Mexico's groundbreaking move to open its faltering energy sector to foreign investment threatens to ratchet up competition with Canada for market share in the United States and for capital.
The Mexican government expects the constitutional amendment – passed by the federal Congress last week and now headed for a ratification vote by Mexico's 31 states – to reverse the country's decade-long production slump, creating increased competition for oil-sands producers who are hoping to gain access to U.S. Gulf Coast markets through the Keystone XL pipeline. While there has been staunch opposition from the left, who accuse the government of selling out the country's patrimony, the amendment is widely expected to be ratified by the states.
The ruling PRI party and its ally in reform, the PAN, control more than 20 of the 31 states. The ratification process is expected to conclude by mid-January, Jesus Rodriguez Davalos, a Mexico City energy lawyer, said in an interview. The process requires a simple majority of the states. The government will then have to pass enabling legislation and regulations that will lay out the crucial details and establish regulatory bodies.
The country is opening up at a time when oil-patch executives in Calgary are warning that Canada must build pipelines to access new markets, and that delays will chase away foreign investment.
"Mexico is another source of potential competition for the Canadian oil patch for investment funds," Bank of Nova Scotia energy economist Patricia Mohr said. "But it will depend on how open the actual reforms are in Mexico and how prospective the geology is."
But there are investment opportunities as well: TransCanada Corp. is already building a natural-gas pipeline, for example.
The oil industry in Mexico was nationalized in the 1930s as the country sought economic independence from the United States.
For the past 75 years, the state-owned oil company, Petroleos Mexicanos (Pemex), has had a monopoly on oil and natural-gas production in the country, but it has been unable to maintain that production.
Its crude exports to the United States have fallen from 1.5 million barrels per day in 2004 to 400,000 barrels per day this year. And the country is now importing natural gas from the United States. Mexico is believed to have huge potential in its under-developed offshore, where energy giants such as Exxon Mobil Corp., BP PLC, Royal Dutch Shell PLC and Statoil ASA are expected to become active.
The reforms would allow foreign investment across the entire energy industry, from exploration and production of oil and natural gas, to pipelines and storage terminals, to electricity generation. Mexican crude exports to the United States have fallen for the past 10 years, and U.S. Gulf Coast refiners are looking to Canada to fill the gap in heavy oil for which their refineries are best suited.The Mexican government is eager to attract skilled labour and foreign capital – as much as $20-billion (U.S.) annually – to the country to rebuild an industry that has been starved for investment. Mr. Rodriguez Davalos said he expects the biggest short-term impacts to occur in rebuilding the country's energy infrastructure, which has been neglected for the past dozen years, and in construction of sorely needed power generation and transmission.
While those areas don't attract the international attention paid to potential for increased crude oil production, they are critical to President Pena Nieto's plan.
Investment in infrastructure and electricity would generate immediate employment across the country, and create a modern energy system that would better support industrial development.
On the oil and gas side, foreign investors have been watching the reforms closely to see how far the government would go in allowing them to book reserves, a key issue for international oil companies that are valued on their ability to replace production with reserves. Mr. Rodriguez Davalos said Mexico will find a way to do that.
Onshore, there are opportunities for independent companies to revitalize aging oil fields through enhanced recovery methods, and to develop the country's massive potential in tight oil and shale gas using horizontal drilling and hydraulic fracturing.
But Mr. Rodriguez Davalos said the country needs to build the industry virtually from scratch, including the regulatory bodies and bureaucracies needed to oversee development and issue contracts. "We're going to have this great reform and we'll have our secondary laws and regulations and standards, and then you need to implement all that," he said. "And that is going to be very challenging."