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The floodgates are about to open in Mexico's oil industry

Article - July 18, 2013
President Peña Nieto is looking to overhaul Mexico's oil industry, opening it up to the private sector for the first time since the 1930s
PRIVATE ENERGY FIRMS WILL SOON BE ABLE TO PARTNER PEMEX TO CONDUCT DEEPWATER DRILLING AND OIL AND GAS PRODUCTION
After eight decades of a state monopoly on Mexico’s oil industry, the government is introducing groundbreaking reforms that will open up Mexico’s reserves to the private sector and foreign investors. 
 
In September, a bill is due to be passed which will allow private energy firms to conduct deep-water drilling and produce oil and gas through joint ventures with Petroleos Mexicanos (Pemex), Mexico’s state-owned oil company. 
 
Mexico’s oil production has been dwindling; output has fallen from 3.4 million barrels per day in 2004 to 2.6 million currently, mainly due to the fact that it hasn’t had the technology, infrastructure or capital to go further offshore where huge reserves are understood to lie. Pemex fears that the country could become a net oil importer by 2020 if the country does not tap into and utilise its large offshore reserves.
 
“In 2003 we received a lot of criticism in the media over why Pemex did not venture into exploring deep waters. We were compared with Brazil, which was already operating in deep seas, while Pemex was concentrated in shallow waters. Now, because of necessity, Pemex has to go further and explore the deep sea,” says Carlos Morales Gil, Pemex Director for Exploration and Production.
 
To reach untapped deepwater oil reserves and deposits of shale gas (Mexico could possibly have the fourth-largest reserves of shale gas in the world), Pemex needs billions of dollars in investment. The only way it is going to raise this money is by allowing international oil companies to have a presence in Mexico’s lucrative offshore oilfields. 
 
“It’s obvious that Pemex doesn’t have the financial capacity to be in every single front of energy generation,” said President Enrique Peña Nieto in an interview in June in London.  “Shale is one of the areas where there’s room for private companies, but not the only one.” 
Considering the prospective resources, we could have sufficient supplies of hydrocarbons for approximately 100 years.

Carlos morales Gil,
Pemex Director for Exploration and Production
Should the 46-year old president be successful in introducing these game-changing reforms, he will have achieved something that every government in Mexico has dreamed of achieving for 20 years but has been unable to do so.
 
“We are not in the process of privatising Pemex. But we need to expand its capabilities. Pemex needs more resources. If we want more affordable gas, better production levels, we need to open up to private participation through methods that have been tested in other countries,” said the president at a speech at Chatham House in London.
 
Under the new reforms, Pemex will continue to be wholly owned by the government and have complete control of onshore and shallow offshore fields. Private companies will be allowed to have a share in the profits from deepwater operations, but Mexico’s oil and gas resources will remain in the state’s possession. This is a significant step for a country that is viewed as having the some of the world’s most restrictive energy laws; experts say only North Korea’s energy market is more closed.
 
The deep offshore operations made possible by the new reforms should significantly boost oil and gas output in Mexico (already one of the top 10 oil producers in the world), which will subsequently accelerate general economic growth. 
 
“This sector is fundamental for sustained economic growth for the next 20 or 30 years,” says the Pemex boss.
 
“Mexico has proven reserves of hydrocarbons for about 10 years and in total reserves we have a margin of supplies close to 30 years. Considering the prospective resources, we could have sufficient supplies of hydrocarbons for approximately 100 years. That opens up a very important commercial platform for the country,” he adds. 
 
“Mexico can grow in its production of 2.6 million barrels per day to 3 million over the next six years and with a goal of reaching 3.5 million by the 2025.”
 
Mexico nationalised its oil industry in the late 1930s, following a conflict between international oil companies and workers’ unions, which led to mass strikes that paralysed the country. The government at the time decided to take the side of the workers and later expropriated all the oilfields run by foreign companies, leaving all hydrocarbon resources in the hands of the state. Pemex has controlled Mexico’s oil and gas sector since then and is now Mexico and Latin America’s biggest company, the largest contributor to government revenues and an employer of 139,000 people. It is the world’s seventh-largest crude producer, with annual sales of more than US$100 billion.
 
“Pemex was born as a consequence of an institutional conflict and was not built or created by investors; it was created to generate value for the resource owners, who are all Mexicans,” explains Mr Morales.
 
“But despite that, Pemex is not a company that has remained static. During its 75 years of existence, it has evolved. It has found a way to improve the management of its resources, because it knows what the profitable investments are and which do not suit it. Besides this, we have the best technical team that gives strength to all processes and raises our standards.”
 
Although private sector participation has been largely restricted in Mexico’s oil industry, Pemex has hired contractors such as Schlumberger and Halliburton to perform work for a fixed fee. The Pemex director says it has also formed successful alliances with British companies Petrofac and BP.
 
“Petrofac has worked in the area of mature fields and has managed to position itself as a leading oil company working in Mexico. A strategic alliance was signed with BP for the safety of deepwater drilling activity. Partnerships with British companies have moved in the right direction.” 
 
Looking towards its future, of course Pemex cannot ignore environmental issues and is committed to developing sustainable energy, and hence a sustainable company. On the issue of the environment, Mr Morales assures that the company has cleaned up its act. “We stopped injecting water in the extraction process and began to restore and clean the environmental liabilities impacted during oil extraction since the last century.” 
 
  It has also significantly reduced the amount of flared gas it produces in the extraction process. “This year, the World Bank in London recognised Pemex for being the company with the lowest consumption of gas in these processes in the world,” he adds. “This does not mean that we have reached where we want to, but we are aware that it is a good start.”

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