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Mexico’s Unfulfilled Potential A Discussion of the Recent BIPP Study: Scenarios for Oil Supply, Demand and Net Exports f

Mexico’s Unfulfilled Potential A Discussion of the Recent BIPP Study: Scenarios for Oil Supply, Demand and Net Exports for Mexico. Presentation to the Dallas Federal Reserve Branch Conference “Mexico: How to Tap Progress”. Kenneth B Medlock III, PhD

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Mexico’s Unfulfilled Potential A Discussion of the Recent BIPP Study: Scenarios for Oil Supply, Demand and Net Exports f

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  1. Mexico’s Unfulfilled Potential A Discussion of the Recent BIPP Study: Scenarios for Oil Supply, Demand and Net Exports for Mexico Presentation to the Dallas Federal Reserve Branch Conference “Mexico: How to Tap Progress” Kenneth B Medlock III, PhD James A Baker III and Susan G Baker Fellow in Energy and Resource Economics, and Senior Director, Center for Energy Studies, James A Baker III Institute for Public Policy Adjunct Professor, Department of Economics Rice University November 2, 2012 James A Baker III Institute for Public Policy Rice University

  2. Discussion Points • Some basic points • Projections for oil demand, supply and net exports • Implications of the story lines • What needs to happen? • Can the course change? • Broader developments in the global market • The role of unconventional resources • Where does Mexico fit?

  3. On the Concepts of Resources and Production • We generally define total resource as: • Ultimate = Produced + Proved + Potential (or Undiscovered) • Thus, we can assess, albeit with uncertainty, the extent of the total technically recoverable resource. • Even this is insufficient because economic recoverability is really the subset that matters, and even this is dynamic. • The ultimate scale of unconventionalresources is still a big unknown due to a relative lack of exploration • Uncertainty remains in the resource estimates for shale • Tight oil resources are becoming mainstream • Heavy oil from tar sands and oil shale

  4. A note on what politics can mean for supply • Geopolitics can present barriers to investment (risk premiums, limited access), effectively shrinking the size of the resource box (below). • Barriers to investment reduce the impact of exploration, limit the ability to respond to higher long run prices, and limit the impact of innovation. Discovered/Identified Resource Exploration, Technological improvement Proved Possible Probable Increasing Economic Viability Undiscovered Resource Price increase, Cost decrease Sub-Economic Resource Geopolitics Increasing Geologic Uncertainty Source: Modified from McKelvey, V.E., “Mineral Resource Estimates and Public Policy,” American Scientist, 1972

  5. Scenarios for Mexico’s Oil Demand, Supply and Net Exports

  6. History (1971-2010)

  7. Projection – Business as Usual • Business-as-usual • GDPgr = 1.44%; POPgr= 0.44%; Poil,2040 = $90/bbl • Resource = 29.83 billion bbls; Reserve replace = 0.83 billion bbls/y • Mexico becomes net importer in 2027.

  8. Projection – Alternate Assumptions • The result, however, is highly contingent on • Reserve replacement (+); New discoveries, such as deep water (+) • Domestic demand growth (-) • Pictured: US-type reserve replacement with GoM Discovery

  9. The Intersection of Market Structure and Regulation:An Example – US Unconventional Oil

  10. A Study in Contrast: US Oil Production • The last 5 years higher price has motivated exploration and development, leading to a resurgence in US oil production, from unconventional and old fields.

  11. Ongoing developments in US Tight Oil • Resource potential in US is distributed widely. • For example, North Dakota (Bakken), Texas/New Mexico (Permian – Avalon, Bone Springs, Wolfcamp, South Texas – Eagleford), Ohio (Utica), Pennsylvania (Marcellus), Colorado/Wyoming (Niobrara), Florida (Sunniland), Louisiana (Tuscaloosa), Oklahoma (Mississippi Lime), California (Monterrey). • Not all shales are created equal, but the total technically recoverable resource endowment may exceed 40 billion barrels. • To date, activity in the Bakken and Eagleford accounts for most US tight oil production (about 680 thous b/d). • Market structure and regulation facilitate entry my multiple firms and high efficiency.

  12. The Potential for Change

  13. Upstream Firm Efficiency: A Function of Operating Conditions • Average revenue efficiency (pictured) for 2000-2009, sourced from Hartley and Medlock, 2012. • Unlike most international majors, PEMEX is burdened by government objectives, which lowers estimated efficiency. • Absent change, PEMEX is not likely to move to the frontier.

  14. Questions/Comments

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