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The Los Pajaritos petrochemical complex that belongs to Mexico’s state-owned oil company Petroleos Mexicanos (Pemex) in Coatzacoalcos in the state of Veracruz. (DARIO LOPEZ-MILLS/AP)
The Los Pajaritos petrochemical complex that belongs to Mexico’s state-owned oil company Petroleos Mexicanos (Pemex) in Coatzacoalcos in the state of Veracruz. (DARIO LOPEZ-MILLS/AP)

Mexico’s oil policy change challenges Canadian energy sector Add to ...

A rush of foreign investment in Mexican oil production in the wake of that country’s energy reforms threatens to fuel competition against Canada in the race to supply the U.S. Gulf Coast market with crude.

Mexico’s government is seeking to break a 75-year state monopoly on energy and lure private investors into the oil, gas and electricity industries to boost flagging output and lower energy costs for manufacturers.

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The plan from President Enrique Pena Nieto, unveiled Monday, will be sent to the Congress for approval this week. It includes plans to change articles of the Constitution that prohibit private ownership of Mexican oil and introduce profit-sharing contracts.

If enacted, the reforms would mark the largest private sector opportunity in decades for Mexico’s oil and gas industry, which was nationalized in 1938 and is controlled by state monopoly Pemex. The national oil sector has been a source of Mexican pride since then, so approval of the reforms is still uncertain.

Under the planned reforms, Pemex would remain in government hands.

The changes could mean big opportunities for Canadian oil and gas service companies to expand their businesses as investors seek the necessary technology to boost oil and gas production in Mexico’s onshore and offshore fields, and tap shale oil and gas reserves, analysts said.

However, the changes also have the potential to turn on its a head a long-held expectation – that of building Canadian heavy crude production displacing declining Mexican oil supplies over several years.

A timetable is not yet known, but it could take two years to arrest Mexico’s production declines with new drilling and rehabilitation of oil wells with the aid of investment by international players, said Bob Schulz, professor of strategic management at the University of Calgary’s Haskayne School of Business.

Meanwhile, new pipelines – such as TransCanada Corp.’s proposed Keystone XL to Texas refineries from Alberta – and expansion of other systems are expected to start flowing around the middle of this decade, assuming they win U.S. approval, which is anything but assured.

“You better get Canada connected to the U.S. before Mexico figures it out,” Mr. Schulz said.

The contrast between the countries has been stark as Canadian output has surged while Mexico’s has waned. The United States imported an average of 2.96 million barrels of oil a day from Canada, up 25 per cent in six years. Imports from Mexico sank 41 per cent over the same period to just over one million barrels a day, according to U.S. government figures.

A wide price gap between Mexico’s Maya heavy oil and Western Canada Select heavy blend has been one of the market drivers behind the push to build pipelines to Texas from Alberta, because Canadian producers would be able to ship the oil for far less than that spread.

At the same time, both Canada and Mexico aim to boost exports to lucrative Asian markets.

The centrist Mexican government’s proposed change stops short of proposing concessions to tap Mexican oil, or production-sharing, which were viewed as the best-case scenarios by oil companies. It also avoids giving private companies ownership over Mexico’s oil and gas, and instead would give them a share of profits.

A big question is whether Mexico can not only halt production declines, which have been pegged at 25 per cent since output hit a peak of 3.4 million barrels a day in 2004, but also increase output.

“Can it be to the extent of the production they’ve lost? I don’t think so,” said Dirk Lever, an analyst at AltaCorp Capital Inc. “It all depends on what is discovered, but Mexico has seen a huge fall.”

Mr. Lever said he does not expect a rush of Canadian oil and gas producers into a liberalized Mexican oil patch because they would expect to be elbowed out by U.S. companies.

The level of access to companies, including foreign oil majors such as BP PLC and Exxon Mobil Corp., will be crucial to the reform’s success.

With files from Reuters

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