Last week, Mexican President Pena Nieto signed legislation which
ended state control over the nation's oil sector. This is the first
time since 1938 when private players will have access to the
nation's oil reserves. During that year, the Mexican government had
expropriated the resources and facilities of private players.
These actions led to the creation of state-owned oil company
Petroleos Mexicanos, or Pemex. Since then, the company has emerged
as the world's seventh largest oil producer and dominated the
Mexican energy space. The new legislation, which received
legislative approval in December, goes a long way in diminishing
On the other hand, it provides an opening to foreign companies
which can now invest in Mexico's vast oil reserves. This includes
behemoths like ConocoPhillips (
) and Royal Dutch Shell plc (
Reasons for Reforms
Oil production from Pemex has been declining for quite some time
now. The state-owned company has been unable to match up to the
pace of production across the world. Now, the government is opening
up its energy space in order to increase the pace of production.
The government has said that rights for 83% of Mexico's "proven and
probable" energy reserves will be awarded to Pemex as per a "Round
Zero" allocation. The company's director Emilio Lozoya has said
Pemex believes this will help to boost flagging production levels.
However, Pemex will have access to only 21% of the country's future
oil and gas reserves. This is much lower than the share it had
demanded. Speaking to CNN Lozoya said: "Of the prospective
resources, we have received 67% of what we asked for."
Big Oil Gets a Boost
Pemex had demanded 31% of "possible reserves" before these
allocations were made. But now, private companies will have access
to the balance 79% of such reserves. This translates into at least
21 billion oil barrels which can be produced from the Gulf of
In March 2013, Chevron Corp. (
) made large discoveries in this region at the "Shenandoah" and
"Coronado" locations. Last month, Royal Dutch Shell announced that
it has made yet another major find in the deepwaters of the Gulf of
Mexico in the Norphlet play. Shell estimates resource potential of
about 100 million barrels of oil equivalent.
Such discoveries will further increase interest in Mexican oil. In
a statement to CNN, Exxon Mobil Corp. (
) said: "We will pursue potential investment opportunities in
Mexico that are competitive with other opportunities around the
Apart from shale gas, these companies will compete for vast
deepwater reserves in the Gulf of Mexico. These areas remain
largely unexplored, in sharp contrast to furious activity taking
place in U.S. territory.
What's in It for Mexico?
Oil majors were silent during the reforms process, declining to
interfere in a politically sensitive exercise. In fact, Exxon was
possibly the first oil major to break its silence post the
enactment of the legislation. Now that reforms have started, they
have set the stage for a fiercely competitive auction.
As a consequence of the reforms process, Mexico hopes to receive
$50.5 billion in private and foreign investment by 2018. The "Round
One" tender will invite bids for 69 exploration and extraction
blocks. This includes both offshore and onshore areas which span an
area of 28,500 square km.
Additionally, Pemex's director for exploration and production said
the company hopes to enter into partnerships with oil majors for
deepwater drilling. This includes the likes of BP plc (
) and Petrobras (
). The company revealed that a year before reforms, the company
received offers to enter into partnerships and utilize
infrastructure on the U.S. side of the Gulf of Mexico.
Implementation is the Key
Mexico stands to make substantial gains from the reforms process.
The country stands to gain monetarily from the auction of oil
reserves. But more significantly, Pemex hopes to increase
production to levels last witnessed in 2004 by 2025.
However, the success of these reforms lies in effective and
transparent implementation. Efficient handling of the auctions and
new procedures are the first step in this direction. Secondly,
Mexico will have to deal firmly with corruption. It will have to
prevent unfair trade practices and ensure that the auctions process
is above board.
This is particularly relevant when it comes to Pemex. The state-run
company has acquired a reputation for corruption which needs to be
dealt with. A smooth reforms process will go a long way in aiding
oil majors. It comes as no surprise that they have welcomed the
announcement and are keenly watching developments on this
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
BP PLC (BP): Free Stock Analysis Report
CHEVRON CORP (CVX): Free Stock Analysis Report
CONOCOPHILLIPS (COP): Free Stock Analysis
ROYAL DTCH SH-A (RDS.A): Free Stock Analysis
PETROBRAS-ADR C (PBR): Free Stock Analysis
EXXON MOBIL CRP (XOM): Free Stock Analysis
To read this article on Zacks.com click here.