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Photo credit: Oil drilling rig arriving at New Plymouth, Taranaki, New Zealand, 10 August 2008 by Phillip Capper

There are impending plans to potentially overhaul the Mexico’s oil industry. The government has unveiled a controversial bill, which seeks to make changes to the Constitution to allow the partnership of private companies and Pemex to exploit the large reserves of oil and shale gas.

The State run oil company Pemex has had a monopoly for seventy five years and is the sole producer for gas and oil in Mexico. Their operation has suffered numerous managerial and resource issues, so they now outsource many operations including exploration and drilling to service companies. However, this business model is largely unattractive to major oil companies and as a consequence oil production in Mexico has been steadily declining.

Major oil producers which are struggling to discover new large reserves and fields are far more likely to be attracted to the operating conditions and familiar geology of Mexico. Since the alternatives are likely to involve the unforgiving Artic conditions or unstable political regions in other areas of the world.

The new bill, which looks set to gain congressional approval, is politically risky and could cause discord among the public and nationalistic politicians. The bill would break the tradition which was established in 1938, when Mexico became the first large oil producer to nationalize their oil industry. This set the trend for a number of other developing nations to follow Mexico’s example. Mexico has some of the most restrictive laws on energy in the world. Many experts compare the rigidity of the rules to Kuwait’s and cite that even Cuba is more liberal in this regard.

Many Mexican officials are hopeful that this new initiative will promote massive economic growth and attract billions in investment dollars, improve efficiency and competitiveness and showcase Mexico. The bill has fallen short of many oil companies hopes as it will not allow private companies to gain outright ownership of an oil field. Pena Nieto has confirmed that the government will provide a cash equivalent rather than relinquish a share of the oil found and produced. This profit sharing initiative is similar to arrangements that are offered in Iran, Ecuador, Malaysia and Iraq.

The opinion of many experts is that the interest developed among the major oil companies may well depend on the clarification and crucial detailing that will be confirmed in secondary laws. These should cover issues such as how much tax and fees will private firms be charged by the Mexican government. Mexico will need to offer incentives and attractive contract deals to secure investment and encourage commitment of capital. It is likely that Mexico will limit the number of companies permitted to explore her territory. They will likely target partnerships will major companies who have the technological equipment and expertise for shale and deep water drilling.

On the other hand, the Reform could force the U.S. Senate ratify the Transboundary Hydrocarbon Agreement, setting the rules for dividing potential oil reserves in the Gulf of Mexico. Mexican Senate already approved this Agreement. The Reform could be the first step for an integration of a cross-border energy infrastructure.

The bill represents high stakes for Mexico as oil production under Pemex has dropped by a quarter in the last ten years. This is primarily as a result of lack of technology and expertise that are expensive and create difficulty in development.  This decline is present even with annual investment from Pemex has increased fivefold in the last ten years.

Assuming the bill is passed, the hard work of clarifying the detailing for Mexico’s potential offshore oil boom will need to begin.


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