Foreign Companies to Play a Role in Mexico’s Energy Future

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The Mexican energy reform drafted by President Enrique Peña Nieto was approved by the Congress in Dec 12 and most of the 31 states. As a result, the once PEMEX-controlled sector opened up to private and foreign partners after 75 years. Starting next year, new contracts will be issued to companies to allow them to enter Mexico and carry out their work without becoming PEMEX contractors. As well, PEMEX may partner or contract with companies, too.

Peña Nieto believes that foreign companies’ knowledge and technology are what Mexico needs to exploit its huge reserves. "We, Mexicans, have decided to set aside myths and taboos, to take a big step forward," said the President to assure investors that Mexico is indeed changing its policies and attitudes towards foreign investors. Funds are also an important factor in the success of Mexico’s energy sector as PEMEX estimates that Mexican fields require $60 billion a year in investment, which is double what Pemex spends today.

By allowing private contracts for profit and production sharing with well-known companies such as Exxon Mobil, the government expects the country’s oil output to increase by one million barrels per day. Currently, the country produces 2.5 million barrels per day, which is about one million less than the numbers recorded in 2003. With the reforms implemented and part of the constitution, the new energy sector changes are bound to increase Mexico’s GDP by 1% until 2018 and by 2% by 2025. This means a stable economy for Mexico, which translates into a growing middle class and lower poverty rates.

Though the reforms give PEMEX the first round of entitlements, the state-oil producer will have three to five years to develop the resource on its own or by entering into a joint venture with private companies. US oil service companies and independents may be interested in partnering with PEMEX, but the latter is definitely aiming for this joint venture.

The reason behind this is that PEMEX has burdened the economy by not making the most of oil and gas resources due to insufficient labor and lack of technology. By entering into a joint venture with one of the independents, it will be able to learn the know-how it lacks and use sophisticated technology to develop half-exploited fields.

In addition to international oil companies, oil service companies will contribute to Mexico’s energy. This is because the contracts opening up and the licenses provided are better suited for their work. Foreign service companies may also join forces with Mexican companies to develop Mexican energy resources, further boosting the productivity of the oil and gas sectors.

However, Mexico is yet to decide how its hydrocarbon fields will be valued, what the bidding process entails, the nature of the contracts, and other important details. Given the speed and dedication exhibited in drafting and approving the reform bills, Mexico’s regulators are bound to resolve these issues before President Peña Nieto leaves office in 2018. Yet the reforms will be so advanced by then that the new government will deem them economically costly to turn back.