The Hydrocarbon Sector in Mexico: From the Abundance to the Uncertain Future

Oil in Mexico has been the cornerstone on which the Mexican State has built upon since its nationalization. It has been the main federal income source, it has supported industrial development and has allowed the State to increase international reserves. Petróleos Mexicanos (PEMEX), the National Oil Company (NOC), is a supply of vital resources for the government by financing public spending, providing certainty to the economy as well as providing extra resources for local governments. However, for decades, fiscal, institutional, legal and organizational constraints have not allowed the NOC to fully behave as a profit maximizing firm that chooses optimal strategies for reinvesting its own resources and/or subcontracting other firms with advanced technologies, such as deep-water technology. In this paper we describe the history of the hydrocarbon sector in Mexico, discuss its performance, analyze its legal, contractual and fiscal conditions, and study the corporate governance of PEMEX as well as its financial, operative independence and regulatory architecture. We further study the main aspects related to geology and technology, the evolution of discoveries and the success rates of exploration in the Mexican oil industry. We also analyze details of investment strategies, and the role of Cantarell and the deep and ultra-deep oil fields. We finally analyze the drivers of performance, counterfactual scenarios, and alternative hypotheses.