Energy

A Big Oil Find May Derail Reforms in Mexico


Mexican President Felipe Calderón

Photograph by Ariel Guiterrez/EPA/Newscom

Mexican President Felipe Calderón

When Mexican President Felipe Calderón turned 50 last August, the head of the state oil company called with what he labeled “a great gift.” After years of deep exploration and almost $10 billion in investment since 2009, Petróleos Mexicanos (Pemex) made a big oil find in the ultradeep waters of the Gulf of Mexico. A week later, Calderón appeared at a press conference holding a flask of crude from the new site, the Trion field. Pemex is preparing to announce a second deepwater discovery in coming days, according to company executives.

The finds will bolster the legacy of President Calderón, who had overseen declines in crude output by Pemex every year since he took office in late 2006. But ultimately the discovery could derail an overhaul of the company promised by President-elect Enrique Peña Nieto, who assumes office on Dec. 1. Because Pemex’s petroleum production has dropped 25 percent from its peak of 3.4 million barrels a day in 2004, Peña Nieto called energy reform his “signature issue.” He promised to change rules that allow private and foreign oil companies to provide services to Pemex but ban them from owning stakes in Mexico’s oil and gas fields. Mexico depends on royalties from Pemex for about a third of its budget.

Pemex lacks experience beyond shallow waters, and Mexico’s deepwater Gulf territory is too vast for a single company to explore and exploit, says Juan Carlos Zepeda, head of the nation’s Hydrocarbons Commission. Capital Economics, a London-based research firm, says allowing international companies to invest and produce in Mexico’s fields could boost the nation’s growth by as much as 0.8 percent a year. Now, with a possible 10 billion barrels in new reserves from the recent finds, politicians may find it easier to stick with the status quo. “Reforms are easier done in an urgency moment,” says Lisa Schineller, chief of Latin American ratings at Standard & Poor’s (MHP), which downgraded Mexico in 2009 in part because of its overreliance on oil. “When you’re losing oil revenue, there’s greater pressure.”

Mexico, the ninth-largest oil producer, has proven reserves of 13.8 billion barrels. An extra 26.5 billion barrels may be found in deep Gulf waters, Pemex says. To develop all of the nation’s oil and gas, Mexico would need to invest as much as $35 billion a year, says José Suárez Coppel, Pemex’s chief executive officer. That’s 54 percent more than the $22.7 billion granted by congress this year. If Mexico doesn’t invest enough it may become a net oil importer by 2020, according to a study by Rice University.

Opening Pemex up to foreign investment is politically tricky. The restrictions on foreign stakeholders have been in place since 1938; Mexico’s expropriation of U.S. and British companies decades ago is still seen as a shining moment in its history.

Already, Peña Nieto’s transition team has scaled back expectations. Andrés Manuel López Obrador, the hard-left politician defeated by Peña Nieto, opposes any opening of Pemex to foreign investment; he could make life hard for the new president’s party, which doesn’t have an absolute majority in congress. A key question is whether private companies would be allowed to book reserves under new laws, a move experts say could increase exploration and output.

“Mexico’s problem is that we’re not listening to the warning bells,” says historian Enrique Krauze, author of Mexico: Biography of Power, who says that without foreign investment Pemex will never reach its potential. “At any time, reality is going to hit us in the face.”

The bottom line: Mexico may need up to $35 billion to develop its oil and gas reserves. That may be impossible without private and foreign investment.

Rodriguez is a reporter for Bloomberg News in Mexico City.
Roeder is an editor for Bloomberg News in Mexico City.

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