Mexico is poised to join the North American oil revolution as a new government is moving to significantly modify 75-year-old constitutional restrictions against foreign involvement in the oil sector, allowing U.S. firms to go in for the first time and help develop the country’s sizable untapped reserves.
Energy analysts are increasingly optimistic that Mexico will make changes it has resisted for decades to revive its foundering oil sector, which is a primary source of growth for the economy and revenue for the government but has been in rapid decline in recent years because of the depletion of Mexico’s conventional oil fields in the Gulf of Mexico. A liberalization of the legal restrictions barring foreign investment proposed by Mexican President Enrique Pena Nieto last month promises to boost Mexico’s economy and wealth and to help put North America on the map as a potential new “Persian Gulf” for oil.
“This has the potential to be a game-changer,” said Marc Chandler, an analyst at Brown Brothers Harriman. Mexico has reserves of oil estimated by industry analysts at 60 billion to 120 billion barrels in the deep-water Gulf, shale and other land deposits, but most of that has gone undeveloped. When combined with Canada’s huge reserves of oil in the Alberta oil sands and large shale oil resources that the U.S. is exploiting through pioneering technologies, the unlocking of Mexico’s oil wealth has the potential to transform the entire region, he said.
“It is part of the North American energy and manufacturing story,” which has boosted the economy in the U.S. and Canada as plentiful, inexpensive supplies of energy have attracted more industry and jobs to North American shores and led to predictions that in coming years the region will become energy-independent. Other analysts note that full-throttle production of oil in Mexico, Canada and the U.S. could make North America the fastest-growing oil producer worldwide and the most important region for influencing global oil prices.
Despite having some of the largest unexploited oil reserves in the world, Mexican production has declined sharply in recent years. The state oil company, Pemex, lacks the technical expertise to drill in the deep waters of the Gulf or tap into the large deposits of oil and gas trapped in shale rock and other complex geological formations on land. U.S. and other foreign oil companies have the technology Mexico needs, but they have long been prohibited by law from operating there.
What Mexico does with its oil is important to the U.S., which is the largest importer of Mexican crude. U.S. refineries on the Gulf Coast turn the nearly 1 million barrels a day from Mexico into gasoline and other refined products and sell some of that back to Mexico, which also lacks advanced refining capacities. Since 2006, net petroleum imports from Mexico have plunged by 70 percent, and crude imports last year dipped to less than 1 million barrels a day for the first time since 1994. The biggest source of decline has been the rapid depletion of the easily tapped oil in Mexico’s giant Cantarell oil field in the Gulf, once the second-largest oil field on the planet.
Although Mexico has the sixth-largest shale gas reserves in the world, according to the U.S. Energy Information Administration, a lack of the technology needed to retrieve it has forced Mexico to become a big importer of gas from the U.S. to satisfy fast-growing domestic demand for the relatively clean fuel.
All that could change under Mr. Pena Nieto’s legislation. Although the proposed reforms face an uphill climb to get through the national legislature, analysts say, the legislation has a better chance now than ever before. Left-wing and right-wing nationalist parties are promising to try to block the reforms, tapping into strong public sentiment against allowing foreigners to own or develop any of the nation’s rich natural resources. Opinion polls show that 65 percent of Mexicans prefer to keep foreign developers out of their country.
But political leaders of Mexico’s centrist and right-leaning parties — including Mr. Pena Nieto’s Institutional Revolutionary Party, which enacted the constitutional restrictions in 1938 in a swipe at U.S. oil barons of the time — have come to agree in recent years that the prohibition against foreign oil companies is inhibiting Mexico’s economic growth and prospects. Because of that, analysts expect Mr. Pena Nieto to be able to scrape together the two-thirds vote of both houses needed to enact the reforms.
Mr. Pena Nieto campaigned last year on a platform of reforming the oil sector, reversing his party’s historic stance. Other presidents such as Vicente Fox and Felipe Calderon, who came from more conservative, business-oriented parties, weren’t able to get proposed reforms through the legislature.
“It’s a big change. We’re looking at a serious opening of the oil sector for the first time in 75 years,” Duncan Wood, director of the Mexican Institute at the Woodrow Wilson International Center for Scholars, said last month on Platt’s Energy TV.
The reforms would allow Pemex for the first time to partner with foreign oil companies to extract hard-to-get oil, and then share the profits from selling it in world markets. That goes well beyond more modest reforms enacted in 2008 allowing the state oil giant to hire foreign oil service firms such as Halliburton and Schlumberger to provide technical assistance to extract the oil. The liberalization has done nothing to prevent the slide in Mexico’s crude oil production to 2.5 million barrels a day from 3.4 million a decade ago.
Mr. Wood noted that Mr. Pena Nieto has had legislative success with other ambitious reforms such as with education and telecommunications — one reason the prospects for reforming the energy sector seem bright. Another reason the new president has a good chance of getting his legislation enacted, he said, is that he is working privately with oil companies and legislators on the delicate wording needed to ensure that major oil firms get the incentives they need to do business in Mexico while avoiding any appearance of giving away the nation’s oil wealth.
Attracting the oil majors
The biggest draw for oil companies is Mexico’s estimated 40 billion to 60 billion barrels in untapped but technically recoverable crude reserves in the deep-water Gulf, which can be extracted at the greatest profit given today’s premium crude prices of more than $100 a barrel, Mr. Wood said.
“The ‘big money’ and the ‘big opportunity’ lies within Mexico’s deep-water plays,” he said. Global oil giants such as Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell PLC have shown interest in entering that market.
Mexico may not see as much interest in its shale oil and gas, despite having some of the world’s largest deposits, he said. Shale oil has been the province of mostly small oil companies in the U.S., such as Chesapeake Energy, which pioneered the extraction of oil from shale. The company may be reluctant to share its profits and relinquish ownership of the oil after having gone to great lengths to extract it from solid rock using expensive procedures such as hydraulic fracturing and horizontal drilling, Mr. Wood said.
Also, oil companies have shown less interest in developing vast deposits in the onshore Chicontepec field northeast of Mexico City, which contains an estimated 60 billion barrels in oil reserves but is in a geologically complex area that makes it hard to extract.
“There’s enormous amount of oil there but it’s tremendously difficult to get out of the ground,” Mr. Wood said.
With oil companies queueing up to do business in Mexico, Mr. Chandler estimates that the rise in oil production made possible by the legislation would boost Mexico’s economic growth rate by 1 to 2 percentage points a year and lead to a general upgrade of the nation’s economic outlook and credit rating.
The Wall Street credit rating agency Moody’s Investors Service last week called the planned reforms “the most significant to date for Pemex” and should brighten the outlook for Mexico and its oil company. But Moody’s said the legislation could “evolve markedly” and get diluted in the legislature, and it is waiting to see how efforts toward passage play out.
Christopher Swann, an analyst with Reuters Breakingviews, doubts that the country is ready for big changes. He said stiff opposition has forced Mr. Pena Nieto to back off his most ambitious oil reform ideas, and the limited opportunities for profits under his legislation will not attract major oil companies, which have boycotted Mexico’s efforts to spur production.
“He’s watered down plans to end the state oil monopoly to placate nationalists,” he said. “That’s bad for foreign oil companies needed to jump-start production — and shows rivals may weaken his broader agenda.”