Photo credit: tiny adorable oil pump by Heidi De Vries
As many energy sector investors know, Mexico is world’s sixth largest oil producer and is the tenth largest net exporter of oil. Mexico’s production is only behind that of the United States in North America and surpasses Canada’s oil production efforts. As may be expected, the petroleum sector is incredibly important to the country’s economy; however, production has seen a steady decline for decades. This decline could very well be reversed if Mexico’s ruling party, the Institutional Revolutionary Party (PRI), gets legislative approval for its most recent proposals concerning the oil industry.
The colossal state-owned Petróleos Mexicanos (PEMEX) currently dominates Mexico’s oil sector; and while the current government insists that PEMEX will remain a state-owned company and will continue to enjoy a monopoly, it is aggressively adopting a platform to open PEMEX to private investment.
The goal of the current government’s proposal is to increase production as the energy needs of the country have been growing to such an extent that supply cannot meet demand. Although the country has vast reserves of oil and gas, they cannot be extracted, as PEMEX does not have the shale oil and gas extraction technology that exists in the United States. Furthermore, the country’s oil industry infrastructure is badly in need of modernization. At the moment, in order to meet the demand for energy, this oil-rich/extraction-poor country is importing energy resources from its northern neighbor via cross-border pipelines.
This situation could be reversed as mentioned above; President Enrique Peña Nieto is hoping that proposals to open the oil industry to foreign investment will be passed. This could mean that opportunities for American investors may arise. A primary aim of investment would be to get more Mexican oil to the United States; but where foreign companies could profit the most would be in the area of consulting services.
As previously stated, the country is sitting on vast reserves but PEMEX technology is outdated and is not extracting oil in an efficient manner. Foreign companies that specialize in infrastructure technology could be hired by PEMEX to modernize the country’s facilities thanks to the proposed legislation.
Mexico also lacks shale gas and oil extraction technology. Since this technology has been implemented in the United States, Mexico’s northern neighbor will most likely become a net exporter of energy in the next twelve years and will no longer be dependent on foreign sources of oil. Many manufacturing industries that left the country to set up factories in Asia are in fact returning precisely to take advantage of the significantly lower energy costs. If the PRI’s proposal gets legislative approval, American and other foreign consulting companies could indeed take part in setting up shale oil and gas extraction facilities in Mexico.
While PEMEX will remain a state-owned company and foreign energy businesses may not be able to set up shop in the country, many energy sector investors could turn a healthy profit by investing in the above-mentioned consulting services. Mexico has the energy resources but needs the infrastructure, technology and facilities to extract them.
One area that could enjoy benefits of these proposed PEMEX reforms is Texas, which already has strong energy sector ties with Mexico. South Texas, which is experiencing “unprecedented” growth in the industry, is the ideal candidate to bring its wealth of experience to help Mexico modernize its state-owned giant and build an effective, efficient extraction/transportation infrastructure.