Mexico Oil Reform Investing

Brian Hicks

Written By Brian Hicks

Posted September 30, 2013

1938 marked a milestone in Mexico’s energy history as well as the world energy market. It started when President Lorenzo Cardenas seized oil assets from foreign oil companies after ignoring a Mexican Supreme Court Decision that sided with workers. That year, Mexico became the first country in the world to nationalize its natural resources.

mexico mapMost of these foreign companies were from Britain and the U.S. – sparking such outrage that both governments sought legal action against Mexico. President Roosevelt was reluctant to lend his support to oil companies, but his hand was forced when the Justice Department and the U.S. courts became involved.

As a result, all Mexican goods were boycotted by the British and U.S. governments. Citizens of those countries were discouraged from visiting Mexico, and diplomatic ties were cut off. After the boycotts and condemnation, Mexico conceded in 1942 – awarding the companies $23.9 million in compensation for all assets seized.

Most Mexicans considered the concession an outrage, but it only further instilled a sense of pride in the nation. The nationalization of oil assets is so strong that it has been passed on from generation to generation in schools. The seizing of energy assets was viewed as a symbol of Mexican independence and self-determination.

Now fast forward to 2013, and you’ll get an idea of what Mexican President Enrique is facing in his effort to liberalize the Mexican energy economy by making state-run oil firm Pemex open to foreign investment.

It is something that needs to be done if Pemex wants to amp up production and gain the necessary drilling expertise to maintain productive flows.

Mexico’s overall crude production has fallen 23 percent since 2004, Fuel Fix reports. And there are areas in the southern portion of the Gulf of Mexico that require more complex drilling techniques.

President Peña Nieto believes foreign investment is the only way to increase Mexico’s production.

Peña Nieto’s Plan

The president’s plan starts by cutting Pemex’s tax rate and allowing the oil firm to choose the most productive fields without having to compete with foreign companies. These tax cuts would amount to $10 billion a year for Pemex – a big relief for a company that has been overly taxed.

But the plan also includes allowing foreign companies to produce crude for the first time since 1938.

The tax breaks and breathing room for Pemex are beginning to attract more support from the main parties, but there is still widespread opposition – not only among politicians but among the public as well.

According to a recent poll, 65 percent of Mexicans want no foreign involvement in their oil and gas industry.

Peña Nieto is spending quite a bit of political capital in getting the Mexican constitution changed to allow foreign investment, and it will be an uphill battle in convincing voters and left-leaning colleagues to get on board with Mexico’s new energy plan. The particular constitutional provision that he is looking to change is the clause that disallows companies from taking a higher stake in Pemex, along with sharing profits. Like in the U.S., Peña Nieto needs a two-thirds vote in Mexico’s congress to get his way.

Peña Nieto is looking for support from the oppositional National Action Party (PAN) – a party known for its conservative values. But PAN has its own version of the bill.

PAN would only support the bill with the attachment of serious changes in the electoral system – something that would limit the power of Peña Nieto’s party, the Institutional Revolutionary Party (PRI), which was in power for over 70 years until 2000. This could gunk up the progress of this bill as the two main parties wrangle for political power.

Investor Benefits

Even though the bill is facing tough opposition, it is still gaining mainstream consensus from the two main parties, and it appears that passage is only a matter of time – even if Peña Nieto doesn’t get 100 percent of what he wants.

So when Peña Nieto gets his way, which companies will benefit?

Exxon Mobil (NYSE: XOM) has already been in Mexico purely on an exploratory basis, but Peña Nieto is hoping to attract the company to his country once more.

Chevron (NYSE: CVX) has also been sniffing around Mexico and would likely swoop in at the first sign of energy liberalization. Royal Dutch Shell (NYSE: RDS-A) signaled interest in the nation, as did Spain’s Repsol (OTC: REPYY) – a company that was burned when Argentina nationalized its oil company but may be looking to Mexico for future gain.

If you’re deciding on whether or not to make an energy play for Mexico, you’ll have to wait a while longer, since the bill is still in the voting process. It will hit the Senate floor this coming Tuesday.

But if you want to get in now, emerging markets like Mexico will be prime territory, especially since the Federal Reserve announced it will continue its $85 billion worth of monthly bond purchases. This has heightened the value of Mexican notes and Pemex bonds, Bloomberg reports. And this injection of cheap funds has lowered borrowings costs – making it easier for investors to take more of a risk in emerging markets like Mexico.

While the politics of Mexico are out of your hands, it is certainly a country worth watching. Mexico is considered to have the largest proven oil reserves in Latin America, with 13.9 billion barrels of oil and as much as 460 trillion cubic feet of shale gas. According to Pemex, the country could add another 27 billion barrels of oil to its proven reserves with the right amount of investment.

The southern portion of the Gulf of Mexico is prime territory for oil ventures, while Pemex would most likely stick with shallower waters in the Gulf, since it has been in the region for some time.

It is an interesting drama that is playing out in the Mexican legislative system, and it is something that can widen your pockets in the future should this bill pass.

Keep a lookout for Mexico and any legislative developments.


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