Mexico Poised to Reverse Declining Oil Production, Doors Open to

The end to Mexico’s 76-year monopoly on its oil reserves and production is a gargantuan change to the energy landscape in North American. While it remains unclear just how ‘open for business’ Mexico’s vast offshore oil reserves will be, politicians have given the initial green light and it warrants a review.

In mid-December, Mexico’s lower house of Congress gave general approval to a legislation that would open the state-run oil industry to private investment for the first time since 1938.

In September 2013, Pinnacle Digest published an article titled, Will Mexico’s Deep Water Oil, Soon be Open for Business?

Although the recent December vote was unanimous, it came with a degree of criticism. The measure passed the Senate on a 95-28 vote and just a few hours later members of the House of Deputies took up the bill. This came after overriding attempts by leftist opponents to block discussions.

The dismal performance and recent track record of Mexico’s state run oil company, PEMEX or Petroleos Mexicanos, seemed to corner the leftist opponents who firmly opposed the bill.

Key Fact:Oil production in Mexico has declined 25 percent in the last 10 years.

Pemex has admitted that it doesn’t have the finances nor the expertise to tap into the country’s significant deep-water and shale reserves.

Various Offshore Drilling Techniques

The bill is not a full on green light, but would allow contracts for profit- and production-sharing. The licenses may be granted under which companies would pay royalties and taxes to the Mexican government for the right to explore and drill.

Below is an excerpt from September’s article on Mexican off-shore oil fields.

“Pemex held an auction on July 11th 2013 for six onshore oil leases which, by all accounts, had a very weak outcome. Previous speculation suggested that up to 12 foreign oil companies including Schlumberger and Sinopec were in the hunt to make acquisitions, but in the end 2 out of the 3 contracts were awarded to Mexican companies.”

Pemex and Mexico’s government, is desperate to turn the energy sector around in a bid to boost tax revenues, will be hoping for a much stronger turn out at future auctions. They know they will have to sweeten the pot to get the likes of Chevron and Shell off the sidelines and into the game if they want to secure the billions in tax revenue at stake.

Congressman Alejandro Sanchez, a member of the leftist Democratic Revolution Party, immediately stated,“We want a referendum on this.”

Mexico’s Deep-Water Oil Riches

Pemex struck gold in August of 2012 and then again in September. Incredibly, Pemex’s first successful well was drilled only 39 kilometers from the US territorial waters on the Mexican side of the Perdido Fold Belt. Considering the belt lies at a depth of 2,540 metres makes advanced deep-water extraction technology even more critical.

Pemex Perdido Discovery

In September we wrote that,

“Pemex CEO Juan Jose Suarez Coppel has said it will take “at least five or six years” to produce the first barrel of crude from the Perdido area. And that “underwater robots” will now begin to be prepared for that task. The reality is that Pemex is not familiar with or capable of extracting what it believes to be a multi-billion barrel find at such depths. Pemex sources have confirmed they expect to certify 350 million barrels of crude from the find and that total reserves at deposits in Mexico’s offshore discovery, known as the Perdido Fold Belt – could total 10 billion barrels.”

It is these vast resources of oil that US, Canadian and European oil companies are after.

In 1938 President Lazaro Cardenas nationalized the oil industry, a step written into the constitution to protect the country from possible profiteering by foreign companies.

This is a game changing bill that’s impact will be felt for years. Pinnacle will be watching the next auctions closely to gauge the interest and to witness which oil majors jump in first.