. It’s around 90,000 square kilometers, which is equivalent to the amount of surface area that belongs to Pemex. 

So, when the industry comments that the cancellation of new bid rounds has paralyzed the industry, I don’t see it that way. There’s a significant amount of territory and blocks current being developed and there’s plenty of work in progress. Additionally, I think the high oil prices have provided an incentive for companies to seek to drill again, including in deepwater fields.