Mexico's Energy Reform: A New Horizon?

Shutterstock photo

Over the years, Mexico, one of the biggest producers of petroleum and other liquids globally , has transitioned from being a net energy exporter to a net importer of energy.

What Led to the Change?

The import dependence was a result of the steady decrease in oil production that started in 2005. To address the situation, in August 2014, the government decided to deregulate its energy industry and end the 75-year monopoly of Pemex. The ministry of energy in the country, SENER, issued a five year, four round tender plans from 2015 to 2019.

The deregulation was aimed to help the Mexican oil industry become more efficient and draw more investments from abroad as it denationalized 914 oil and gas blocks.

Effects So Far

The benefits of the reform depend on Mexico's ability, will and transparency in properly implementing the safeguards and regulations keeping in mind the interests of both potential investors as well as the public. As of now, it seems that the new energy law has been able to lure multinational firms to explore oil and gas independently in one of the world's largest energy markets, or under contract/license with the state oil giant Pemex.

For example, ExxonMobil Corp. XOM is planning to invest around $300 million in fuels logistics, product inventories, and marketing in the country for the next 10 years. In March 2017, BP PLC BP opened its first retail fuels site in the country and plans to invest more in the industry over the next five years.

Chevron Corp. CVX , Glencore PLC GLNCY , TransCanada Corp. TRP and other energy related companies also announced their intention to enter the Mexican energy market. These companies will work with local partners to spread their grasp over the market.

Integrated oil majors like Total SA TOT , Exxon Mobil and Chevron - carrying a Zacks Rank #3 (Hold) - received eight separate blocks from the government of Mexico. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

What's Attracting the Companies?

Apart from high demand for energy in Mexico, the country has the resources, which the government is trying to utilize to draw private investments. Per National Hydrocarbons Commission of Mexico, as of Jan 1, 2017, the country's proved oil and gas reserves are estimated at 9.16 billion barrels of oil equivalent (BOE). Proved oil reserves currently are 7.037 billion BOE, while 115 billion BOE is yet to be discovered.

The Burgos Basin in the country has a huge opportunity as well. It is connected to the U.S. Eagle Ford shale play. Following the deregulation, Mexico opened the onshore part of its Burgos Basin for private foreign investments.

By the end of 2018, the energy ministry plans to allow new entrants through a series of tender for the Burgos Basin and other shale plays in the country.

Was the Deregulation Necessary?

The major reason behind the shrinking oil income was lower production from Cantarell and several other onshore and offshore fields, along with a low price environment. The state-run oil producer PetroleĆ³s Mexicanos (Pemex) was unable to arrest the decline due to lack of efficiency, technological improvement, proper infrastructure and hydrocarbon extraction know-how.

The decline in oil output also resulted in lower natural gas volumes, as most of its gas extraction is a by-product of oil production.  With natural gas making up around 40% of Mexico's total energy consumption, the Latin American country is forced to import 60% of its consumable gas from the United States. Moreover, Mexican oil industry constituted only 6% of the country's export earnings in 2015, a steep decline from around 30% in 2009. In the period 2004-2016, oil production in Latin America's second largest economy plunged 32%.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.

Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020.

Click here for the 6 trades >>

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

Glencore PLC (GLNCY): Free Stock Analysis Report

BP p.l.c. (BP): Free Stock Analysis Report

Chevron Corporation (CVX): Free Stock Analysis Report

TotalFinaElf, S.A. (TOT): Free Stock Analysis Report

Exxon Mobil Corporation (XOM): Free Stock Analysis Report

TransCanada Corporation (TRP): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

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

This article appears in: Investing , Business , Stocks
Referenced Symbols: GLNCY , BP , CVX , TOT , XOM

More from Zacks.com




Equity Research

Research Brokers before you trade

Want to trade FX?