Mexico's President Peña Nieto Looks To Foreign Investment In Bid To Revive Oil Industry

Michael Teague |

While the story may not have received top billing in US news media, the significance of a bill proposed on Monday by President Enrique Pena Nieto to Mexico’s congress to open up Mexico's oil industry to private investment cannot be understated.

Mexico’s oil industry has been a state-owned and operated enterprise for some 75 years. Petroleos Mexicanos, otherwise known as Pemex, was created in 1938 after then-president Lazaro Cardenas became fed up with the intransigent stance adopted by major international oil companies such as Royal Dutch Shell ($RDS-A) and Standard Oil of New Jersey, the precursor to ExxonMobil (XOM) , during the course of negotiations over the distribution of wealth they were extracting from the country’s large reserves. Both companies were eventually sent on their way as Cardenas nationalized the country’s oil industry, an event that is commemorated every year on March 18.

This long-standing situation looks as though it will soon change, as Pena Nieto’s PRI party has the backing of other political forces such as the PAN and Green parties, giving it more than the two-thirds majority needed in both the lower House and the Senate in order to make constitutional changes.

Over the past eight years, Mexico’s oil industry has languished as output has dropped. Pena Nieto hopes that making room for private investment will bring much needed upgrades, which Pemex has said will allow access to deep-water sources that could add as much as 27 billion barrels to the country’s proven reserves. Mexico currently has the third-largest proven reserves in Latin America with 13.9 billion barrels, behind Venezuela and Brazil, as well as up to 460 trillion cubic feet of shale gas.

Pena Nieto’s bill, which will also put an end to state control of the country’s electricity grid, would split Pemex into two separate companies. Rather than offering concessions to foreign oil majors, however, the bill allows for Pemex to enter into risk-sharing contracts according to which outside companies would be allotted a share of the profits, and would also be able to book a percentage of their reserves under US Securities and Exchange Commission rules.

According to the proposed changes, Pemex would remain under the ownership of the government; taxes paid by the company contribute about one-third of its budget. Still, it is difficult to not notice that the deal already has the full attention of the world’s major oil companies, including those like Shell and ExxonMobil who were kicked out during the nationalization of 1938.

But they aren’t the only ones interested in getting in on Mexico's oil industry. Chevron (CVX) , and the Spanish giant Repsol SA have also expressed interest, as has Latin America’s biggest non-state producer Pacific Rubiales Energy Corp.

[Image: Fountain in front of the Pemex corporate offices in Mexico City, courtesy of Flickr Creative Commons]

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Companies

Symbol Name Price Change % Volume
CVX Chevron Corporation 115.61 0.44 0.38 3,121,631
XOM Exxon Mobil Corporation 88.67 0.35 0.40 4,656,287
ARGNF Argen X NV 15.60 0.00 0.00 0
RDSA Royal Dutch Shell Plc ADR Sponsored Repstg A Shs n/a n/a n/a 0

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