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FRONT PAGE CONTRIBUTOR

Mexico Opens Oil and Gas Sector to Outside Investment

Even Joe Biden would agree: this is a pretty big flipping deal.

To recognize how big, you need to understand that Mexico commemorates the anniversary of the day it nationalized its oil fields and threw the Norte Americanos out as a national holiday. The national oil company, Petroleos Mexicanos (PEMEX), is a great source of national pride and a cash cow that funds the country’s social programs. Allowing private companies back in, not merely as service providers but as equity owners of production required amendment of the national constitution.

MEXICO CITY (AP) — Mexico has passed laws to open its oil, gas and electric industries to private and foreign investors after 76 years of state control. Now comes the hard part.

Experts say Mexico’s hopes for tens of billions of dollars in outside investment, and possibly a shale gas boom like the one occurring across the border in Texas, hinge on being able to design the kind of tenders, contracts and concessions that would actually prove attractive to companies that already have their hands full drilling in deep sea waters and hydro-fracking elsewhere. …

Mexico’s oil and gas production peaked in 2004 at 3.4 million barrels a day. It has fallen steadily since to the current 2.5 million barrels. With the reform, the government hopes to increase that to 3 million barrels by 2018 and 3.5 million by 2025, by attracting private companies with the expertise and technology to exploit the country’s vast shale and deep-water reserves.

And that’s just it. As an arm of the state, PEMEX’s operations have historically been hamstrung by labor unions and plundered for personal gain. Politicians’ thirst for petrodollars meant that PEMEX could not be run like a capitalist business. Consequently, projects that consume lots of capital and depend on the latest technology (read: deepwater and shale plays) have been bypassed in favor of the large shallow water, conventional offshore fields that have historically been PEMEX’s bread and butter.

Geology knows no political boundaries. Half of the Gulf of Mexico deepwater lies in Mexico’s Exclusive Economic Zone and is relatively unexplored. Onshore, it’s easy to project the Eagle Ford trend of South Texas across the Rio Grande, but PEMEX has only drilled a handful of wells there. Needless to say, the deepwater and shale plays are the prize that has the attention of the major international companies who hope to make Mexico’s relatively unexploited resources their playground.

Since 2007, the Eagle Ford and Permian Basin booms have propelled Texas from a declining 1 million barrel per day producer to 3 million barrels per day (N.B.: greater than all of Mexico). Opening Mexico to capitalist competition for the first time in 75 years is great news for the industry, for North American oil supply and for the Mexican economy.

More on the story here and opinion from the Houston Chronicle here.

The energy opening has been termed “Mexico’s second revolution.” While some may view the statement as an exaggeration, few would dispute that the reform will be transformational for the country. Given Mexico’s immense existing and potential resource wealth, and its other favorable attributes (stable democracy, solid macroeconomic fundamentals, global economic integration, geographic proximity to the US, to name a few), the energy reform should attract international interest appropriate to the unique and unusual opportunity it presents. For those in Texas involved in a booming energy sector, the extension of North America’s energy renaissance is a good thing.

Cross-posted.

@VladimirRS

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