Mexico: Oil Renaissance?

Amidst uncertainty stemming from the renegotiation of NAFTA, Mexico has awarded 70 oil contracts to a wide range of oil companies through a competitive and transparent bidding process. (Photo: CNH)

Will liberalization spur a Mexican oil sector renaissance?

Inter-American Dialogue 

U.S. energy company Talos, Mexico’s Sierra Oil & Gas and the United Kingdom’s Premier Oil on July 12 announced a “historic and significant” oil discovery in shallow waters of the Gulf of Mexico, which the consortium says is the largest find anywhere in the world in the last fi ve years. The Zama well is estimated to contain between 1.4 billion and 2 billion barrels of light oil. How important are these latest discoveries? Will the new finds spark a flurry of interest—and more significant investment—from international and domestic investors to Mexico’s oil and gas sector? Will the discoveries and increasingly populist tendencies in Mexico’s political races ahead of next year’s elections tempt politicians or officials to modify the country’s oil reform agenda or change its rules for foreign investors?

Lourdes Melgar, Robert E. Wilhelm fellow at the Center for International Studies at the Massachusetts Institute of Technology, and former Mexican deputy secretary of energy for hydrocarbons: Mexico’s landmark energy reform is providing tangible results only three years after the enactment of the secondary legislation to the 2013 constitutional reform. July 12 of this year proved to be a memorable date, with the awarding of 21 oil contracts in the bids of Round 2.2 and 2.3, and the announcement of a major oil discovery in the shallow waters of the Gulf of Mexico. The consortium formed by Mexico’s Sierra Oil, the United Kingdom’s Gas Premier Oil and the United States’ Talos Energy as operator successfully drilled exploration well Zama-1, finding light crude oil and associated natural gas, which the consortium estimates contains between 1.4 and 2 billion barrels of gross original oil in place. If confirmed, this will be the third-most significant discovery in Mexico’s offshore in the past 20 years. The news came three months after the Italian company ENI successfully drilled Amoca-2 in a fi eld that Pemex previously discovered.

The liberalization of Mexico’s upstream sector is already a success story: in the midst of a sharp decline in oil prices and political uncertainty stemming from the renegotiation of NAFTA, Mexico has awarded 70 oil contracts to a wide range of oil companies through a competitive and transparent bidding process. Areas that otherwise would have been idle are being developed by companies that are bringing in expertise, technology and a fresh look at geology. Zama-1 will come into production as a new administration takes office in Mexico. The results of the reform will speak for themselves in terms of oil production, revenue and job creation. The technical design and constitutional nature of the reform should ensure its long-term viability. Energy security needs should overcome ideological electoral rhetoric.

David Shields, independent energy consultant based in Mexico City and editor of Energía a Debate: The Zama oil find could easily be overstated, since it is based on the drilling of just one well. But it is clear that several companies now are anxious to be seen as the heroes of this energy reform, just as the government wants to herald the reform as a success to the markets and to its political rivals. The markets are fast to pick up on any good (or bad) news related to Mexico these days. But is it hard for anyone to argue that Mexico has an alternative to the reform agenda, which is attracting oil companies from all over the world. Whatever government comes into power in Mexico in 2018—even if it is not hostile to the current one—will want to at least tweak the reform to put its own stamp on future energy policy.

But if the reform agenda is seen to be working and shows tangible results, it will be hard for a future administration to justify a change of course. Some fear that a left-wing populist government could gain power next year and reverse reforms, but the left is severely fractured and has no support or reasonable arguments for reversing course and trying to rehash the old state-monopoly model. Also, the failure of a populist leftwing government that has lived off the revenues of the national oil industry in Venezuela certainly does not go unnoticed. So, it looks like investors can remain confident about investing in oil and gas in Mexico.

Benjamín Torres-Barrón, head of the energy, mining & infrastructure practice group at Baker & McKenzie in Mexico: These discoveries are extremely important and play a crucial role in the early years following the inception of the energy reform. It is not only the fifth-biggest discovery anywhere in the world in the last five years, but many energy experts also argue that it is one of the world’s 15 largest shallow-water discoveries in the last 20 years. The discoveries will generate interest from both international and domestic investors, since the well is the first one found by a private company in a new field in Mexico, after almost eight decades in which the state had a monopoly on the sector. The finding demonstrates the opportunity that the Mexican oil sector represents, and it will also generate good inertia for the rest of the upstream companies. I am sure this will trigger an increase in the number of proposals and participants in the following CNH bid rounds. Because of the proximity of this discovery to next year’s presidential election, it is a matter that may be used in the political discourse of each candidate. Some may defend this discovery as one of the most important achievements thus far during Mexico’s energy reform, since it represents exactly the objectives pursued by this reform: new capital, new participants and a spirit of innovation that leads to new local jobs and concrete government revenues for Mexico. Expected participation from the Mexican state in the profits of the project is 68.99 percent, plus all applicable taxes and fees throughout the life of the project. States like Veracruz, Tabasco and Campeche will clearly benefit from their proximity to the contractual areas. However, there may be voices attempting to revive nationalism and return to the philosophical idea that only Mexico’s government should exploit its oil and is not to be shared with private companies.

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor


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