Mexico's Potential Energy Reforms Would Open Doors to U.S. Oil and Gas Cos


 
Author: Ken Silverstein
Location: New York
Date: 2013-08-13

Mexico’s contentious political landscape is transforming now into a battle over economic ideals. At issue is the debate over the nation’s state-owned gem and whether the government there will be able to sell private stakes to foreign investors, which include those U.S.-based oil and gas giants.

Mexico is rich with oil and gas resources. But the country has been unable to harness that vast wealth because of under-investment by the Petroleos Mexicanos, Pemex. Now, the nation’s president, Enrique Pena Nieto, is expected to make a proposal to allow foreign stakes, although the Nieto is insistent that Mexico would retain the majority stake. Despite that concession, he must garner two-thirds of his national Congress to make this move legal -- difficult in a country where this entity is a matter of national pride. 

The country’s back is against the wall. A story in Bloomberg said that if the Mexican congress is able to pass an energy reform bill, it would create as much as $50 billion in annual new investment. It said that President Nieto has both the determination and the political capital to push through such changes. The concensus: Mexico must attract capital for both deep-water and shale gas deposits. 

Previous attempts to alter the country’s rules to allow ‘profit sharing’ have faltered. That applies to exploration, extraction and refining. But, a few years ago, national leaders were able to sell bonds as well as get some agreements in place to allow for liquefied natural gas development. 

Meanwhile, about 40 percent of the oil and gas company’s revenues go to the federal government. Critics of proposals to privatize any portion of Pemex say that a better national policy would be to let the company keep more of its revenues, enabling it to re-invest larger proceeds into production and refining. 

If Pemex does not attract foreign capital, 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. The U.S. Energy Information Administration says that Mexico could become a net-importer of oil by 2020 without foreign investment. It also says that Mexico holds the world’s fourth largest shale gas reserves. 

“Non-conventional (reserves) are going to play a bigger and bigger role,” Carlos Morales, Pemex's exploration and production chief, told Reuters in late April. "If not by Pemex, then as part of the country's overall oil policy."

The end of the 20th Century saw a rush to privatize the utility and energy sectors in Latin America generally. But government meddling along with an economic slump had caused some retrenchment. While much of the focus may now be on giving state-run enterprises more latitude to pursue outside ventures, there's still opportunity for those with the stomach for risks.  

Mexico, though, has been a harder 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. It’s especially true when it comes to Pemex. 

Mexico needs to find more oil and gas deposits but it is heavily indebted and can't do it alone. The solutions are not easy ones to implement or to pass into law. But it is apparent that government subsidization is becoming increasingly difficult in the current economy. An infusion of outside capital is necessary to bolster the infrastructure and meet future energy demand.

 

To subscribe or visit go to:  http://www.riskcenter.com

 

http://riskcenter.com/articles/story/view_story?story=99915707