Mexico’s opening of energy sector to outsiders

President Enrique Peña Nieto revealed plans on July 12 to allow foreign investors into Mexico’s energy sector for the first time in 75 years, marking a radical break with the protectionism of the past. Oil companies gave a thumbs-up to Mexico’s planned energy reform, but said the government will have to offer competitive terms if it is to attract the foreign investment needed to develop the country’s vast untapped oil riches.

Kurt Glaubitz, spokesman for the US oil major Chevron, said the reform was a “good sign for us and the other international oil companies out there that the door is opening”. He said Chevron was “pleased and upbeat” about the president’s plan. Chevron’s enthusiasm is understandable. The company has made huge oil discoveries in a layer of rock beneath the US Gulf of Mexico known as the Lower Tertiary trend, which extends into Mexican waters. Petroleum geologists have often speculated that the Mexican side of the trend could be just as prolific. Similarly, Mexico’s Burgos Basin is seen as an extension of Texas’ Eagle Ford shale – a formation that has been at the forefront of America’s unconventional oil and gas boom. All in all, Mexico is thought to have 115bn barrels of resources, with three-quarters of that identified as unconventional, that is locked in hard-to-get-at shales and in deep waters offshore.

Up until now, Pemex, the state oil company, has lacked the financial muscle and technical skills to exploit these riches. That could now change if, under the government’s reforms, it is able to team up with foreign oil companies and tap their huge balance sheets, technological knowhow and project management skills. But there was some uncertainty about the terms on offer in Mexico’s energy shake-up. The president’s reforms envisage profit-sharing contracts – an arrangement the majors normally shun. Oil companies typically prefer contracts that give them ownership of some of the oil in the ground. “Profit-sharing contracts have been used in the past by Ecuador, Iran and Bolivia – and I can’t think of three countries you’d least want to be associated with,” said Daniel Kerner, head of the Latin America practice at Eurasia Group. But Ayman Asfari, chief executive of the oil service company Petrofac, which is active in Mexico, said that should not prove a deterrent. “Even though the terms are not ideal, Mexico’s reserve potential, particularly for deepwater and shale gas, is so great that it will definitely be attractive to the majors,” he said.

Moreover, there may be a chance that the agreements Mexico is contemplating will at least allow the majors to book reserves, thereby reflecting the potential value of the oil or gasfields in their accounts. This is not normally the case under profit-sharing contracts. But Mr Asfari said Pemex and the Mexican government had been in talks with the US Securities and Exchange Commission over the past six to eight months to make sure foreign investors can book their share of profits from the Mexican contracts as reserves. Whatever the technicalities, Mr Peña Nieto’s gambit represents a huge break from the past. Ever since President Lázaro Cárdenas expropriated the country’s oilfields from US and British companies in 1938, it has largely been closed to foreign investment. Mexico’s constitution forbids private sector contracts and puts all exploration and production in the exclusive hands of the state. It is precisely these articles of the constitution that the president wants to change. But analysts said Mr Peña Nieto has to move carefully, never moving too far ahead of Mexican public opinion, which remains cautious about opening up the country to foreign investment. “He can’t be seen to be giving away the country’s crown jewels,” said Ford Tanner, a Latin American analyst at PFC Energy. “Right now you’ve got to let the public digest this.”

Analysts said the reform was a meaningful first step on the path towards resolving Mexico’s looming energy crisis: experts predict it will become a net oil importer within a decade unless something is done. “But the truth is – to know if this will be successful, we have to wait for the secondary legislation, which will provide clarity on what kind of contracts will be on offer,” says Mr Kerner. “Until then, it’s basically wait and see.”

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