(EnergyAsia, December 19 2013, Thursday) — After a lengthy debate, Mexican energy reform will revive the world’s ninth-largest crude oil industry by opening it up to direct foreign investment, said US consultant ESAI Energy.

Foreign participation will take many forms that will eventually reverse a steady decline in Mexico’s crude output, enabling it to compete against other producers in Latin America and beyond.

ESAI said Mexico will start overhauling its hydrocarbon industry from next year. Following constitutional reform, there will be secondary legislation to corporatise state-owned Pemex and rewrite energy regulation to shape the nature of private participation.

Thereafter, a more autonomous Pemex will review options for “Round Zero,” where it will essentially retain control of its preferred resources and help signal which others (at what percentages) will be available for private investment, said ESAI.

The reform will allow for profit-sharing, production-sharing and licensing agreements to attract significant interest from large international and national oil companies as well as smaller upstream players.

The types of foreign participation will depend on the resources being exploited.

ESAI expects existing offshore and onshore plays to remain the property of Pemex, which already uses service contracts with foreign companies to improve extraction techniques in existing fields.

“These are a revenue lifeline for Pemex and Mexico,” said ESAI.

Greater potential lies in the deepwater Perdido Belt, which extends across the border from existing production platforms in US waters.

While Pemex will want a stake in these resources, it needs to attract the technology and expertise to expand production, and will have to pursue profit-sharing and production-sharing arrangements.

Attractive partners include majors with deepwater capabilities and refining assets like Shell or Chevron and state-owned Statoil with seasoned offshore drilling capabilities.

Earlier this year, Mexico and Pemex signed deals with Chinese, Colombian and Norwegian partners. Mexican shale oil resources, the world’s eighth largest and some of which are an extension of the Eagle Ford formation, could provide opportunities for licensing deals for companies like EOG and Chesapeake already operating in Texas.

There are many reasons to be bullish about long-term Mexican production as a result of the reform, said ESAI.

The country has favourable geology to improve output and favourable geography due to its proximity to the largest concentration of refining infrastructure in the world.

Mexico also has a wealth of technocratic managers and skilled industrial labor that can facilitate the build out of its oil industry. Crucially, a generation of the country’s leading politicians has put its future on the line by moving forward with the reform.

Nevertheless, as ESAI Energy noted in the October issue of Latin America Watch, the region’s crude production outlook is not only the product of the ambitions of energy ministries and oil companies, but the rest of the world’s demand for crude.

US and European imports are falling and Asia is a long haul. As a result, Mexican production targets of 4 million b/d will have to contend with global supply-demand dynamics.

On a broader note, Mexican energy reform will likely have an important consequence of igniting upstream investment and development in Latin America.
Mexico’s deepwater plays can draw attention away from Brazil while its  shale reserves can divert resources from Argentina. By exporting more heavy-sour crudes, Mexico could render Venezuela’s Orinoco belt less attractive.

OPEC, already reeling from by rising US output, will need to adjust to an increased production profile in a major OECD economy with strong commercial ties to the US and Europe.

The volumes of Mexican crude production will also depend on the country’s downstream sector, which is currently running near 75% capacity and is in need of substantial upgrading investment. The energy reform calls for sweeping liberalisation of the midstream and downstream sectors that should also attract foreign interest. Contact ESAI Energy for additional information on Mexican energy reform.