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Mexico Opens Energy Sector, but Investors May Hesitate


Mexican President Enrique Pena Nieto signed into law on August 11 a number of changes to his country’s energy sector that are designed to open it to private investment for the first time since it was nationalized on March 18, 1938. That day is celebrated in Mexico as a national holiday and many Mexicans are opposed to reform. Without outside help, though, Mexico’s oil production will continue to fall.

As output from Mexico’s main oil fields has dropped, the country’s future prosperity has become cloudy. That is why Pena Nieto made energy reform a priority and convinced lawmakers to act.

“The vast majority of Mexicans should receive the benefits that this transformative reform will bring,” he said.

Previously, national oil company Pemex controlled all energy exploration and production, with foreign companies sometimes working under contract to provide services. Now, foreign oil companies can participate in some joint ventures and bring their expertise to Mexican fields.

Hurdles remain

George Baker, who runs the newsletter Mexico Energy Intelligence, said energy companies in Houston and elsewhere are being cautious about the reform.

“Mexico is a very Pemex-centric country, and as such, there is built-in resistance to change. The government has very high expectations, private industry is more on the side of wait and see,” he said.

The success of the reform is critical for Mexico as its oil production of 3.4 million barrels a day has now slipped to 2.5 million barrels. Mexico, which borders the booming shale gas fields in Texas, imports natural gas because it lacks the technical expertise to fully exploit its own fields. Baker said government officials are determined to change that.

“The government believes it has the fourth largest shale gas endowment in the world and they are saying, ‘why are we paying high prices for gas when we have this great endowment?’” he said.

Much of the oil produced by the United States now comes from offshore operations in the U.S. zone of the Gulf of Mexico, but Baker said there is very little activity in the Mexico zone.

“The Mexican side of the Gulf of Mexico is the largest unexplored petroleum province on the planet, perhaps outside the North Pole,” he said.

Baker said big oil companies like Exxon-Mobil and Shell could transform that zone, which has many advantages over the North Pole in climate, nearby infrastructure and easily accessible services. He said Mexico must compete for investment money with projects in U.S. fields, however, which now are the most competitive energy players in the world. He said if a major oil company develops a project in Mexico, it might encourage others to follow.

Security issues

Another problem is security. Mexico political expert George Grayson, who teaches at the College of William and Mary in Virginia, said violent drug cartels could threaten the energy industry.

“Los Zetas, which are the most sadistic members of cartels in Mexico, have tapped into oil and gas pipelines, and I wonder if the foreign investors are going to be willing to go into northern Mexico where Los Zetas and other cartels operate,” said Grayson.

Lack of sufficient water in some northern areas also could impede operations there, he said, noting that Mexico’s state and federal government agencies, which have operated for decades in a closed, nationalized system, may not meet international standards.

“There is going to have to be a great deal of beefing up of the regulatory system if the Mexicans hope to deal evenhandedly with foreign investors, who, of course, can afford to purchase the best talent in the world,” said Grayson.

Mexican officials say they are moving quickly to implement changes as they prepare for the first round of private investment bids. Both Texas A&M University and the University of Texas are developing projects with Mexican universities to educate more Mexican petroleum engineers. But experts say Mexico would benefit from hiring experienced people from around the world who could bring new perspectives to the country's currently non-diverse energy work force.

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