Mexico Considers Opening Waters to International Oil Firms

From NASDAQ

By  Laurence Iliff and  Juan Montes

As Mexico this week marks 75 years since it expropriated the oil industry from foreign companies, President Enrique Pena Nieto’s government is working to overhaul the state-run sector to attract private investment to complex offshore resources.

At an event Sunday to mark the expropriation, Mr. Pena Nieto warned that if Mexico doesn’t fundamentally transform the energy industry quickly, the country could be energy deficient by 2020. “That scenario is grave because it will limit our economic growth and the possibility of improving the lives of millions of Mexican families,” he said.

The result is that state oil monopoly Petroleos Mexicanos is turning to the Gulf of Mexico’s deep waters after eight years of declining output in the country’s “easy oil” shallow waters of the southern Gulf.

Several hundred miles offshore from this Mexico-Texas border city, Pemex’s Bicentenario rig is drilling in the hopes of finding a big crude-oil deposit to add to a couple of nearby finds.

But how Pemex gets the oil out of the ground thousands of meters below the rig is complicated. The company is barred by Mexico’s constitution from forming joint ventures with the international oil companies that drill on the U.S. side of the Gulf and doesn’t have the expertise and resources to extract the deep-water oil on its own, analysts say.

Pemex faces a similar problem with oil and gas in sedimentary shale-rock formations, which often requires fracturing the rock with water and chemicals. Mexico likely has billions of barrels of oil equivalent in shale and deep water, but no commercial production in either.

Industry consultants say international oil companies would like to form joint ventures with Pemex in which the foreign companies share the investment and the oil from the economically risky business of deep-water production. But Mexico’s history of false starts on oil-sector overhaul has made a lot of skeptics.

John Padilla, managing director of energy consulting firm IPD Latin America, says this time could be different, especially after Mr. Pena Nieto last week proposed to take on Mexico’s top billionaires in the telephone and television industries. But given the nationalism associated with oil, Mr. Padilla says, major changes in the industry will be more difficult than in telecommunications.

Chevron Corp. and Royal Dutch Shell say they welcome the possibility that Mexico will open up to outside investment. BP PLC declines to comment.

Discussions among policy makers are still in preliminary stages, with a proposal likely months away. One idea under discussion is to follow a model used elsewhere, in which the state arranges with private companies to extract the oil and pays them market prices minus hefty royalties that reflect the country’s continued ownership of the asset, several people with knowledge of the talks said.

But international oil companies need to book reserves to satisfy shareholders that future revenue is on tap. And Mr. Padilla says that might not be possible without a change to Mexico’s Constitution, which holds that the oil is the country’s property.

Other people in the industry say that hurdle can be overcome without a constitutional amendment. Under an “economic interest” accounting system, for example, companies can book reserves even if they don’t own the oil, if they are involved in the production and if the financial outcome is tied to production.

George Baker, a Houston oil consultant who runs energia.com, remains a skeptic that international investment will arrive. President Pena Nieto’s proposal “is going to be some intermediate step that can be backtracked on, because it’s so politically hot,” Mr. Baker says. “The rule in Mexico is that you don’t stick your neck out on oil reform.”

Pemex produced about 2.55 million barrels a day of crude oil last year, down from roughly 3.4 million barrels a day in 2004. The decline in the huge Cantarell complex in the southern Gulf was responsible for much of the slide, and analysts say Pemex needs to explore and produce from unconventional sources of oil and gas quickly or face becoming a net energy importer, perhaps by decade’s end.