Liberalization of Mexico’s energy sector began in 2013, and so far the results have been less than hoped for. The country’s oil production continues to decline, quickly, and real/perceived “above-ground” risk is clouding opportunities for outside investment, analysts at Raymond James & Associates Inc. said in a note Monday.

Mexico aggregate oil production peaked in 2004. “Since then, output has fallen by one-third, from 3.82 million b/d to 2.49 million b/d, reaching the lowest level since 1981,” Raymond James said. While recent declines over the last three years come amid a worldwide industry pullback, they are, nonetheless, “surprising to many observers, including us,” the firm said.

“For example, in 2016 alone Mexico is exhibiting a decline of around 3.4% (or 90,000 b/d) — not as steep as the U.S. and China, but more so than Argentina and Brazil. We anticipate a further decline in 2017…Mexico’s rig count is down by close to 75% since the recent peak set in 2013, which helps explain the steepness of the recent output declines.”

Besides the industry-wide doldrums, Mexico’s three post-reform acreage auctions to date “ended up generating disappointingly low levels of interest from companies outside Mexico,” Raymond James said. Most deals have been signed by private Mexican companies, many of which are small players, lacking substantial balance sheets and operational expertise, the firm said.

“…[I]t would be odd if Mexico — by definition a new area for any international [exploration and production] company — would be at the top of the priority list,” Raymond James said. “However, there is no escaping the fact that the government’s reluctance early on to offer the choicest bits of its drilling acreage portfolio has also contributed to the weak response by international operators.”

Looking ahead to next year, Raymond James doesn’t see much to get excited about in the first two phases of Mexico’s second round of acreage auctions. The first auction, set for March, is expected to offer 15 shallow-water blocks in the Gulf of Mexico (see Daily GPI, July 21). The second auction, set for April, is to have 12 onshore blocks, of which nine are in the Burgos Basin and offer conventional drilling opportunities rather than shale (see Daily GPI, Aug. 24). “…[T]he acreage does not look especially exciting,” Raymond James said.

The country’s inaugural shale auction had originally been planned for 2015, the firm said, but it was postponed due to low commodity prices. Further out, “northern Mexico’s shale optionality provides an intriguing long-term resource development opportunity, albeit with poor visibility,” Raymond James said.

“The Burro-Picachos Basin, just across the Texas border, represents the southern flank of the Upper Cretaceous Eagle Ford Shale fairway.” Petroleos Mexicanos (Pemex) has drilled few shale wells here. Production metrics were “markedly lower” than in the Eagle Ford, but this was probably because of inadequate well stimulation rather than inferior geology, Raymond James said.

“There is also the Upper Jurassic Pimienta formation, a source rock that correlates with the Cotton Valley-Bossier-Haynesville of East Texas. This formation is found in the Burgos and Tampico-Misantla basins.” None of this acreage was offered in the first three phases of Mexico’s Round 1 auctions.

And now with Mexico’s 2018 presidential election looming, the future of the energy reforms is uncertain. Mexico has a one-term limit on its presidents, so incumbent and energy reform overseer Enrique Pena Nieto won’t be returning. If the center-left PRI party retains the office, not much is likely to change with regard to energy reform, Raymond James said. A victory for the center-right PAN party would have about the same outcome, the firm said.

However, the candidate currently in the lead, according to polls, is Andres Obrador of the hard-left MORENA party, a strong opponent of the energy reforms. “…[I]f Obrador were to win, it would have a chilling effect on foreign participation in Mexico’s oil and gas industry,” Raymond James said. “Even though Obrador would not have the power to undo the constitutional amendment [that created energy reform], his administration would be able to change how foreign partnerships are managed.”

Expect Mexico oil production to show steep declines this year and next, “and we are skeptical that a major uplift will come anytime soon,” Raymond James said.

Meanwhile in the Mexico’s midstream natural gas sector, projects and participation by outside companies continue as the country needs miles and miles of pipelines to import and distribute U.S. natural gas (see Daily GPI, July 27; Aug. 3; June 13; April 20; April 15).

For more on Mexico infrastructure development, check out NGI‘s specialreport on the development of Mexico’s natural gas market.