Remember the (M/V) Alamo!: Mexican Reform Invites Maritime Reinforcements

by Baker Donelson

In a moment as pivotal as the Battle of San Jacinto, groundbreaking reform in Mexico may bring a Lone Star-sized opportunity to the American maritime industry. On December 20, 2013, Mexican President Enrique Pena Nieto signed into law constitutional reforms that will open the country's energy sector to private investment. The reform will end the long-held monopoly by state-owned Petróleos Mexicanos ("Pemex"), allowing private companies to explore for and produce oil and gas under a variety of contracts, including services, production, profit-sharing and licenses. The reform was driven by a number of factors, including Pena's broad political agenda, aging refineries, lack of deep-water drilling capability and dwindling oil production. The "easy" oil is drying up, and Pemex lacks the funds and technology to get at the difficult stuff.

Mexico has huge untapped resources of oil and gas. Mexico is the third-largest producer in the Western Hemisphere, after Brazil and Venezuela, and is among the top ten in the world, but its production has plunged in recent years. Its exports to the United States have plummeted from 1.7 million barrels a day in 2006 to a little more than 900,000 barrels a day in recent months, while it has been forced to import increasing amounts of gasoline from the United States refineries. oil and gas companies have the "know how" and are geographically poised to be the most likely beneficiary of the reform. Pemex has contracted with American companies in the past, but until now has been constitutionally forbidden to share out of production. Past attempts at reform have been far narrower and unsuccessful. The sheer breadth of the current reform makes it a truly revolutionary event.

Not only could the reform hasten North American self-sufficiency in the oil and gas industry, it has the potential to unlock the national offshore sector and boost activity in a way not seen since the 1980's. Those likely to benefit include American owners and builders of supply boats, work boats, platforms and drilling rigs.  Recent reports highlight increased activity in the Gulf, with deepwater rig deployment representing the most active area. With the post-Macondo permit moratorium lifted, reform in Mexico likely will stir up even more work. Indeed, American shipowners -- especially those focused on medium-size platform-supply vessels (PSVs) -- have already responded.  Darrin Griggs Oslo, Mexico Oil Industry Reform to Create Work for 50 New PSVs, Tradewinds News (Sept. 11, 2013). It has been estimated that the reform could provide work for as many as 50 new PSVs and even more over the longer term. Id.

Despite a mutual interest in the reform, making the dream a reality entails a number of challenges. The timeline for implementation is short. Mexico's Congress has 120 days to enact supporting legislation, and the executive branch has 365 days to create the necessary regulatory scheme. There is still a large amount of resistance to change among Mexicans themselves, who have an "almost religious devotion to a state-controlled energy sector." Absent a tangible ownership stake, the risk involved in deepwater exploration may outweigh the benefit to be gained by American companies. Even where the risk is lower, for example with respect to existing reserves, the reform as worded does not contemplate transfer of hydrocarbons themselves, only shares in revenue, and American companies prefer to be able to report to investors that they have acquired actual reserves.  Political corruption will surely prove challenging in view of the Foreign Corrupt Practices Act, an American reform high on American enterprises' radar. Last but not least, ever-expansive exercises of jurisdiction by American regulatory agencies (specifically the Bureau of Safety and Environmental Enforcement (BSEE) and United States Coast Guard (USCG)) may dampen the enthusiasm of American companies to jump back into the Gulf  post-Macondo.

Still, the recent events signal a clear game change, one with great potential for the American maritime industry, and the industry should move forward with cautious optimism. To follow the advice of Davy Crockett, "Always be sure you are right, then go ahead." Groneman, William (2005). David Crockett: Hero of the Common Man. New York, NY: Forge Books. ISBN 978-0-7653-1067-5.]


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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