Mexico’s constitution forbids private sector contracts and puts all exploration and production of Oil into the exclusive hands of the state.
14th August 2014
Mexico has broken a 75 year state monopoly on energy which could boost flagging growth and double foreign investment, potentially providing the biggest succour to its economy since the North American Free Trade Agreement (NAFTA) two decades ago. Oil companies have welcomed the energy reforms by President Enrique Pena Nieto, but said the government will have to offer competitive terms if it is to attract foreign investment needed to the country’s vast untapped oil riches. Mexico’s oil industry is dominated by the state oil firm Pemex, but it needs investment and expertise to develop new oil and gas fields. The state oil company, does not have adequate technical expertise and investment capability to exploit these riches, this could change under the new reforms envisaged by the government which will allow Pemex to team up with foreign oil companies and exploit their technological knowhow, project management skills and investment capabilities. However, uncertainty looms over the proposed profit sharing contracts which are not accepted by major oil companies, they prefer contracts that give them ownership of some of the oil in the ground.
Daniel Kerner, head of the Latin America practice at Eurasia Group said “Profit sharing contracts have been used in the past by Iran, Ecuador and Bolivia and I can’t think of three countries you’d least want to be associated with”.
But Ayman Ansari, CEO of oil service major Petrofac, which is active in Mexico, said that should not prove a deterrent. “Even though the terms are not ideal, Mexico’s reserve potential, particularly for deep water shale gas, is so great that it will definitely be attractive to the majors” he said. Moreover, there is also a possibility that the agreements Mexico is contemplating will at least allow the majors too book reserves, thereby reflecting the potential value of the oil or gas fields in their accounts. Although, profit sharing contracts do not allow oil companies to book reserves, Pemex and the Mexican government had been in talks with the U.S. Securities and Exchange Commission over the past few months to ensure foreign investors can book their share of profits from the Mexican contracts as reserves.
The North American country is a major exporter of crude oil to the U.S., but its output has fallen by a quarter since hitting its peak in of 3.4 million barrels per day in 2004. Private involvement would give the sector a much needed technical expertise to tackle deep water projects.
Mexico’s constitution forbids private sector contracts and puts all exploration and production into the exclusive hands of the state and given the oil crisis in Mexico, President Nieto wants to consider constitutional changes to allow more private sector participation in the energy sector. There is a huge interest in Mexico’s energy assets, its 3 million barrels a day of oil production ranks ninth in the world according to U.S. Energy Information Administration. The North American country also has relative political stability compared to other petroleum producing nations, unfortunately the inefficiency of state run enterprises has cost Pemex dearly as oil production is experiencing a steady decline since 2004. The profits generated from the state run oil producer are siphoned towards the government exchequer and there is no investment on improving its technology and manpower to realize the potential of its untapped resources. With expertise and potential from foreign partners, production would expand again.
But analysts opine that the President has to move carefully without confounding the opinions of the Mexican public, which remains cautious about opening up the country to foreign investment. Ford Tanner, a Latin American analyst at PFC Energy said “He can’t be seen to be giving away the country’s crown jewels”. To win support from the Mexican public for more aggressive reforms, Mexican consumers will have to be convinced that greater energy production leads to lower utility bills.
The energy overhaul is the cornerstone of a far reaching reform package that Pena Nieto hopes will ramp up growth, boost credit, add jobs and modernize Mexico’s ailing petroleum, gas and electricity industries.