Mexico's Energy Reform: A New Horizon?

Over the years, Mexico, one of the biggest producers of petroleum and other liquids globally, has transitioned from being a net energy exporter to a net importer of energy.

What Led to the Change?

The import dependence was a result of the steady decrease in oil production that started in 2005. To address the situation, in August 2014, the government decided to deregulate its energy industry and end the 75-year monopoly of Pemex. The ministry of energy in the country, SENER, issued a five year, four round tender plans from 2015 to 2019.

The deregulation was aimed to help the Mexican oil industry become more efficient and draw more investments from abroad as it denationalized 914 oil and gas blocks.

Effects So Far

The benefits of the reform depend on Mexico’s ability, will and transparency in properly implementing the safeguards and regulations keeping in mind the interests of both potential investors as well as the public. As of now, it seems that the new energy law has been able to lure multinational firms to explore oil and gas independently in one of the world’s largest energy markets, or under contract/license with the state oil giant Pemex.

For example, ExxonMobil Corp. (NYSE:XOM) is planning to invest around $300 million in fuels logistics, product inventories, and marketing in the country for the next 10 years. In March 2017, BP PLC (NYSE:BP) opened its first retail fuels site in the country and plans to invest more in the industry over the next five years.

Chevron Corp. (NYSE:CVX) , Glencore (LON:GLEN) PLC (OTC:GLNCY) , TransCanada Corp. (TO:TRP) and other energy related companies also announced their intention to enter the Mexican energy market. These companies will work with local partners to spread their grasp over the market.

Integrated oil majors like Total SA (NYSE:TOT) , Exxon Mobil and Chevron – carrying a Zacks Rank #3 (Hold) – received eight separate blocks from the government of Mexico. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

What’s Attracting the Companies?

Apart from high demand for energy in Mexico, the country has the resources, which the government is trying to utilize to draw private investments. Per National Hydrocarbons Commission of Mexico, as of Jan 1, 2017, the country’s proved oil and gas reserves are estimated at 9.16 billion barrels of oil equivalent (BOE). Proved oil reserves currently are 7.037 billion BOE, while 115 billion BOE is yet to be discovered.

The Burgos Basin in the country has a huge opportunity as well. It is connected to the U.S. Eagle Ford shale play. Following the deregulation, Mexico opened the onshore part of its Burgos Basin for private foreign investments.

By the end of 2018, the energy ministry plans to allow new entrants through a series of tender for the Burgos Basin and other shale plays in the country.

Was the Deregulation Necessary?

The major reason behind the shrinking oil income was lower production from Cantarell and several other onshore and offshore fields, along with a low price environment. The state-run oil producer Petroleós Mexicanos (Pemex) was unable to arrest the decline due to lack of efficiency, technological improvement, proper infrastructure and hydrocarbon extraction know-how.

The decline in oil output also resulted in lower natural gas volumes, as most of its gas extraction is a by-product of oil production. With natural gas making up around 40% of Mexico's total energy consumption, the Latin American country is forced to import 60% of its consumable gas from the United States. Moreover, Mexican oil industry constituted only 6% of the country’s export earnings in 2015, a steep decline from around 30% in 2009. In the period 2004-2016, oil production in Latin America’s second largest economy plunged 32%.

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