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