Mexico’s vote on rules for the end of its 76-year state-oil monopoly couldn’t come at a better time for global energy companies from Exxon Mobil Corp. (XOM:US) to Royal Dutch Shell Plc.
With reserves holding $1.3 trillion of crude at yesterday’s prices, Mexico offers a new opportunity for deep-pocketed producers as well as pipeline and power companies to try and mimic an energy revolution that has spurred U.S. oil output to a 26-year high and pushed Canadian production to records. New access to Mexico comes amid unrest in some African oil nations and sanctions that threaten to strangle Russian output, places where some oil companies have invested heavily in production.
An injection of foreign investment could help double daily output to 5 million barrels a day, a figure that would rank Mexico the world’s fourth-largest producer. It would join a North American energy boom that has reignited investment in manufacturing and reduced trade deficits as the U.S. seeks to become free of oil and natural gas imports and even begins to contemplate exports.
“The potential is great,” Tony Payan, director of the Mexico Center at Rice University’s Baker Institute for Public Policy in Houston, said in a telephone interview. “If they play it right, Mexico could become a major oil producer and Mexico, the U.S. and Canada could come very close to energy independence.”
Chevron Corp., BP Plc (BP/), Total SA (FP), Petroleo Brasileiro SA and Pacific Rubiales Energy Corp. are also among those that may bid for tens of billions of dollars in joint ventures and contracts to help pump oil in a nation with North America’s third-largest reserves.
Among the prizes are portions of prolific fields that stretch across the border in the U.S. Gulf of Mexico and Eagle Ford shale formation in south Texas. Shell, BP and national oil companies like China National Petroleum Corp. already have agreements to collaborate with Mexico’s state-owned Petroleos Mexicanos, or Pemex, which may boost their chances for joint ventures.
While Mexican President Porfirio Diaz may have lamented more than a century ago that the country was “so far from God, so close to the United States,” the nation’s allure to oil producers may be enhanced by how close it is to U.S. fields that have seen output soar in recent years.
“The proximity to the U.S. is a big factor because companies are already operating on those same oil and gas plays in the U.S. and the technical information that is available will be a big advantage,” said Gabriel Ruiz, a partner for the law firm Thompson & Knight LLP based in Monterrey, Mexico.
Mexico could draw investment away from African nations like Angola and Nigeria, where companies may see more challenges and instability than in North America, said Jorge Castilla, speaking by phone from Mexico City, where he leads Deloitte LLP’s energy sector practice in Mexico.
While there is drug violence in Mexico’s northern regions, “once you look at a global perspective, you’re comparing with places where turmoil could be bigger,” Castilla said.
Opening the nation to outside oil companies was spurred by a slump in production from Pemex. To reverse that decline, Mexico must strike deals with one or more of the largest oil companies, Fadel Gheit, a New York-based analyst for Oppenheimer & Co., said in a phone interview.
“They desperately need capital, technology and management to exploit their Gulf of Mexico resources,” said Gheit. “That means a deep-pocketed company. You’re not going to get a company with a capital budget of a couple of hundred million dollars to move the needle at Pemex.”
Major oil companies are looking hard at Mexico’s reserves as a relief from war in North Africa, the Middle East and Ukraine that have disrupted output or triggered sanctions, Gheit said.
“We will pursue potential investments in Mexico that are competitive with other opportunities around the world,” said Richard Keil, a spokesman for Irving, Texas-based Exxon. Shell is “following these developments with great interest,” Kayla Macke, a spokeswoman for the company, said in a statement.
Spokesmen for Chevron and BP declined to comment.
Total agreed in April to strengthen technological cooperation with Pemex and supports the creation of a framework “for strategic partnerships with international companies, especially in the new deep-water and shale gas sectors where Total has an extensive experience to share,” Evgeniya Mazalova, a Total spokeswoman in Paris, said today in an e-mail.
Pacific Rubiales, Latin America’s largest non-state producer, expects to be among the first to sign contracts in Mexico, Chief Executive Officer Ronald Pantin said May 13. Geopark Ltd., which sold shares in New York in February, is looking at opportunities to work with Pemex on lower-priority properties, CEO James Park said by e-mail yesterday.
At the same time, companies are leery that Mexico’s reform can be overturned if the ruling party loses control in 2018 elections. The rewards offered oil companies by Pemex must exceed the political risk that Mexico may reverse or amend the new petroleum policy, Gheit said.
“There’s a lot of unhappiness in Mexico over the slow economic growth and the 2018 presidential election is going to be fierce,” said Rice University’s Payan. The nationalist Party of the Democratic Revolution opposes foreign investment in the nation’s oil fields and fell only a few percentage points short of victory in the past election.
The energy overhaul was supported by President Enrique Pena Nieto’s Institutional Revolutionary Party and the National Action Party, Mexico’s largest political blocs and the only parties to hold the presidency in the past 85 years.
Sempra Energy (SRE:US), the San Diego-based parent of one of the largest private energy companies in Mexico, sees an expected surge in production leading to the need for additional infrastructure, including about 1,000 miles of new pipelines in the next three years.
“We think there are some great opportunities,” Chairman and CEO Debra Reed said during a May 2 conference call. The Mexican government’s five-year plan, released this year, calls for an estimated $13 billion in investment in natural gas pipelines, $7 billion in electricity lines and $14 billion in power plants as part of the build out of energy infrastructure.
And while some U.S. Gulf Coast refiners are drowning in oil, prompting calls for exports, adding Mexican crude likely won’t exacerbate that problem because Pemex will want to process its own fuel, said Sam Margolin, a New York-based refining analyst for Cowen & Co. The nation currently imports about half of its refined products, according to Deloitte’s Castilla.
“For the big companies, Brazil has shut, given the way they did the pre-salt rules,” said Ramon Espinasa, lead oil and gas specialist at the Inter-American Development Bank. “Venezuela is effectively shut, Argentina is shut. So Mexico is the new point in the Western Hemisphere.”
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