Mexican Oil Profits

Brian Hicks

Written By Brian Hicks

Posted August 15, 2013

Mexico gave the power back to the Institutional Revolutionary Party (PRI) back in December, and now it has plans to loosen the reigns on its state-owned Petroleos Mexicanos (Pemex).

President Enrique Peña Nieto wants the world’s eighth-largest oil company to open up to private and foreign investment, opting for profit-sharing contracts that would reverse an eight-year decline in crude oil production.

mexico mapMexico sits right behind Venezuela and Brazil for the third largest proven oil reserves in Latin America, with 13.87 billion barrels. Its shale gas resources could reach as much as 460 trillion cubic feet. And with changes to its energy sector, it could promote as much as $50 million in annual investments.

But the Mexican people aren’t so sure. They see these changes making things worse before they get better. 80 percent of Mexicans already think Pemex is corrupt, and under President Pena Nieto’s new plan, all they see is and increase in the gap between the rich and the poor, as the working class continues to struggle.

Workers already say they are experiencing labor issues that the state-run oil monopoly Pemex has been engaged in for years – contracts go to companies who will hire the cheapest possible labor and spread it across the oil fields. Workers often go unpaid for months at a time and don’t dare speak out because of a fear they will lose their jobs.

But while much of the nation is beyond skeptical about new changes, the truth is, Mexico seems to be trying to clean up its act across the board. And there’s no doubt its oil industry needs to be reformed.

The shallow water fields where most Mexican production comes from are starting to dry up, and production is down roughly 25 percent in the past decade. Mexico is at the point now where it needs to attract leading world oil giants like Exxon Mobil (NYSE: XOM) and Argentina’s Petrobras (NYSE: PZE), which can come in and provide the technical expertise and capital for more advanced deepwater and shale exploration.

Oil has been considered legal property of the Mexican people since 1938 – including the production, refining, and distribution of the resource. That year, fields were seized by then-President Lazaro Cardenas from U.S. and British empires. That occasion is even celebrated in Mexico on March 18.

But with new investments and technology, Mexico could add another 27 billion barrels of crude to its proven reserves from its deepwater reserves alone. But the nation can’t do it by itself.

By the end of the year, the government will make the push to amend its constitution and enact new regulatory laws. The proposal will be similar to those used in Ecuador and Iran.

Mexico’s Plan

In order to attract the likes of Exxon Mobil and put an end to the 75-year state energy monopoly, the new Mexican government has a plan.

Companies will be able to register the economic interest of the risk sharing contracts they sign up for, while the government and Pemex will still retain ownership of the oil. This would all be done under Securities and Exchange Commission (SEC) rules that allow the value to be written out as volume.

Right now, there is a restriction on companies registering the value of contracts with the SEC. Those restrictions would be lifted, and from there, values could be converted into volumes and recognized on a balance sheet.

This is very important to companies because it shows, schematically, where profits are and where they are going. In turn, it makes it easier to finance projects. Users can look at a balance sheet and see spending, investing, and where future production will come from.

With the new plan, companies would receive a portion of cash generated from production, rather than just barrels produced – a further incentive to entice new business.

All that’s left now is for the government to gain the full support from its National Action Party, which proposed the concessions, and to win over the Democratic Revolution Party, which opposes the new changes to its constitution.

This is the next and vital step to ensure Mexico brings its oil industry back into prosperity. It certainly has the means to do so, but it must make the necessary changes to attract the oil giants of the world.

This new proposed plan would bring Mexico one step closer to opening its waters and shale reserves to companies that want to drill as private entities, something that hasn’t happened since 1938.

Mexico’s Market

This next half of the year will show us just how ready Mexico is to turn its oil business around. If the proposed changes do take place, Mexico will look more promising than ever. The country would be taking on a lot of the risk, as Pemex still controls the oil. All companies would need to do is provide the know-how.

And as for allowing companies to book their reserves with the SEC, it’s the next best thing to production-sharing contracts.

When Mexico can show that the proper changes have been made, that’s when companies will start rolling in.

Pacific Rubiales Energy Corp. (TSX: PRE), Colombia’s leading crude producer, is waiting for the day when it can strike while the iron’s hot.

Exxon, Chevron Corp. (NYSE: CVX), Shell (NYSE: RDS-A), Repsol SA (OTC: REPYY), and other major producers are all waiting for the conditions of contracts to be just right.

And when they are, that’s when they’ll be there to strike up a deal.


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