Mexico’s Oil Reforms: What Does This Mean for the US Energy Sector?

By Thursday, January 12, 2017 0 No tags Permalink

According to the US Energy Information Administration (EIA), the US imported roughly 9.4 million barrels per day of petroleum in 2015. Of that imported petroleum, 8% (or .76 million barrels per day) came from Mexico. And unlike most of the other countries from whom the US received petroleum, Mexico was receiving nearly the same amount in exports from the US (.69 million barrels per day).

While the history between the two oil-producing superpowers hasn’t always been the smoothest, it appears that this relationship is on the up-and-up.

A Brief History of Mexico’s Oil Independence

In the early 1900s, Mexico was a hotspot for petroleum seekers. Many foreign oil firms—especially those from the United States—came to Mexico in search of land available for purchase or lease. It was during this time that Mexico was able to expand its oil production and exports with the aid of US oil companies invested in Mexican petroleum. This, consequently, contributed to Mexico becoming one of the top three producers of oil in the world.

Mexico’s ensuing revolution and the ratification of their constitution, however, brought sweeping changes to the nation’s oil and gas industry.

On March 18, 1938, all oil resources in Mexico were officially nationalized by President Lázaro Cárdenas, forcing out all foreign-based oil companies. Shortly thereafter, on June 7, Petróleos Mexicanos (also known as Pemex) was formed, which established rights over all matters related to oil production in Mexico.

Despite numerous global boycotts in response to Mexico’s expatriation, their oil and gas sector soared for decades. By the time the 2000s rolled around, Mexico was producing roughly 3.5 million barrels per day and was ranked as the fifth largest producer of oil in 2005.

Mexico’s Need for Oil Co-Dependence in the Present Day

Over the last ten years, Mexico has seen a sharp decline in oil production with each passing year. Recent estimates place production at roughly 2.5 million barrels a day. While Mexico is still one of the top oil producers in the world, the Mexican government recognized the need for help.

Currently, Mexico holds approximately 11 billion barrels of oil reserves, ranked the 10th top oil producer in the world. Be that as it may, they continue to search for new opportunities from US oil companies that can help them sustain, if not grow, that number.

In December 2013, Mexico announced the re-opening of their oil fields to foreign investors. And in 2015, they auctioned off shallow-water production blocks in the Gulf of Mexico. With the government’s energy revenue slipping every year, it has become very apparent that Mexico’s oil and gas industry will need foreign assistance in order to survive.

One of the ways we may see this happen is through upstream companies that can use their expertise in uncovering new oil resources. There are a number of yet-to-be-discovered deep-water and shale reserves off the coast of Mexico, but have not yet been explored due to Mexico’s limited technology and financial backing. Somewhere down the line, Mexico will eventually need foreign investors and support in order to modernize their own oil production capabilities to meet domestic energy demands.

Another opportunity Mexico may seek in the near-future is with US companies to construct natural gas pipelines across the border. According to Opportune LLP, “Other industries which could benefit are midstream with the construction of cross-border natural gas pipelines, storage, and processing since Mexico has increased its natural gas imports from the United States due to gas shortages which has hindered Mexico’s economic growth.” Essentially what this means is that with gas shortages having severe, negative effects on Mexico’s growth, they’ll need those natural gas imports in order to recover.

While Mexico has taken steps to turn around their oil, gas, and energy sector, there may be some issues that will keep them from fixing their situation as quickly as they’d like. Bidding process limitations, government corruption, and potential security issues may all come into play at some point. Regardless, the re-opening of Mexican oil production once again is a cause for celebration for US oil firms—and energy consultants should take note.

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