Brush Up On Your Spanish

The United States and Mexico have a long-standing relationship in the oil and gas industry. Mexico is currently the 3rd largest crude oil supplier to the United States, but Mexico also relies very heavily on US refineries in the Gulf Coast. In the early 1900’s, the United States played a significant role in helping Mexico become a top 3 world producer, but the Mexican revolution and a new constitution established national ownership of its hydrocarbons. Mexico’s state owned oil company was created in 1938 and by 1958, they effectively monopolized the entire industry which forced out all foreign/private investment.

After 75 years without any reforms, Mexico passed a constitutional amendment in December 2013 to re-open Mexico’s vast oil, gas, and power sectors to private/foreign investors to partner with PEMEX in response to declining oil production and reserves. Mexico held public auctions in July and September of 2015 where it awarded shallow-water blocks for exploration to successful bidders.

Mexico is currently the 10th largest producer of oil with 11 billion barrels of oil reserves and the opening of Mexico’s oil and gas resources could provide new opportunities for many US companies. For example, upstream companies could provide expertise in tapping new reserves since there are significant deep-water and shale resources yet to be discovered due to limitation in technology and capital. PEMEX’s average production costs are approximately $22 per barrel, which offers a potential for profitability, especially in the current environment of $40 oil.

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. Mexico also needs major upgrades and investment for its downstream operations since its does not have enough refining capacity to meet its own domestic demand. There are still many challenges such limitations in the bidding process with the areas being offered for exploration, corruption within the government, and security concerns.

Despite the current downturn, Mexico’s new energy reforms are unprecedented and created a lot of excitement in the United States. Consultants may need to dust off their old Spanish books since many clients will likely be operating in Mexico in the near future.

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