Shrugging off the notion of an industrial rivalry, Mexican Ambassador Francisco Suarez says Canadian companies will enjoy enormous opportunities as his country seeks to rejuvenate its energy sector with sweeping, though politically challenging, liberalization.
In an interview Tuesday, Mr. Suarez said he expects Canada’s highly developed energy sector to figure as a key partner in Mexico’s multibillion-dollar effort to modernize not only its oil extraction sector but the pipeline and refining businesses as well as natural gas and electricity industries.
“This is the mother of all reforms,” he said at his office a block from Parliament Hill.
“I think this opens great possibilities for Canada not as competitors but as complementary economies. I think this offers enormous opportunities for the relationship between Canada and Mexico.”
Mexican President Enrique Pena Nieto on Monday introduced a long-promised reform package which includes constitutional amendments to allow foreign companies to invest in energy production, although it stops short of allowing non-Mexicans to own or control oil and gas reserves. The exact nature of the proposed foreign involvement has yet to be spelled out.
Mr. Suarez said industry players should not underestimate the challenge in winning approval for the constitutional reform, which was derailed before. Former President Vicente Fox attempted similar reforms and failed. Mexico nationalized its oil and gas industry in 1938 – in fact, Mr. Suarez’s father was finance minister and a signatory to the decree at the time. That declaration of independence from foreign – mainly American – oil companies has been a source of national pride for 75 years.
The closed-door policy also choked off investment: Mexico’s oil production has slumped by nearly a third since the middle of the last decade; its oil and gas pipeline system has become sclerotic with some industrial regions unable to get sufficient supplies; it is importing natural gas despite huge resources. Moreover, the country’s electricity system struggles with a lack of capacity and high prices. The government estimates Mexico needs more than $20-billion a year in investment to begin to catch up, even as it has used the national oil company, Pemex, as a cash cow to finance its operations.
Mr. Nieto’s governing Institutional Revolutionary Party (PRI) has the support of the conservative opposition party (PAN), and together they have enough votes in Congress and in the various states to approve the constitutional amendment, Mr. Suarez said. But left-wing opposition is denouncing the plan as a treasonous privatization of Pemex and the country’s energy sector.
The ambassador rejected the notion that Mexico would become an increasingly threatening competitor for Canadian oil companies eager to expand their deliveries on the U.S. Gulf Coast. Refiners there are looking to replace declining volumes of Mexican and Venezuelan heavy crude with oil sands bitumen.
Since 2005, Mexican production has declined to 2.5 million barrels a day from 3.7 million in 2005. The government expects liberalization could boost domestic production to three million barrels a day by 2018 and 3.5 million by 2025. However, it also expects the domestic economy will accelerate as a result, sopping up much of the additional fuel.
Mexico “is hoping to replicate the U.S. energy revolution,” said Daniel Kerner, an analyst with Eurasia Group, a political risk firm in Washington. Its success, he added, will depend on how attractive it makes the investment regime for international oil companies.
TransCanada Corp. already has a natural gas pipeline business in Mexico and would consider further investment, including in electricity generation, if the reforms proceed.
“We have a good commercial position in the country,” Karl Johannson, the company’s president for natural gas pipelines, said in an e-mail. “And [we] expect our significant knowledge and experience constructing and operating energy infrastructure projects in Mexico will be a competitive advantage should we pursue new projects that may arise from these changes.”
Mr. Suarez said the three North American partners need to build a continental grid of oil and gas pipelines and transmissions, and for that reason Mexico supports TransCanada Corp.’s plan to build the Keystone XL pipeline to deliver oil sands crude to the Gulf Coast.
While greater Mexican production could compete with Canadian supply on the Gulf Coast, Mr. Suarez said the opportunity for collaboration outweighs any competitive concerns. His government will be looking to Calgary for energy service companies, engineers, pipeline companies, and even producers willing to work in joint ventures to develop offshore oil and shale gas reserves on a profit-sharing or production-sharing basis. For example, Pemex alone needs expertise and investment to help the company move production deeper into the Gulf of Mexico.
Moves to liberalize the Mexican oil industry would help companies like Calgary-based Trinidad Drilling Ltd., whose small operation in the country was hit by unexpected cuts in Pemex budgets. Those cuts have forced the company to reduce operations in recent years.
“If it was to open up more, it would just give us more opportunities, more potential customers,” said Lisa Ciulka, Trinidad’s vice-president of investor relations. “And for Trinidad, in particular, our company is based on high-performance drilling … being able to go in there with high-spec equipment and being able to outperform our competitors. Sometimes with Pemex it is more politically driven than performance driven.”
With a report from Jeffrey Jones in Calgary