It has been 75 years since Mexico declared the privatization of its oil and gas reserves, but that is all set to change.
Representatives from the nation’s two biggest political parties met this past Saturday and agreed to allow private and foreign energy companies to pump oil as part of Mexico’s $95 billion-a-year industry. The two sides appear to have the necessary two-thirds majority vote to pass the bill in both houses to amend Mexico’s constitution and relinquish its state monopoly.
Mexico is thought to have the world’s largest unexplored crude reserves in the world after the Arctic Circle. It is already the 10th largest producing country in the world, but under state-owned Petroleos Mexicanos (PEMEX), Mexico has seen a decline in output for eight straight years.
The new plan would back President Enrique Peña Nieto’s idea to rejuvenate the Mexican oil industry that has been on a downward slide for close to a decade now. He believes Mexico would realize its full potential by inviting in private investors – including some of the biggest energy producers in the world.
The new bill would also allow companies to log crude reserves as assets for accounting purposes, making it easier to secure financing. And companies would have greater control in operations and be able to manage projects directly.
It is important to note that the oil would remain state property until it is first pumped.
Saturday’s proposal comes after four months of debate and two separate plans – one from the President’s ruling Institutional Revolution Party, or PRI, and one from the National Action Party, or PAN.
The idea is to reverse Mexico’s loss in production while encouraging an economic lift of one percent by 2018.
The bill could be approved as soon as this week.
If this new bill does pass, it would be a dramatic shift for Mexico and its oil, as well as a lift for its people as a whole.
It was in 1938 that Mexico locked down its energy industry from the outside world – everything from production to distribution – officially making it legal property of the Mexican people. Then President Lazaro Cardenas nationalized all of Mexico’s oil fields that were operated by U.S. and British companies and banned any and all foreign investment.
And that’s the way things have stood. It’s been 75 years since any foreign company set foot in Mexico. And it worked for a while; Mexico peaked in production in 2004 at 3.8 million barrels per day, according to RT.com, but today those production values have dropped below 3 million barrels.
And if you look at the time frame, it’s no coincidence that soon after Mexico started to fall from peak form, the fracking boom started to take off. Mexico no longer had the know-how to incorporate new drilling technology like hydraulic fracturing – the process of blasting water, sand, and chemicals deep into shale rock to dislodge oil and gas.
By opening the door to foreign producers, Mexico hopes it will be back up to 3 million barrels per day by 2018 and as many as 3.5 million barrels by 2025, according to RT.com. Gas production that currently sits at 5.8 billion cubic feet would jump to 8 billion by 2018 and 10.4 billion by 2025.
But this is not possible without significant changes. The Democratic Revolution Party, the third-biggest party in Mexico, still opposes the new amendments.
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But this is where it gets good. It looks like the votes are there, and this is going to happen any day now.
When it does, licenses will mostly be granted for shale gas exploration, where Mexico has an estimated 460 trillion cubic feet, according to Bloomberg.
All of the majors are going to jump on this as soon as they get the word. The usual big players – ExxonMobil (NYSE: XOM), BP (NYSE: BP), Chevron (NYSE: CVX), and Royal Dutch Shell (NYSE: RDS-A) – will all be in line.
Major Eagle Ford producers like EOG Resources Inc. (NYSE: EOG), Chesapeake Energy (NYSE: CHK), and ConocoPhillips (NYSE: COP) will have no problem hopping over the border, either.
And companies like Russia’s Rosneft (MM: ROSN) and Gazprom (MM: GAZP) have been expanding into Venezuela and the U.S., so they will likely be looking to partner up with Mexico as well.
And on the production services side of things, you have to look at Halliburton (NYSE: HAL) who has been conducting business in Mexico for years already.
If you had to choose between Mexico or the Arctic Circle, I’m going where the weather’s warm. It’s also safer, cheaper, and already more developed. A lot of these companies will be thinking the same thing.
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