COMMODITIES 2025: Decline in Mexico's crude and gas production could accelerate

This is part of the COMMODITIES 2025 series, where our reporters bring to you key themes that will drive commodities markets in 2025.

With no new strategy to revitalize its exploration and production divisions and profound changes reshaping the ethos of the country, observers and experts warn the decline of Mexico's Pemex crude and gas production could accelerate in 2025.

Missing its own output goals may force the state oil and gas company to import crude for its refining system, and if its finances continue to deteriorate, its liabilities could soon endanger the country's credit rating.

"The decline is beyond Pemex control now," said Alma América Porres Luna, an independent analyst who formerly served as commissioner at the National Hydrocarbons Commission, or CNH, the country's upstream oil and gas regulator.

Without any new discoveries in sight, the only two new projects that could contribute to the national production in the short term are Trion and Zama, which will not be enough to compensate for the declining production of Pemex's main fields, Porres Luna said.

Investments for the development of Zama, operated by Pemex, have been delayed until the end of 2024, according to CNH data. Trion is expected to be producing in 2028.

Peak production at Zama, expected by 2029 or 2030, will be roughly 180,000 b/d of crude and 70 MMcf/d of gas. Peak production at Trion, also expected around 2029, could contribute with roughly 110,000 b/d of crude and 100 MMcf/d of gas to the national output.

Pemex depends on a handful of projects for its output. Roughly 50% of the company's liquid hydrocarbon production comes from seven main developments, all of which are already in decline.

According to Porres Luna, at the current rate of decline, Pemex will lose 100,000 b/d of production every year beginning in 2025.

Pemex operates roughly 250 projects in total, many of which hold 30 million barrels of oil or less to be recovered. In the last few years, major international companies that had obtained exploration contracts in Mexico decided not to invest in projects where they could recover as much as 300 million barrels, according to data compiled by Commodity Insights.

Some of the companies that have relinquished contracts include Shell, Qatar Energies, Equinor, Premier Oil, Chevron, China Offshore Oil, Repsol and BP, according to CNH. Eni is still evaluating whether or not to develop a cluster putting together a few projects that hold a few hundred million barrels each.

"I don't see how the trend in production can change, especially considering the budget cut the company received in 2025," said Oscar Ocampo, energy and environment coordinator at the Mexican Institute pro Competitiveness, a local think tank.

In 2025 it will have to operate with a budget that will be 7.5% lower than that of 2024, while it is expected to maintain its crude production at 1.8 million b/d through the end of the decade, something it was not able to obtain in October even with the help of private producers in the country and even considering its production of condensates.

"The budget cut will not allow the company to do much," Ocampo said.

Pemex will need to develop fields which it does not have the technology nor the money to do it alone, said Rosanety Barrios, an independent energy analyst with extensive experience in the energy industry in Mexico.

Barrios was referring to the vast amounts of hydrocarbons located in deepwater and unconventional deposits in Mexico, where Pemex has no experience.

But instead of looking for partners to turn things around, the government will continue to use service contracts to operate its upstream assets, a model it has used for years, Barrios said.

"Given its poor finances, sticking to the old model appears to be a losing game," she said.

Constitutional overhaul

In 2025, Pemex will experience a few changes, as the administration of new president Claudia Sheinbaum conducts a major overhaul of the Constitution: Pemex will have a new fiscal regime expected to translate into savings; the company will be ruled by a new law, different from the commercial law applied to all private companies; and it will be freed from the oversight of independent regulators as they will be eliminated.

The changes, according to the new administration, are part of a broader strategy that will lead to "energy sovereignty." They come as the Sheinbaum government continues a set of reforms started by her predecessor, including a total reshaping of the judicial system.

Although experts agree that it is important to wait until the new rules are published to know the details, they told S&P Global Commodity Insights the changes will likely have little impact on the company's declining performance.

"To attract interest for service contracts you need liquidity, which Pemex lacks," said a Mexico-based lawyer from an international firm who advises clients in the energy industry.

Pemex foreign debt is close to $100 billion plus roughly another $20 billion it owes to its service providers, according to official filings to the Mexican Stock Exchange. The promised savings from the new fiscal regime will be worth $2.5 billion.

"There might be some companies who might still be willing to get a contract from Pemex because there is still money to be made, but there is a limit to how much they can give," said the lawyer.

Money-losing business

The refining business is what experts say needs most attention, as it is where Pemex loses the most. In the first quarter of 2024, the company lost almost $13 billion in refining crude. However, the government has maintained its goal to reduce crude exports to produce its own gasoline and reduce gasoline and diesel imports.

During Andres Manuel López Obrador's administration, the Mexican government built a new 320,000 b/d refinery called Olmeca, commonly known as Dos Bocas for the port where it is located.

The refinery is in the process of being commissioned. Commodity Insights expects crude processing to start ramping up between November 2024 and February 2025. Assuming no major setbacks, Commodity Insights expects Olmeca to reach full commercial operations by the end of 2026.

"Refining is the problem," said Barrios, noting that if the situation of the company continues to deteriorate, it could cost Mexico its investment grade status.

Moody's Investors Services in February downgraded Pemex's rating to B3 from B1 partly because of the losses of the refining division. In November, it lowered its perspective for Mexico's sovereign rating to negative partly due to the increased risk that Pemex liabilities become part of the federal balance.

On Dec. 13, S&P Global Ratings affirmed Mexico's sovereign rating, but warned in a downside scenario that weaker public finances, combined with the risk of extraordinary support for state-owned companies could lead to a downgrade over the next two years.