Energy

Mexico's President Courts Big Oil With End to State Monopoly


Mexican President Enrique Peña Nieto

Photograph by Raul ArboledaA/AFP/Getty Images

Mexican President Enrique Peña Nieto

Petróleos Mexicanos, or Pemex as it’s known, is a laggard among state oil companies. Production from the huge offshore Cantarell field has been declining steadily. The Mexicans know there is plenty more gas and oil to be had, but Pemex lacks the in-house expertise and capital to drill in deep Gulf of Mexico waters or extract oil through hydraulic fracturing on land. The oil majors have little incentive to help, since they were kicked out 75 years ago.

Then on Aug. 12, Mexican President Enrique Peña Nieto announced that Pemex would allow outside companies to drill in Mexico—provided he can amend the constitution, which bans outsiders from the industry.

Mexican legislators and foreign investors immediately focused on the question of reserves. The oil companies want to include Mexican crude in calculations of their own reserves, which financial analysts view as a prime indicator of an energy company’s health. Most Mexicans still don’t want foreigners owning any of the nation’s reserves. The expropriation of overseas companies’ oil fields is still celebrated every March 18 and trumpeted in school textbooks.

There may be a way out. According to Deputy Energy Minister Enrique Ochoa, Peña Nieto plans to lift a Mexican government ban on oil companies registering the “economic interest” of their exploration and development contracts with the U.S. Securities and Exchange Commission. Under 2001 guidelines, the estimated value of those contracts can then be converted into barrels and recognized on balance sheets as if they were reserves, without transferring ownership of the petroleum. Top producers including ExxonMobil (XOM) use this approach, known as the economic interest method for risk sharing, to book reserves in Latin America and Africa, says Herman Acuña, a vice president at Ryder Scott, which evaluates petroleum reserves.

Yet disclosing the president’s plans to give companies the right to book some reserves indirectly could complicate passage of the controversial bill. That may explain why Peña Nieto has been largely silent on the subject: Ochoa is one of a few top officials who have mentioned the economic interest method.

At least two-thirds of both houses of Mexico’s Congress must vote in favor of the constitutional amendments for them to pass. Peña Nieto also needs approval from the legislatures of a majority of Mexico’s states. The amendments would change articles 27 and 28 of the constitution: The articles ban the government from signing production contracts with private companies, and they state that Pemex has a monopoly in oil development. If Peña Nieto prevails, he will then tackle the regulatory changes needed to fix the reserve problem. “The contracts that Mexico will offer will be attractive for private companies and the government,” Ochoa says. But they’ll also be “respectful of Mexican history.”

The oil industry is watching and waiting. Recent comments by Mexican officials provide “comfort on the booking of reserves,” says Dallas Parker, energy partner at law firm Mayer Brown in Houston. But “the enabling legislation will have to be clear on this point.”

The bottom line: National oil company Pemex needs foreign expertise to reverse a steep decline in production.

Rodriguez is a reporter for Bloomberg News in Mexico City.
Cattan is a reporter for Bloomberg News in Mexico City.

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