March 18, 2013

Reforming Mexico’s Moribund Oil Industry

Today marks the 75th anniversary of the nationalization of Mexico’s oil industry.

In a January post on, I wrote that one of the top energy trends to watch in 2013 will be developments around Mexico’s oil industry. Here is an excerpt from that post:

Mexico’s oil industry has been in a perpetual state of decline. In its heyday, the country was the world’s second largest oil producer, just behind the United States. But when the industry was nationalized in the 1930s, it all began to go south. Private foreign companies – with their capital, skills and technology – left the country and spent years seeking compensation from the government to cover their losses. In their place, the industry was left with the state-owned Petróleos Mexicanos – Pemex. Unfortunately, Pemex never quite brought the same resources to bear as its foreign competitors and has been plagued by technical deficiencies that have contributed to poor management of its oil fields and their subsequent decline. One need only look to Mexico’s Cantarell super-giant oil field as a case in point: production has sharply declined from about 2 million barrels a day (mbd) in 2004 to 400,000 barrels a day in April 2012. It bodes poorly for a government that relies on oil revenue for roughly 35 percent of its budget.


But all that is starting to change and Mexico’s moribund oil industry may be on the rebound.  Since his election in July, Mexican President Enrique Peña Nieto started the move toward privatization of the oil industry, which would help bring the necessary capital, technology and skills to onshore oilfields that have been in decline and the deepwater oil fields that have effectively gone untapped. If the industry does turn around, Peña Nieto may singlehandedly be responsible for unleashing the country’s energy potential, potentially adding as much as 1.6 mbd of petroleum to North American output by 2020.

Mexican President Peña Nieto has run into some opposition in Congress, particularly around the future of Pemex. On Sunday, Peña Nieto tried to allay concerns that his support to allow private investment in the country’s oil sector would be the death knell for Pemex, which has long been heralded as a symbol of the 1938 nationalization order and national identity.  Pemex will not “be sold, nor will it be privatized,” he said. Instead, Pemex would be “modernized and transformed.”

Peña Nieto's effort to assuage concerns about Pemex’s future comes after the company announced it increased its proven reserves for the second straight year, largely as a result of ultra-deepwater oil discoveries. Proven reserves are technically recoverable oil – though Mexico claims much larger probable reserves that are not considered recoverable today, due to a combination of operating conditions, costs and technical hurdles. Of course, the ongoing debate around Pemex is whether it has the necessary experience and expertise to safely tap into those ultra-deepwater proven resources, or whether Mexico should reform its laws to allow more experienced international major oil companies to acquire the rights to explore and produce those proven resources.  As I foreshadowed in January, this is going to be an interesting issue to watch. 

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