Mexico Opens the Oil Floodgates

Brian Hicks

Written By Brian Hicks

Posted December 17, 2013

I mentioned last week that Mexico was about to pass a bill that would end 75 years of oil nationalization.

This week it is a reality. Mexico’s Congress approved the bill that will allow foreign investment in Mexico’s oil and gas reserves and generate as much as $20 billion per year.

mar 2011 oil pumpThis is the single biggest piece of legislation for Mexico since it signed the North American Free Trade Agreement. With the required two-thirds majority vote secured, the lower house passed the bill with a margin of 353-134. Now, all that’s left to be done is have the proposal ratified by state assemblies that are controlled by members who support the reform.

The bill was supported by the National Action Party, or PRI, and the Green Party. The Democratic Revolution Party, or PRD, along with some smaller parties, argues that by inviting energy giants like Exxon (NYSE: XOM) and Chevron (NYSE: CVX) in, Mexico is losing its identity.

But the economic impact is undeniable. An oil industry that has seen eight consecutive years of declining production could literally be turned upside down, as development would focus on the second largest unexplored crude area in the world.

Mexico will, in all likelihood, become a top five crude exporting country and see the peso gain favor like never before.

The vote comes one year after President Enrique Pena Nieto took office and vowed to right Mexico’s sinking ship.

Lots of changes are taking place. A complete overhaul of Mexico’s energy sector will likely be finalized early next year, and we should start seeing the first foreign contracts by the end of 2014.

Foreign Investment

Producers or foreign companies will be offered production-sharing contracts or licenses that would give them the rights to any oil that is pumped, from which they would be allowed to log crude reserves for accounting purposes. Any oil in the ground prior to production would still belong to Mexico.

This reform to the Mexican oil sector will bring in an estimate of $15 billion annually, help the economy grow by a half percentage point, and see an additional $20 billion in foreign direct investment as soon as 2015, according to Bloomberg.

And it will all be for the benefit of Mexico. Deep-water reserves found in the Gulf of Mexico would likely attract players like Exxon and Chevron, while shale plays would lure in the likes of EOG Resources Inc. (NYSE: EOG) and ConocoPhillips (NYSE: COP).

Naturally, all of North America would be affected by the drastic changes in Mexican oil and gas. Any and all players, big and small, will have to make it a priority to consider Mexico as a future asset.

And with the current abundance of gas and oil from producers in the U.S. and Canada, adding Mexico to the mix will make the need for pipelines, infrastructure in general, and the ability to export efficiently that much more important. American crude has been strictly prohibited from making its way overseas for decades now. That must change.

Even without Mexico in the mix, North America was already on its way to becoming a bigger producer than all OPEC members except Saudi Arabia.

Since the free-trade agreement with the U.S. and Canada in 1994, Mexico is no stranger to trading. Relationships will be more crucial now than ever, and sure, we’ll see more competition between the three as they duke it out for new and emerging markets. But with Mexico’s present lack of infrastructure, I don’t see that being a big problem.

The Benefit

As things stand today, Mexico is the world’s ninth-largest oil producer, and that’s with eight consecutive years of declining output by state-owned Pemex. According to Bloomberg, an increase in production by as much as 4 million barrels per day by 2025 could be realized.

Production has fallen off by 25 percent to 2.5 million barrels per day from a high in 2004 of 3.3 million, according to Bloomberg. If Mexico can reach the 4 million barrel mark, it could surpass Canada to become the world’s fifth-largest producer.

Natural gas production would double in that same time, and Mexico would eventually become a gas exporter, as well.

The entirety of the industry should be licking its chops right now.


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