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.
Pemex Dominates
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 Pemex’s dominance.
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 (COP) and Royal Dutch Shell plc (RDS.A) (RDS.B).
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 Mexico.
In March 2013, Chevron Corp. (CVX) 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. (XOM) said: “We will pursue potential investment opportunities in Mexico that are competitive with other opportunities around the world.”
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 (BP) and Petrobras (PBR). 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 front.
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