Mexico’s Oil Reform
Momentum appears to be growing for a proposal that would more fully open Mexico to outside oil and gas investment. The move could offer attractive upstream opportunities to operators and the service sector, and intends to rescue Mexico’s steeply declining production.
The proposal by Mexican President Enrique Peña Nieto lacks critical details for investors and is politically controversial, but it marks the most significant step to loosen restrictions on foreign investment in decades. Mexico nationalized its oil industry in 1938, and its constitution states that ownership of natural resources belongs solely to Mexico. Oil production and reserves have been falling sharply, however, and now pose a threat to the country’s economic health. The proposed reform addresses the downstream as well as power sectors, but the changes designed for the upstream are the most contentious.
Although Mexico is the 10th largest oil producer in the world, its output last year of 2.6 million BOPD represents a 20% decline since 2002. In July, oil production dipped to its lowest level since 1995. Aging oil fields and underinvestment have contributed to the fall, as the government leans heavily on state oil company Pemex for revenue that a private company likely would reinvest in oil infrastructure. The once prolific Cantarell field, the world’s third largest when it was discovered in 1976, produced 400,000 BOPD in July, compared with a peak of 2.3 million BOPD in 2003. The new proposal argues that the oil sector needs additional investment, technology, and expertise to fully exploit promising deepwater and shale opportunities.
The proposal would allow the government to offer profit sharing to private operators. However, it is unclear whether operators would be allowed to book reserves, which could be a deal breaker. A foreign company’s share would be based on a percentage of production relative to the oil price.
The president contends that his plan would increase oil production from the current 2.5 million BOPD to 3 million BOPD by 2018 and 3.5 million BOPD by 2025. Of particular interest is exploration in the deepwater Gulf of Mexico, where most of the country’s future oil potential appears to lie, which represents both financial and technical challenges, and northern Mexico, where shale basins contain an estimated 60 billion BOE. The shale basins are just south of the Eagle Ford Shale development in south Texas, which has contributed to the “shale revolution” in the United States.
Oil nationalism in Latin America runs strong. But Brazil state oil company Petrobras blossomed after it was partially privatized in 1997. After it opened its oil sector to private participation, Brazil went from a net oil importer to self-sufficiency in just a few years and production rose from under 1 million BOPD to the current 2.4 million BOPD. Its recent pre-salt discoveries may enhance its output significantly. The development of those resources could propel Brazil into the league of the world’s largest oil exporters.
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