Will Security Problems Hamper Mexico's Energy Boom?

Mexico has attracted attention for passing secondary laws that will end its state oil monopoly and open the country's borders to new types of foreign investment. As Juan Montes explained in a recent article, "Under the new law, foreign and private domestic energy companies will be able to explore, produce and refine oil for the first time since Mexico nationalized its oil industry in 1938 and transformed oil into a symbol of national pride. State-owned oil giant Petróleos Mexicanos, or Pemex, was created that year, and has since been the only company allowed to exploit the country's oil and gas resources, turning Mexico into the world's ninth-largest oil producer."

Economic consultant Luis de la Calle explained, "This is a new, important step in that same direction of creating markets. Transforming the energy sector into an energy market should lower power costs and Mexico's industry would be unstoppable against China and even the U.S."

Mexico is now open for investment by foreign oil companies. It remains to be seen what the impact of this reform will be.  (Photo credit: Wikipedia)

There are opportunities for foreign companies both offshore and in the shale fields of northwestern Mexico, south of the Texas border. The Perdido Fold belt which is located on the U.S.-Mexican maritime boundary could contain between ten and thirty billion barrels of oil. The area is likely to be of interest for oil majors such as Chevron, BP, and Royal Dutch Shell are already operating in areas close to Mexican waters.

Mexico's state-owned oil company Pemex will likely still control the bulk of Mexico's oil and shale production. In mid-September the Ministry of Energy will decide what blocs it will open to private investment, but deepwater projects and difficult shale plays are likely to be opened to competitive biddings. These projects require expertise and funding that Pemex lacks.

In a recent article for Oil & Gas Journal Rachel Seeley explained "The Ministry of Energy will ultimately decide which geographic areas to make available for international bidding and when they will be unveiled. The ministry will also be responsible for deciding which contract types will be applied to which areas, evaluating bids, awarding contracts, and later monitoring exploration and production plans to ensure contract compliance and maximize productivity."

It is still not clear whether foreign companies will be offered production-sharing deals, profit-sharing agreements, pure service contracts, or licenses rather than concessions. Companies considering investing will wait to see how attractive the terms of the deals are. Then, the first round of bidding will likely take place after the July 2015 mid-term elections. Once the deals start taking effect, however, the impact on Mexico's economy could be quite significant. During an April 2014 visit to Washington DC Pemex chief Emilio Lozoya said, "The impact on the economy will be great."

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