Mexico Takes Steps to End Oil Monopoly

By Commodity HQ  AUG 15, 2013 9:45 AM

The Mexican government introduced a bill this week that would allow private companies to explore for and produce oil and gas, ending the state monopoly of Petroleos Mexicanos.

 


When it comes to commodity production, Mexican oil is perhaps not what first comes to mind. Currently, the country produces roughly 2.55 million barrels of crude a day; compared to the US' production of over 7 million barrels per day, Mexico’s capabilities seem rather limited. Recent legislation, however, has created the potential for more oil companies to gain access to some of the world’s largest remaining untapped oil reserves.

Mexico Tackles 75-Year-Old Monopoly

This week, Mexico’s government unveiled a bill to change the constitution to let private companies find and produce oil and gas within the country. Currently, the country’s oil production is solely run by the state monopoly Petroleos Mexicanos (PEMEX). In an effort to attract more interest from major oil companies, Petroleos pays a fee to service companies to do everything from exploration to drill wells.

This model, however, has failed to draw in major oil producers and has led to a significant decline in production and exports. Over the last decade, Mexico’s oil production has fallen by 25%, while investment spending has increased nearly fivefold to almost $20 billion a year. As a result, Petroleos has been unable to efficiently tap into the country’s hard-to-reach shale and deep water reserves, which analysts estimate could total more than 87 billion barrels in additional reserves.

Government officials also believe breaking up this monopoly will pave the way for oil and gas companies to invest billions of dollars in Mexico’s untapped reserves, which could ultimately give the country a much needed economic boost. If the bill gets passed, analysts fear potential backlash among nationalistic politicians and the public who fully support the country’s nationalized oil industry.

Will Big Oil Bite?

Investor’s should note that the bill will not give private oil companies outright ownership of oil fields through concessions. Instead, the government will give firms the cash equivalent of the oil they find and produce. Despite this, several big oil companies -- namely Chevron (NYSE:CVX) -- have already responded positively to Mexico’s efforts, noting that new investment possibilities would certainly be considered.

Analysts believe the decisions made in the upcoming months will be a significant factor for oil companies considering tapping into Mexico’s reserves. Issues concerning taxes, government fees, and the number of participants that will be allowed to explore and drill are just a few of the key components that will either make or break the country’s efforts.

Another key factor for oil companies will be the overall health of Mexico’s economy. Over the past three years, Mexico’s economic growth has slowed rather significantly from 5.3% in 2010 to 3.9% in 2012. For the year, Mexico’s central bank has lowered its GDP growth forecast to 2%-3% from 3%-4%, and in 2014 the metric is expected to come in the 3.2% to 4.2% range.

But considering that Mexico is the third largest supplier of crude to the US and owns the world’s fourth largest reserves of shale gas, this legislation and the subsequent flow of foreign capital investments could certainly open up some lucrative opportunities for investors willing to make a bet on Mexico’s latest efforts to bring its oil and gas industry into the 21st century.

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Editor's note: This article by Danielz Pylypczak was originally published on Commodity HQ.
No positions in stocks mentioned.