17 Feb 2014 More

Mexico Ends Oil Monopoly; PEMEX to Participate in Joint Oil & Gas Ventures

posted by Brown Books @ 13:23 0 Comments

Image of Pemex truck
Petroleos Mexicanos, or PEMEX, Mexico’s state run oil company and the world’s 5th largest producer of crude, announces that it will begin its first joint venture as early as this year, this from its Chief Executive Officer Emilio Lozoya.  The decision by the Mexican Congress to end the countries 75-year-old monopoly in the oil industry means the Mexican energy business is in for boom times.

"It's a paradigm shift, a jump to modernity that should have happened decades ago," says Lozoya.  "Normally, monopolies don't want competition. We believe competition is the best thing that can happen to PEMEX.”  Although Lozoya is just 39 years old, his background and experience in investment banking give him the credentials to turn the Mexican oil business around.

PEMEX is also the third largest exporter of crude oil to the United States.  Even so, it has seen output drop for the last nine years.  The problem isn’t what lies beneath, it’s getting at it.  This is why Mexico is putting an end to its decades-old monopoly and calling for outside investment.  Companies in both Canada and the United States stand to gain from these new joint ventures, but no one will gain more than Mexico itself.

Export levels to the US have dropped to 2.52 million from 3.3 mmbopd back in 2004.  The new joint venture initiative, backed by none other than Mexican President Enrique Pena Nieto himself, intends to boost that same production to 4 mmbopd by the year 2025.

“We are already having important discussions with players, not only in deep water, but in mature fields and other areas in Mexico,” Lozoya said. “We hope to be announcing some deals towards the end of 2014, early 2015.”

Mexico looks toward deep waters

It’s deepwater drilling indeed where Mexico looks to find its greatest resources.  The problem is that it doesn’t have the technology to do so.  The Perdido find of anywhere from 150 million to 200 million bbl is where Mexico is looking to partner-up with both American and Canadian companies to develop these deepwater fields in the Gulf of Mexico just east of the Texas-Mexico border.

Lozoya believes if the US, Canada and Mexico pull together, North America will become the world’s cheapest source of energy.  According to the Oil & Gas Journal, proven oil reserves in Mexico are 12.4 billion barrels.  Those same reserves are estimated at 10.3 billion barrels by the US Energy Information Administration.

As of 2006, Mexico was the world’s sixth largest oil producing country in the world at 3.25 mmbopd, but these levels are in decline due to decaying infrastructure and out-of-date technologies.
Now for the first time since the country nationalized the oil business back in 1938, private firms will be allowed to not just explore but produce oil.

Proponents of the new bill say it will also bring in billions in foreign investment.  North America is predicted by many industry leaders to become the world’s largest exporter of oil and gas by the year 2025 and Mexico aims to play a major role in this boom.  The bill itself is expected to receive little resistance and should be signed into law by the Mexican legislature as early as the beginning of next year.

For the country’s state-run PEMEX company, with oil sales of $130 billion in 2012, this means more than just getting at the oil-rich reserves in Perdido, but the ability to ship it out through new pipelines.  Beefing up the oil and gas infrastructure as well as new technologies is all part of the plan.

Lozoya under fire, but sticking to his guns

Lozoya is the youngest ever head of PEMEX.  At only 28 years old, his new vision is right in line with that of the young president of Mexico.  While the nationalization of oil fiends made sense 75 years ago, bringing in foreign investment and know-how is the way to turn the country’s nine year slide around.  "It's very exciting. But the challenge now is execution. We delivered on the legislative side, now we need to execute," said Mr. Lozoya.

Lozoya has a master’s degree in economics from Harvard University and has managed investment funds before.  He is the son of a one-time Mexico energy minister.  The face of Mexican politics and business have taken on a more youthful look.  This new look has now turned to foreign sources to help the Mexican oil business grow in the decades to come.

Mexico currently has some of the strictest laws in the world when it comes to the energy business.  Not only are outside interests not allowed to explore or produce oil, PEMEX has a monopoly on gas stations in the country as well.  The new law will allow for outside companies to even run their own gas stations.

It’s not just changes to the law in general that’s surprising to most industry analysts.  The sweeping changes in PEMEX, which employs 160,000 people and provides for as much as one-third of all government revenues, even has industry insiders taken aback.

But not everyone is on board with the proposed changes.  The Party of the Democratic Revolution, a left-leaning organization, voted against changes in the current law, going as far as to call them “treasonous.”  The party has even tried to block the upcoming vote, wanting to push it back to later in 2015.  The Mexican Supreme Court will make the ultimate decision on whether or not the referendum will move forward as scheduled.

Any hold-up in the new law could make investors standoffish, but PEMEX chief Loyoza doesn’t believe there will be any delay.  "We are completely certain the constitutional change and implementing laws give full legal certainty to PEMEX and the industry," says Loyoza.  "We don't believe investors will need to hold back."

PEMEX now on the clock

If the proposed rule changes move ahead as scheduled, PEMEX will have just two years to completely revamp its focus from solely a tax revenue stream for the government to a commercial entity competing in the world market.  The changes would give PEMEX complete autonomy over its fiscal budget and begin weaning off the government’s over-dependency on oil subsidies.

What this means for PEMEX is an increase in its investment budget from $25 billion a year now to as much as $35 billion.  The new influx of investment will help the company to realize greater E&P for the Perdido reserves as well as other projects like hydraulic fracturing.

What this means for the United States and Canadian companies is a potential increase in output from the North American region to 20 million barrels a day by the end of the decade, this according to Citigroup, the Canadian Association of Petroleum Producers, and the US Energy Information Administration.

What this means for the United States in particular is a move in the right direction toward energy independence.  Over the last 20 years, the Mexican and American economies have become more intertwined than ever.  It only makes sense that the two should be working closer when it comes to oil production. 

This is not just an opportunity for American companies to become more involved in the Mexican oil business, but to boost profits as well.  Increased profits mean more high-paying jobs for Americans in the already booming energy business.

Large American oil companies like Chevron already do a brisk business in South American countries like Brazil.  Moving the focus toward Mexico now brings that even closer to home and energy independency for North America.  The new law could mean an increase in Mexican refining which in turn would mean an increase in gasoline imports for the United StatesMexico currently imports half its gasoline due to inadequacies in its oil refining capabilities.

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courtesy of Philip Loyd, Brown Editor

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