It has been another year of horrible headlines for Mexico. Three hurricanes wracked the country, killing hundreds and causing billions in damage. The drug war continues, with more than 60,000 killed since 2006. And after rebounding from the 2008 crash, and even luring away manufacturing jobs from China, Mexico has seen its annual economic growth rate sag to less than 1.5 percent.
Yet there is reason for hope. In the shadow of all this hardship a radical transformation of Mexico’s economy is on the horizon. Under the leadership of new President Enrique Peña Nieto, the country’s congress will by the end of this year almost certainly pass a constitutional amendment to open up its oil and natural gas sector to private investment. By this time in 2014 the likes of ExxonMobil, PetroChina and Norway’s Statoil could even have contracts in place to start exploring for Mexico’s untapped oil and gas bounty.
“The opportunity to accelerate our economy is inside of our country—it’s in the decisions that we will make as a nation,” said Peña Nieto in a recent speech.
Emilio Lozoya, chief executive of state oil company Petróleos Mexicanos (known as Pemex), agrees with his boss. “We are very confident that in the very short term an energy bill will be approved,” he says. “More than a dream come true, it is something that is long overdue.”
How big could Peña Nieto’s oil reforms be for Mexico’s economy? Not only will it be bigger than the revolution in shale drilling and fracking has been in the US, says Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center: “This will be the most significant change in Mexico’s economic policy in 100 years.”
Despite massive reserves, Mexico has one of the world’s most notoriously closed-off oil industries. The Mexican constitution makes it illegal for anyone but Pemex to even own a barrel of oil. If you’re a farmer in Mexico and oil is discovered underneath your land, not one drop of the black gold is yours—it belongs to the state, to the people. There are no private companies operating oilfields in Mexico, no risk-based production sharing contracts or joint ventures with any international oil companies.
Without reforms, much of Mexico’s estimated 30 billion barrels of oil and 500 trillion cubic feet of natural gas (about the same as Brazil) will simply remain locked in the ground. Pemex, despite being one of the world’s biggest oil companies, does not have sufficient technical expertise to explore and develop promising prospects in the deepwater Gulf of Mexico or in the tricky shale layers just south of the border from Texas’s booming Eagle Ford fields. What’s more, Pemex has virtually no hope of acquiring or borrowing such expertise under the status quo, which allows the company to enter into only service contracts.
Big Oil companies like ExxonMobil or Chevron won’t even consider taking on the massive risks of drilling complex wells without a guaranteed cut of whatever oil and gas they find. And with Mexico relying on Pemex revenues to fund a third of the federal budget, Pemex is chronically starved of the capital it needs to develop the expertise to do it itself.
No wonder Lozoya is excited for change. “You will have industrialisation in Mexico that didn’t exist before,” he said recently. “After all, we share the same geology as the USA.”
In 1938 President Lázaro Cárdenas, in response to rampant profiteering by American oil companies, nationalised the sector. Resource nationalism worked all right for Mexico through most of the past 75 years—especially through the 1980s and 1990s as Pemex developed the supergiant Cantarell field in the Gulf of Mexico. Discovered in 1972, the Cantarell field was one of the world’s biggest, with production volumes peaking at 2.2 million barrels per day in 2003.
That year also marked Mexico’s oil peak at 3.4 million barrels per day. Cantarell has since plunged to 450,000 barrels per day. Pemex has sought to replace Cantarell’s barrels, but new developments have been smaller, trickier and far more expensive to develop. Pemex’s total daily production has fallen to 2.5 million barrels.
This matters, because if oil companies can’t claim the future value of those barrels, then they can’t use them as collateral to raise the cash they need to drill them up and get them to market. “The question is, can a solution be found where supermajors don’t take possession of the oil so they don’t violate the Mexican constitution but get a call on the utilisation of reserves?” says Neil Brown, the former top Republican staffer on international energy policy. “The Exxons and Chevrons won’t be able to take ownership of physical oil; what they need to have is a call on that oil to be disposed or sold.”
(This story appears in the 29 November, 2013 issue of Forbes India. To visit our Archives, click here.)
Mexico has an excellent chance to improve its economy by this way. We are expecting all reforms boil down in a short term, probably takes its leadership in latin america back.
on Nov 26, 2013Excellent Article. Much is expected from New President of Mexico Enrique Peña Nieto. Mexico is endowed with natural Resources. Together with Brazil and Argentina,Mexico can play dominant role in Latin America. Dr.A.Jagadeesh Nellore(AP),India
on Nov 22, 2013