What Mexico's Energy Reform Means for Big Oil

By
A A A

By Nick Cunningham for Oilprice.com

Mexico’s Congress have given final approval to a far-reaching energy reform bill that will open up the oil and gas sector to private investment for the first time in 75 years.

The historic opening, a central piece of Mexican President Enrique Pena Nieto’s agenda, will end the monopoly of state-owned oil company Pemex.

That could spell good news for major oil companies waiting to jump in. Mexico offers some of the same promising geology that is seen just north of the border, in Texas. The Eagle Ford shale in Texas is one of most productive in the U.S., and similar deposits of oil and gas are thought to extend south into Mexico. According to a rough estimate published by the Energy Information Administration, Mexico could hold 545 trillion cubic feet of natural gas trapped in shale, and much of that is concentrated in the Burgos basin in the northern part of the country.

Offshore in the Gulf of Mexico will also be a prime target for oil majors. Companies like Chevron (CVX), BP (BP), Royal Dutch Shell (RDS-A), and Statoil (STO) are already operating in the Gulf close to Mexican waters. Known as the Perdido Fold Belt, some of Mexico’s best offshore oil reserves are located along the U.S.-Mexican maritime boundary. The region could hold up to 10 to 30 billion barrels of oil.

And oil companies are increasingly turning to offshore hydraulic fracturing, according to Bloomberg, which help them extract harder to reach reserves in the Gulf.

Both onshore and offshore oil fields are located near existing operations just across the border in U.S. territory – making it a small leap for many companies to expand southwards.

For Mexico’s part, it is anxious to attract international development because Pemex cannot access offshore oil and onshore shale resources with their current level of expertise. Nor can they marshal enough capital. But big multinational oil companies can help them on both fronts.

International investment could also prevent a further slide in Mexico’s oil production, which recently hit its lowest level in over 24 years.

And a new frontier in Mexico comes at a perfect moment, with major oil companies juggling a mess of violence around the world. From Iraq to Libya, Nigeria to Russia, the largest international oil companies are running into above-the-ground problems that are affecting operations. Most recently, Chevron and ExxonMobil (XOM) announced on August 7 that they were evacuating personnel operating in Kurdistan, as the Sunni jihadist group Islamic State moved within striking distance of the regional capital of Erbil.

That has some oil companies casting an eye back towards North America, hoping to avoid the risk that comes with operating in troubled territory.

But Mexico isn’t risk-free, itself. Drug violence still plagues parts of the country, including in areas that hold shale oil and gas. For example, Tamaulipas in eastern Mexico at times resembles a “war zone.” Some oil workers have to be escorted to and from work sites by the Mexican military. Lingering pockets of violence could keep international companies – still smarting from drilling campaigns affected by violence elsewhere – from jumping in too quickly.

The political situation is also uncertain, although to a lesser degree. President Pena Nieto has racked up a lot of wins in his first two years, pushing major reforms through Congress on everything from banking, to education, telecommunications, and energy. Ending Pemex’s 75 year monopoly over energy is a notable feat.

But precisely because it is a radical departure from the past has made it highly controversial. The Mexican public is frustrated, and many are skeptical of the benefits of handing over control of Mexico’s natural resources to foreign companies. Should President Pena Nieto’s PRI party lose control in 2018, an incoming administration could roll back some of the reforms that are now being put into place. That presents another element of risk to international companies pondering billion dollar investments.

Nevertheless, it is hard to imagine any of the interested parties will stay away. With many of their other projects literally located in war-ravaged regions, Mexico looks easy by comparison. Companies like ExxonMobil, BP, and Chevron will probably move in as quickly as they can.

This article was originally published on Oilprice.com.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Commodities , Business , International

Referenced Stocks: CVX , BP , RDS.A , STO , XOM

Oilprice.com

Oilprice.com

More from Oilprice.com:

Related Videos

Stocks

Referenced

Most Active by Volume

57,806,513
  • $13.7967 ▼ 4.19%
47,363,966
  • $13 ▲ 7.35%
44,409,847
  • $45.91 ▲ 1.98%
29,028,096
  • $104.965 ▲ 0.13%
27,377,740
  • $13.50 ▲ 9.22%
26,307,306
  • $11.26 ▲ 3.97%
24,610,633
  • $19.915 ▼ 13.86%
24,363,162
  • $16.61 ▲ 0.06%
As of 10/24/2014, 02:06 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com