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Historic Mexico Oil Industry Reform Provides Investment Opportunities

25 July, 2013

Mexico has been the focus of investors worldwide as the nation comes closer than ever to opening up its energy industry to outside investment by adopting a series of fundamental constitutional changes that are reportedly supported by the nation’s key political parties. Mexico is currently the world’s fifth-largest crude producer and hopes to double the total annual investment in this sector in order to take advantage of untapped shale gas deposits and deep-water reserves in the very near future.

“Changes will open the way for faster growth and a stronger currency in the region’s second-largest economy,” Gray Newman,chief Latin American economist for Morgan Stanley told Bloomberg Businessweek.

In early July the National Action Party (PAN),which is Mexico’s largest opposition party,announced it would support changes to end the oil monopoly that is currently controlled by state-owned Petroleos Mexicanos (PEMEX). This has helped to raise confidence among investors throughout Mexico real estate and the world that private companies will soon be able to participate in modernizing the nation’s energy sector.

According to a report in the Financial Post,Mexican President Enrique Peña Nieto hopes that PEMEX will still be responsible for developing key fields under the new plan,while foreign and domestic private corporations will tap a variety of other new locations. The energy reform bill will reportedly be sent to congress by September of 2013 and will likely be approved before the end of the year.

“We want in-depth reform that gives legal certainty to companies,not another partial step,” said a high level Energy Ministry official in a recent Wall Street Journal Interview. “We want to make it crystal clear in the constitution how private firms can participate.”

Currently,the plan calls for opening up exploration and production of Mexico’s prospective oil resources in deep water locations,as well as the nation’s shale gas. Although not yet released publicly,the proposal will reportedly leave shallow water and onshore oil production,which has lower costs,in the hands of state-run Pemex. 

“If successful,the reforms will enable an influx of private investment in long-needed projects,” writes the Financial Times. “Perhaps the greatest opportunities are in exploration and production. There is huge promise in the deep waters of the Gulf of Mexico,where more than 40 percent of Mexico’s ‘possible’ oil and gas reserves lie. Also,the country’s reserves of shale gas are the fourth largest in the world.”

Today,historic reforms are closer than ever thanks to the successful cross-party Pact for Mexico,which The Economist calls “a model of political compromise.” The reforms will reportedly grant 25-year contracts and will develop a clear path for investment overseen by a new national petroleum agency. So far,the Pact has already been instrumental in passing important telecom,labor and education reforms. 

Although Mexico already permits private organizations to partner with PEMEX on a variety of different service contracts,the constitution currently prohibits the establishment of any profit sharing or production-sharing agreements. The reforms are expected to address these issues,granting third parties the ability to develop contracts and concessions that will allow for direct participation in Mexico’s energy sector. Companies that have already expressed an interest in partnering with PEMEX immediately following the reforms include Shell,BP,Exxon and Chevron. The bill is expected to be available for public viewing by the end of July and will reportedly help to spur greater competition,thereby boosting Mexico’s already strong economy.

In recent months,PEMEX has already announced plans to boost capacity at its largest existing refinery at Salinas Cruz by nearly 10 percent following a $4 billion expansion. This will reportedly increase production at the facility by at least 30,000 barrels per day by 2017. The announcement comes on the heels of a similar plan to expand the nation’s second-largest refinery at Tula,along with a plan to invest up to $3.15 billion in a new offshore light crude project in the Tabasco coastal region. Finally,PEMEX has plans to launch a new auction for three blocks in the nation’s onshore Chicontepec basin in an effort to open up to sector to even more private investment capital.