For 76 years, Mexico’s state-owned oil company Petroleos Mexicanos, or Pemex, has been the government-enforced monopoly over all of the country’s oil and gas industry efforts. Roughly one-third of all of Mexico’s tax revenues is derived from Pemex, according to Reuters.
Like many other countries with government-owned oil and gas monopolies, Mexico has not reinvested enough in Pemex for it to function properly as a production and exploration company. In 2012, Pemex paid $69.4 billion in taxes on $69.6 billion in pretax profits, a 99.7%tax rate.
Mexico has recognized the problems and is trying to recover, much like Algeria and Iraq tried earlier this year. On August 11, Mexico passed a comprehensive energy reform bill to open up its oil and gas sector to private and foreign investment.
This is just in time, considering how Pemex predicted its lowest production rate in 24 decades back in June, marking its seventh consecutive quarterly loss according to Bloomberg. Mexico currently only produces around 2.5 million barrels per day, which is roughly one-quarter less than its peak of 3.4 million barrels per day in 2004 (26% decrease).
On August 13, 2014, The Wall Street Journal reported government officials assigned 83% of the country’s proven and probable reserves to Pemex, including about one-fifth of prospective and undiscovered resources. Lourdes Melgar, the deputy minister for hydrocarbons, said the share of proven and probable reserves is around 20.6 billion barrels of crude oil equivalent, or 15.5 years of output at current production levels. Per Mexico’s oil ministry guidelines, Pemex must address its claimed areas within three years.
Pemex’s chief executive, Emilio Lozoya, said that Pemex intends to form strategic partnerships to develop 10 projects, something it was unable to do under previous laws. The government has identified 109 blocks for the first round of partnership bids, in which it expects investments of around $50 billion over the next four years. Bidding is expected to start in early 2015.
The Associated Press said, “It remains to be seen whether Mexico can assign complex contracts to private companies without the kind of kickbacks, favoritism and insider deals seen in the past,” but that “The law creates a national oil commission to take such decisions out of the hands of Pemex.”
The AP also reported that “the first partial openings in the late 2000s proved unattractive” since companies were “restricted to operating just as subcontractors for Pemex, without the ability to book reserves or gain a significant share in profits.” Pemex, nationalized since 1938, had long been a centerpiece of Mexican nationalism, but the reality of the economy has left Mexico with few options besides private investment.
According to the EIA’s rough estimates, Mexico could hold 545 trillion cubic feet of natural gas in shale alone in Burgos basin, which is just south of the rich Eagle Ford shale basin in Texas.
Offshore drilling is also a promising project, as companies like Chevron (ticker: CVX), BP (ticker: BP), Royal Dutch Shell (ticker: RDS.B), Energy XXI (ticker: EXXI) and Statoil (ticker: STO) are already drilling close to Mexico’s waters. Pemex believes that the area on the U.S.-Mexican maritime boundary could hold up to 30 billion barrels of oil, but the company does not have the equipment, expertise or capital to access this oil themselves.
Reuters reported that “International oil majors like Royal Dutch Shell and ExxonMobil have been monitoring the legislative process and are widely expected to compete for newly established development contracts and licenses as early as next year.”
Mexico’s proximity and resources make it attractive to foreign oil and gas companies, especially since above-ground violence has hurt production in overseas countries like Nigeria, Iraq and Iran. ExxonMobil and Chevron had to evacuate their staff from Iraq on August 7 in response to escalating violence from a radical Islamist group.
However, Mexico has its own slew of problems, mostly manifested through its drug wars, which classifies as a civil war according to historian Melvin Small and political scientist J David Singer in their 1982 book, Resort to Arms International Civil Wars 1816-1980. Civil war is when the battle-related fatalities reach a threshold of 1,000 and the state military is responsible for a number of those fatalities. Mexico well surpasses this death threshold with over 60,000 deaths from 2006 to 2012 alone, according to Human Rights Watch.
“It does raise the cost of doing business when you have to face the threats of kidnapping and extortion,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars in Washington, told Bloomberg. The danger is particularly high along the southern-most border of Texas and Mexico, where the booming Eagle Ford Shale lies.
Bloomberg also reported that “Fuel-theft losses rose to 10.3 billion pesos ($790 million) last year from 3.5 billion pesos in 2009,” and that this theft process, known as bunkering, “led to a pipeline blast in the state of Puebla that killed 28 people and injured 52 in 2010.” Soldiers are escorting some oil and gas members to and from work.
The privatization bill is a prominent part of the agenda of Mexican President Enrique Pena Nieto, but Oil Price reports that the Mexican Public is “skeptical of the benefits of handing over control of Mexico’s natural resources to foreign companies.” It suggests that if Nieto loses his seat in 2018, the new administration might move to block the bill.
President Nieto has won reforms in a many areas, from banking to education, telecommunications to energy, but according to the Washington Post, “for all the praise he has won in Washington and elsewhere in the world, Peña Nieto’s opening act is getting panned in the only place it really counts: Mexico.” In 2013, Mexico’s economy only expanded by 1.1% despite all of President Nieto’s efforts. Mexico expert of the Council on Foreign Relations Shannon O’Neil said “the reforms have yet to make life better for the average Mexican.”
President Nieto has promised average Mexicans would benefit from the revamped energy reforms thanks to lower energy prices and larger number of jobs. Mexico’s new oil frontier might be the economic, and thus the political boost he needs to ensure that the dollars of foreign companies will stay in Mexico.
[sam_ad id=”32″ codes=”true”]
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.