Daniel W. Drezner

The North American energy scene keeps getting more interesting

The North American energy scene keeps getting more interesting

So yesterday Mexican president Enrique Peña Nieto made some news, according to the Washington Post‘s Stephanie McCrummen:

Mexican President Enrique Peña Nieto proposed historic changes to this nation’s state-run energy sector Monday, cracking open the door for global oil giants such as Exxon Mobil and Shell to invest in Mexico’s lethargic 75-year-old state oil monopoly, Pemex, the eighth-largest oil company in the world and a symbol of deep nationalist pride.

So, this seems like a pretty big deal, as the Financial Times’ John Paul Rathbone and Eduardo Garcia note:   

Mexico sits on reserves estimated at 115bn barrels of oil equivalent, comparable to Kuwait’s. Just over half its reserves are non-conventionals, including shale gas, and Pemex estimates that with the right investment and technology about 27bn barrels of deep sea crude could be added to the nation’s proven reserves.

All stages of Mexico’s energy chain – from production and refining to distribution – have remained the legal property of the Mexican people since 1938, when President Lázaro Cárdenas expropriated fields from US and British companies and changed the nation’s constitution.

Although the expropriation is a point of nationalist pride celebrated every March 18, the burden that Pemex faces of being the government’s cash cow – providing a third of government revenues – has led to years of under-investment. Pemex, with $100bn of revenues, is the world’s seventh-largest oil producer, but output has fallen by a quarter to under 2.6m barrels of oil a day over the past 10 years.

Mr Peña Nieto said the reform would reverse that decline, and “provide cheaper energy for all Mexicans”. He said the changes would allow Mexico to boost oil production to 3m bpd by 2018 and to 3.5m bpd by 2025. Gas production would also increase from 5.8bn cubic feet currently, to 8bn cubic feet by 2018 and 10.4bn cubic feet by 2025.

Both stories indicate that between his PRI party and the National Action Party (PAN), Peña Nieto  has the votes to get this through the Mexican legislature.  So, again, a pretty big deal… but back to McCrummen for some of the details:

[Peña Nieto] proposed constitutional changes that would allow for risk- and profit-sharing partnerships between foreign firms and Pemex, a move aimed at luring the money and technology necessary to exploit Mexico’s immense but hard-to-reach deep-water and shale oil fields. At the same time, Peña Nieto emphasized that Pemex would remain the sole owner and manager of Mexico’s oil.

And back to the FT story for why U.S. oil firms might not be all too keen on these proposed arrangements:

“It’s a pretty solid proposal,” said Duncan Wood, director of the Wilson Centre’s Mexico Institute in Washington DC. “But it will be interesting to see how oil companies take to profit-sharing rather than production-sharing contracts as that may limit their ability to book reserves.” Generally, under US Securities and Exchange Regulation, a company must have a right to produced reserves in order to book them.

My hunch is that, compared to some of the other places oil companies have chosen to invest, Mexico might look comparatively good.  Assuming the proposed reforms don’t lead to mass mobilization against the constitutional changes, some MNCs are gonna be very interested.  Which makes this simply one more data point that suggests interesting things are afoot in the North American energy scene.