Photo credit: oil pump by jodelli

Mexico’s current government is strongly pushing through plans to overhaul the country’s hydrocarbons sector.  While there are many protesting the move to allow a certain amount of foreign investment, those involved in the industry feel that Petróleos Mexicanos (PEMEX), the ailing state-owned oil company which enjoys a monopoly, desperately needs investment in order to modernize its outdated infrastructure and extract its untapped reserves of oil and gas.

What must be stated is that while the governing party, the Institutional Revolutionary Party (PRI), is pushing for PEMEX reform, it is still insisting that it will remain a state-owned company and will not be privatized.  In a nutshell, this means that if reforms are approved, foreign oil companies will essentially be working for PEMEX, not for themselves.  However, this does not necessarily mean doom and gloom for international oil companies. Just to give some hints on the coming events, PEMEX has just signed a memorandum of understanding with Exxon Mobil to start negotiating collaboration for the future.

At the present time, PEMEX could be considered as a “hobbled” company; the nation’s oil industry is suffering.  While the country is sitting on massive resources, decades of non-profitable management, a heavy tax burden and a lack of infrastructure reinvestment have taken their toll.  Output has declined by a whopping 25 percent in the past 9 years; peak production was reached in 2004 and was recorded to be 3.4 million barrels per day.  Industry analysts say that even then, the peak production could and should have been higher.

As the situation stands now, the constitution of the country states that hydrocarbons are the property of the state and only the state has the right to exploit them.  Private companies are incredibly limited and can only play the role of service contractors or consultants to PEMEX.  The industry is closed to the type of investment it desperately needs to modernize.

The Mexican government emphasizes and warns that if reforms are not made, Mexico, which is currently the top supplier of oil to the United States, will actually need to import oil in less than five years’ time to meet its growing energy demands.

Recently, in the city of Salamanca, Guanajuato, President Enrique Peña Nieto stated in a speech: “The transformation of PEMEX is indispensable to free up Mexico’s great economic potential.”

The reform proposals include the restructuring of PEMEX and would open the industry to foreign investment in the fields of refining, shale gas exploration and petrochemicals.  Furthermore, the reforms would allow foreign companies limited participation in deep water projects.   However, this does not mean foreign companies could “set up shop”: the hydrocarbons would have to remain in Mexican hands.  While a reform timeline has yet to be established, experts say that they will need to be approved and implemented quickly or else the industry could die out.

But what does this mean for investors and foreign oil companies?  Profitable opportunities will certainly exist, but they will be in the consulting arena.  If the reforms go through, PEMEX will most likely be in a mad dash to find companies with expertise in infrastructure modernization, shale oil and gas exploration, and deep-water projects.

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