Ken Silverstein EnergyBiz Insider Editor-in-Chief

Mexico is rich with oil and gas resources. But, the country has not been able to fully utilize that wealth because of under-investment by the state-owned oil company Petroleos Mexicanos (PEMEX.) The question is whether to allow foreign oil companies more extensive rights when it comes to oil production, or whether to keep such relations relatively minor.

The likely winner of Mexico's presidential race is Felipe Calderon, who wants to give foreign enterprises greater ownership opportunities. He defeated Andres Manuel Lopez, who has said that increased privatization would lead to excessive corruption and that the nation's oil wealth must remain firmly in the hands of the people.

That's a sentiment that resonates with the citizenry there and in fact, has been the policy of the government since the 1930s. But, Mexico's oil exports to the United States -- in the worst-case scenario -- could decline from 1.5 million barrels a day to 1 million barrels a day. The country's biggest field is Cantarell, which is the second biggest in the world and is an off-shore development near the Gulf of Mexico. It now produces more than 2 million barrels a day but could drop to as little as 600,000, say government figures.

The expected president, Calderon, says that the country needs to replenish its resources and says that it can be done by harnessing oil deposits from the Gulf of Mexico. But, PEMEX needs foreign direct investment to do this. If such capital is not attracted, Mexico would risk a declining gross national product -- one fueled by oil money that accounts for as much as 70 percent of the national wealth.

Calderon, who would follow outgoing President Vicente Fox, argues that foreign oil companies ought to be able to join as partners with PEMEX when it comes to pursuing new development. At present, such foreigners are only permitted to join the cause as contractors that provide such services as drilling and construction.

"PEMEX should be given the freedom to buy the technology or put together the contracts necessary to be able to increase reserves and produce oil," Calderon said at a campaign stop. He adds that he would not go as far as President Fox and propose total privatization of the state-owned oil company. To do so, the Mexican constitution would have to be amended, something that would be nearly impossible given the financial attachment that Mexicans have for their prized asset.

The Boundaries

PEMEX produces 3.3 million barrels a day of oil and 4.8 million cubic feet of natural gas. Its revenues this year are expected to be about $90 billion. Mexico is the second biggest exporter of oil to this country while Canada remains number one.

Despite the acrimony shown in Mexico's recent presidential election, all policymakers know that relations with their neighbor to the north must be strengthened: Mexico's natural gas demand is expected to rise 7 percent over the next decade but its supply is only growing by 5 percent -- a paradox that will cause Mexico to import as much as 2.7 billion cubic feet of natural gas per day by 2012. Mexico now consumes 4.5 billion cubic feet of natural gas a day.

Mexico needs to find more oil and gas deposits but it is heavily indebted and can't do it alone. That's why it has opened the door to winning new investment, although to a limited degree. Already, the countries have some agreements in place to allow for liquefied natural gas development.

Royal Dutch/Shell Group is expected to begin building an LNG facility in Costa Azul. It will bring in LNG from Russia and Indonesia and ultimately process 1 billion cubic feet per day. It is scheduled to begin operations in 2008. Meantime, ChevronTexaco is petitioning to build an off-shore LNG plant off the Coronado Island that may begin operations in 2007. It will import the cooled gas from shores off Western Australia. It will then re-gasify it before shipping it on to customers in Mexico and the United States.

Mexico, generally, has been a tough nut to crack. The Enron crisis and the subsequent problems in the United States that were tied to ill-conceived deregulation schemes left a lot of Mexican policymakers leery about opening markets there. Outsiders are interested in making investments but restrictions have kept many investments at bay.

Having been burned by off-shore and Latin American investments in the recent past, many U.S. companies remain gun-shy. But, European firms such as Endes and Iberrola are reporting profits there. "Mexico's relatively restricted but ultimately certain regulatory environment has fostered tens of billions of dollars of investment in the oil and gas, power generation, and transmission and distribution sectors," says Derek Stilwell, head of international business development for Williams and Stevens Energy in Houston, in an earlier talk.

U.S. companies are getting a cut, he adds, pointing to Halliburton. Meantime, "multiple services contracts" issued by state-owned oil giant PEMEX have attracted the attention of companies like Tecpetrol, Teikoku, Petrobras, Repsol and Lewis Energy. More are expected in the coming years, as exploration and production investment needs for the next decade reach $100 billion.

The recent presidential race in Mexico clearly illustrates the crossroad to which the nation has come: It certainly wants to protect PEMEX, its crown jewel. But, existing oil and gas fields there are running dry and the only way to maintain the revenues provided by its natural resources is to attract foreign investors. Odds are that new opportunities will open up. But whether they satisfy those investors is not yet known.

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