Bloomberg News

Mexico Plans Oil Reserve Sweetener for Exxon in Overhaul (1)

August 14, 2013

Mexico Plans Oil Reserve Sweetener to Lure Exxon and Chevron

A ship departs from the Petroleos Mexicanos Bicentennial deep sea crude oil platform in the waters off Tamaulipas, Mexico. Photographer: Susana Gonzalez/Bloomberg

Mexico has come up with an inducement for private companies such as Exxon Mobil Corp. (XOM:US) to bid on contracts that would end a 75-year state energy monopoly.

Though the government will retain ownership of oil, President Enrique Pena Nieto plans to lift restrictions on companies registering the value of contracts with the U.S. Securities and Exchange Commission, Deputy Energy Minister Enrique Ochoa said in an interview yesterday. Those values could then be converted into volume and recognized on balance sheets.

Allowing companies to book some reserves would increase a proposed profit-sharing model’s attractiveness by making it easier for them to raise financing, according to Citigroup Inc. The rule change would be secondary to the government’s main proposal of changing the constitution to allow private companies to develop fields for the first time since 1938.

“It’s very significant,” Julio Zamora, an equity strategist at Citigroup, said by telephone from Quintana Roo, Mexico. “Booking reserves is a way for companies to put them on the balance sheet and allow users of financial statements to understand where they are spending and investing and where they are looking for future production to come from.”

Pena Nieto, the 47-year-old former governor who returned the Institutional Revolutionary Party, or PRI, to power in December, opted for profit-sharing contracts to loosen state-owned Petroleos Mexicanos’s grip on the oil industry and help reverse an eight-year crude production decline.

Looking Closely

Mexico’s peso was little changed at 12.7276 per U.S. dollar at 9:05 a.m. in Mexico City. The currency weakened 0.3 percent yesterday, paring losses after Ochoa’s comments.

Pacific Rubiales Energy Corp. (PRE), Colombia’s largest independent crude producer, is “looking very closely at Mexico,” Chief Executive Officer Ronald Pantin said in an interview yesterday in Bogota. “We have met with Pemex,” he said. “If the contract conditions make sense, we’ll be in Mexico.”

Under the proposal, companies will be paid a portion of cash generated from fields, rather than from barrels produced, as the government seeks to garner support from the National Action Party, which proposed concessions, and the Democratic Revolution Party, which opposes changing the constitution.

Investment Boost

Mexico has the biggest proven oil reserves in Latin America after Venezuela and Brazil, with 13.87 billion barrels, and shale-gas resources that may be as high as 460 trillion cubic feet, according to data compiled by Pemex. The state-owned company says that with the proper investments and technology, about 27 billion barrels of crude in the deep waters can be added to the nation’s proven reserves.

Pena Nieto’s measures seek to promote investment that will lift the economy by 2 percentage points by 2025. The energy changes would prompt as much as $50 billion in annual investments, according to Hector Moreira, a Pemex board member.

Pena Nieto’s chief of staff, Aurelio Nuno, said Aug. 12 that the government will push to have constitutional and regulatory amendments approved by the end of the year. The proposed contracts are similar to those used in Ecuador and Iran, Energy Minister Pedro Joaquin Coldwell said Aug. 12.

“The plan is that companies will be allowed to register the economic interest of the risk-sharing contracts under SEC rules that allow converting that value into volume while the state maintains full ownership,” Ochoa said.

Exxon, Chevron Corp. (CVX:US), Royal Dutch Shell Plc (RDSA) and Repsol SA (REP) are among major producers that have expressed interest in Mexican oil fields. Spokespeople for all four companies declined to comment on the plan to allow SEC registration.

‘Build Agreements’

If the risk-sharing model doesn’t mandate a minimum stake for Pemex and allows companies to report some reserves “Mexico has a lot going forward,” said Jeremy Martin, an oil specialist at the Institute of the Americas in La Jolla, California. “The Mexico model may be attractive enough because it’s country risk.”

Oil at all stages of production, refining and distribution has been the legal property of the Mexican people since 1938, when then-President Lazaro Cardenas seized fields from U.S. and British companies and changed the nation’s charter. The expropriation is celebrated every March 18 and trumpeted as a point of pride in schoolchildren’s textbooks.

“The major oil companies really care about booking reserves,” said Tim Samples, a law professor at the University of Georgia. This is the “second-best thing” after production-sharing contracts, he said.

‘Real Progress’

The SEC allows companies to register reserve equivalents stating that “under the economic interest method, the company’s share of the cost recovery oil revenue and the profit oil revenue is divided by the year-end oil price, which represents the volume entitlement,” according to guidelines published by the regulator on 2001.

“It seems like there’s real progress in the government’s thinking about reserves,” George Baker, a Houston-based energy consultant, said in a telephone interview. “The possibility needs to be explicitly shown in the regulatory law.”

To contact the reporters on this story: Nacha Cattan in Mexico City at ncattan@bloomberg.net; Carlos Manuel Rodriguez in Mexico City at carlosmr@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net


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Companies Mentioned

  • XOM
    (Exxon Mobil Corp)
    • $97.12 USD
    • 0.51
    • 0.53%
  • CVX
    (Chevron Corp)
    • $124.8 USD
    • 0.66
    • 0.53%
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