Mexico’s energy reform signed last December by President Pena Nieto marks an important milestone for the country, opening oil and natural gas exploration and production not only to local, but also to foreign private companies. Private investment will be allowed through various schemes: profit sharing, production sharing and in the form of a license.
For the past 75 years, Mexico has considerably relied on its oil revenues, representing a third of its national revenue. However, in recent years Pemex saw its production decline, unable to unlock its promising shale and deepwater resources. According to estimates of the U.S. Energy Information Administration, Mexico has the world’s sixth-largest shale-gas reserves[i], with 555 trillion cubic feet of recoverable reserves, plus a further 13 billion barrels of recoverable shale-oil reserves. To boost production, following the footsteps of its neighbor that generated a shale gas revolution, the country would need significant financial capacity and investments in technology. While in 2012 the United States granted over 9,100 permits for shale drilling in 2012, through the participation of 170 companies, Pemex only scored three permits. [ii]
Mexico’s energy reform, if successful at the implementation, seems to be good news for foreign energy and service infrastructure companies that seek new investment opportunities, particularly in the US. US energy companies that have been developing the exact same shale geology and similar Gulf of Mexico deepwater challenges will be in a privileged position to gain access to Mexico’s market. However, many wonder if the reform might also exacerbate some or all of Mexico’s weaknesses that may impact the profitability of such investments. Mexico has been notorious for its corruption and inefficiencies in the political system.
While foreign investment might seem like the silver bullet to boost Mexico’s GDP by 2% and create 2.5 million jobs by 2025, the question remains: what will be the true outcome for Mexico?
by MIDDONI RAMOS / CELINE ROTTIER
[i] IAE Report “Technically Recoverable Shale Oil and Gas Resources” http://www.eia.gov/analysis/studies/worldshalegas/
[ii] Mexico Government, “Explanation of the Energy Reform” http://presidencia.gob.mx/reformaenergetica/assets/descargas/40_pags.pdf
Categories: Discussion - Oil & Gas, Energy
Whether controlled by Los Zetas, the Gulf Cartel, or the Sinaloas, the Mexican extension of the Eagle Ford Shale play is in dangerous territory. It will be interesting to see if the same international actors who braved violence to chase oil in Iraq will try their hands in Mexico’s cartel territory. Like those with shale oil experience, these players with warzone E&P experience may also be in a privileged position when it comes to working in the cartels’ backyard.
“The best predicament of future behavior is current behavior.” There’s much corruption within the Mexican government, I have little hope this will benefit the people the way the media/government show us . The reform is more needed in the political system before anything else. I’m really hoping I’m wrong.
Thank you for your comment Raul. If this is your view, how do you think foreign investors should go about this? Should they invest? And if so, how can they mitigate their exposure?
I partially agree with you Chaim. If true some of the biggest shale reserves are in areas located in the areas with the most drug-related violence and activities, those cartels don’t really interfere with the productive activities of the country. However, corruption is a big issue and the Mexican government needs to address it soon. Not too long ago, fraudulent operations was exposed between Oceanogradia, a Pemex service company, and Banamex (Citigroup), which raised many flags to foreign investors seeking an opportunity in the energy reform. While fraud is part of banking (unfortunately), Mexico needs to improve its anti-money laundering procedures and reinforced its internal audits to improve it s current investment climate.
The reform is coming closer to approval!…
8 July 2014 – Senator: Mexico Energy Laws Likely To Be Approved By Early August
Mexican laws that lay out the fine print of a landmark energy sector overhaul approved last year should be passed by lawmakers in early August at the latest, a ruling party senator said on Tuesday. The so-called secondary laws are key to implementing a constitutional reform aimed at luring private investors into Mexico’s oil and gas sector, which is dominated by ailing state oil company Pemex.
11 July 2014 – Transboundary Leases Provide Excellent Opening to Mexico DW Exploration
The U.S. Bureau of Offshore Energy Management (BOEM) has awarded the first three oil and gas leases in the Gulf of Mexico that are subject to the U.S.-Mexico Transboundary Hydrocarbons Agreement. This development is an important step for deepwater oil and gas development in Mexico. It follows the recent Constitutional changes in Mexico that open the door for international oil and gas companies to develop Mexico’s vast hydrocarbon resources.