By Rory Johnston, OilPrice.com:
The energy renaissance in the United States and Canada has left Mexico largely behind. While American and Canadian crude production has jumped over thirty percent in the last decade, Mexican production has fallen by over a quarter. This trend has not been lost on the Mexican government, which this past summer announced plans to dramatically reshape its oil industry by reforming constitutional rules pertaining to the role of international oil companies (IOCs).
Now another bill has been proposed in the Senate, one that will go much further than the plan introduced by President Enrique Peña Nieto in August. Peña Nieto’s plan was a step forward for Mexico’s wilting oil industry, but it was a half-measure that only allowed for IOC profit sharing while maintaining exclusive Mexican ownership of all reserves. The Senate proposal, on the other hand, allows for partial ownership of oil reserves, enabling the IOCs to “book” oil reserves as assets.
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This is a far more appealing proposition for IOCs, which would prefer to buttress the strength of their balance sheets by holding physical oil instead of simply an uncertain revenue stream. Ownership is also far more politically controversial. As public intellectual Enrique Krauze mused in La Reforma last week, “in other countries oil issues are essentially economic, but in Mexico petroleum policy is a ‘secular theology … an existential dilemma, as if to allow [private investment] would signify the loss of the Nation’s soul.’”
Investment—let alone ownership—by private firms has been banned since 1938, when President Lázaro Cárdenas declared all mineral and oil reserves to be property of the state and nationalized the Mexican oil industry. He then established a state-owned oil company, Petroleous Mexicanos (Pemex), which has held a monopoly on the exploration, extraction, and refining of oil within Mexico’s borders since.
However, conventional oil production in Mexico has been declining and Pemex does not possess the capital or technology necessary to exploit shale or deep-sea reserves. For instance, while the United States contracted for the drilling of 137 deep-water wells last year, Pemex only drilled six. This has led to significant reductions in Mexico’s total oil reserves, which have shrunk by over one third in the last ten years. These reforms would allow much needed capital and foreign expertise to flood the Mexican oil market, revitalizing the industry and the entire Mexican economy.
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More than simply an industrial shift, “this will be the most significant change in Mexico’s economic policy in 100 years,” according to Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center. Passage of these reforms is far from certain, but Alberto Bernal-León, head of research at Bulltick Capital Markets Miami, is optimistic. “Energy reform is critical for Mexico and next year will be make or break for the country … and I believe there is an 85 percent chance that the reform will be approved.”
A booming Mexican oil industry is good for Mexico, good for global oil markets, and good for North American energy security. Until its passage, however, only time will tell whether or not the economic imperative of industrial reform will overcome a history and “secular theology” of nationalistic resource policies. By Rory Johnston, OilPrice.com
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