From The Hill

The onshore rig count in Mexico fell to one in March, a particularly ominous sign for a country that is attempting to dramatically increase its reliance on natural gas for power generation.

With a declining domestic resource base, Mexico will increasingly rely on U.S. pipeline gas and imported liquefied natural gas (LNG) and may be forced to backtrack in the short term on some of its energy goals by returning to heavier reliance on oil for power generation.

Total Mexican dry gas production fell to only 3.2 billion cubic feet per day in March, according to the most recent data from Mexico’s Secretaría de Energía (SENER) data. That marks a 30-million cubic feet per day (MMcf/d), or 0.9-percent, drop from April and a 14-percent (530 MMcf/d) decline from March 2016 levels.

Surprisingly, dry gas production has remained relatively stable since last November, averaging 3.2 Bcf/d over the last five months. However, the complete absence of drilling activity will likely lead to a resumption of production declines through the rest of the year and into 2018.

The primary leading indicator for future production is drilling, and the combined Mexican drilling fleet is down to only six total rigs. There were only two exploratory rigs active in April, down about 68 percent from last year, and only four development drilling rigs operating, down 31 rigs (149 percent) from last year. This year to date, there has been an average 10 rigs operating in Mexico, down 29 rigs or 74 percent from last year.

This downward trend contrasts sharply with the trend in the United States, where total active rigs have recovered by 62 percent over the same timeframe.

What is starkly apparent is that while U.S. drillers have demonstrated price responsiveness as the oil markets have strengthened, Mexico drillers continue to forestall drilling activity, which will almost certainly drive gas production lower over the near-term.

What might be even more telling from a gas production perspective is where rigs have been declined. As of April, there was only one onshore rig in operation in Mexico, and it was identified as an exploratory rig in the Southern region. The remaining rigs were in the offshore areas, split with two development rigs operating in the Northeast Marine region and two development rigs operational in the Southwestern Marine region.

The Northeast region, which is home to the majority of the nonassociated natural gas production, has been limited to no development drilling activity since June of last year and no exploratory drilling since October 2015.

Gas production from the Burgos Processing Plant combined with direct-from-field gas (which comprises a majority of the non-associated gas production in Mexico) declined to 860 MMcf/d in March, down 260 MMcf/d (23 percent) from a year prior.

Those dry gas declines are expected to continue more-or-less unabated through 2017, with onshore drilling rates indicating that there is no gas directed drilling taking place currently. Platts Analytics, the forecasting and analytics unit of S&P Global Platts, expects that Mexican dry gas production will decline by at least 0.5 billion cubic feet (Bcf/d) over the next year.

Only one plant, La Venta in Mexico’s South region, showed associated gas production growth in the first quarter. This plant appears to be the only reason production declines have slowed over the last several months. While the resumption of production from La Venta following potential maintenance work last year has helped mitigate declines over the last few months, the broader trend is still declining production across the board.

This and other topics will be presented at the Benposium energy outlook conference, May 16-18 in Houston.


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