May 19, 2014 Articles

Mexican Oil and Gas Reform: Getting It Right This Time

Mexico opens up its state-run oil industry to private and foreign companies.

By John Cogan and Carlos Moran – May 19, 2014

While several Latin American countries have decided to increase state participation in their oil and gas industries, Mexico has decided to go in the opposite direction.

More than seven and a half decades after the nationalization of its oil industry, Mexico has finally decided to put an end to Pemex’s monopoly and open up its upstream, midstream, and downstream sectors. The scope of the constitutional reform enacted in December 2013 reached farther than expected. Most significantly, private and foreign companies will soon be allowed to engage in exploration and production (E&P) activities.

The Mexican energy reform has attracted the attention of the industry worldwide. Oil majors are interested in Mexico’s vast offshore reserves, while independent shale-focused companies are interested in the Burgos Basin, which is believed to be the continuation across the U.S.-Mexico border of the Eagle Ford shale play.

Besides having a stable economy in a strategic location, Mexico also continues to be blessed with abundant resources. Despite the fact that Mexican production has declined for the past 10 years, Mexico is still a world-class crude-oil producer and exporter. It has prospective reserves in the range of 45 billion barrels of crude-oil equivalent.

Mexico is equally interested in attracting international companies to reverse its declining production. Mexico’s oil-production rate is currently 2.5 million barrels per day, all of which are produced by Pemex, the state-owned enterprise that currently has a monopoly over the industry. The Mexican government expects new players to increase production by 500,000 barrels per day within the next four years.

The Mexican Ministry of Energy is hopeful that sustained shale-gas production will commence within the next two or three years. U.S. firms are keen to participate in such activities while at the same time they are concerned about security, lack of infrastructure, and land-ownership rights on the Mexican side of the border.

Increasing oil production would not only mean increasing revenues for the Mexican federal government (around a third of which currently come from oil production). It would also mean the creation of much-needed jobs, the reduction of natural-gas costs that adversely affect the competitiveness of Mexico’s important manufacturing industries, and the reduction of massive subsidies on gasoline. In selling its benefits to the Mexican public, the Mexican government has noted that the reform will increase investment in the country to US$50 billion per year.

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