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The reform of oil and gas exploration in Mexico enhances North American energy security

The reform of oil and gas exploration in Mexico enhances North American energy security

After more than seven decades, oil and gas exploration in Mexico is open to foreign capital.

The recent move to open oil and gas exploration in Mexico to foreign investment was nothing short of revolutionary. Mexican energy reform comes three quarters of a century after Mexico shut foreign interests out of its oil and gas industry in order to flex its muscles of national sovereignty. The country’s most spoken slogan at the time, “el petroleo es nuestro,” was a statement that gave proof to the fact that Mexico could stand up to the United States, and, on the grounds of perceived and historical national interests, prevail. Nationalization of oil and gas exploration in Mexico, at the time, included the expropriation of US industry assets. After five years of disagreement on the terms of separation, Mexico and the foreign oil companies that were excluded from the country came to terms on a settlement in 1943. US firms that had had asssets that were subject to expropriation received a settlement, which was a fraction of book value as compensation for their forfeited properties. The agreed upon amount was twenty four million dollars. Fast forward seventy-six years, and the Mexican and entire North American oil and gas exploration and production panorama is an entirely different one. It is one which makes the future of energy security on the continent appear to be quite promising.

Because, during the years following 1938’s nationalization of oil and gas exploration in Mexico, the country’s state oil company, Pemex, became increasingly inefficient, and corrupt, the present time became a propitious one to advance and achieve Mexican energy reform. Bringing this state of affairs to fruition after decades of national monopoly has been the result of Mexico’s growing confidence in its ability to successfully navigate the world economic stage, as well as a recognition of the fact that the country does not have the indigenous capital resources that are required to bring critical oil industry infrastructure, know-how and technology up to the level necessary to keep pace globally, as well as to create the conditions required to spur growth across a larger swath of the Mexican economy.

The reform of oil and gas exploration in Mexico that has recently passed will effectively end Pemex’s seven plus decades monopoly on such activities. Under the provisions of the reform achieved

by the government of president Enrique Pena Nieto, Pemex will be classified as a “state productive enterprise” by Mexico’s government and will compete with foreign companies that will now be allowed to operate in the Mexican domestic energy market. The Mexican government, after having promoted free market policies for the past two plus decades, that are embodied in the NAFTA, now realizes that in order to boost energy production for the benefit of its broader economy and the country’s citizenry, it must partner with foreign capital in a mutually beneficial and collaborative manner.

According to recent article in Foreign Affairs, despite Mexico’s new openness to the joint development of its oil and gas energy resources, some aspects of recent reform associated with oil and gas exploration in Mexico reflect remnants of a history throughout which the government tightly held the reins of the national industry. For instance:

  • “the government has decided to allow risk contracts in petroleum and production.””Unlike service contracts previously used in Mexico, risk contracts base earnings on actual production rather than on services rendered.” “Risk contracts generally take the form of concessions, which grant private companies ownership rights to a petroleum reserve.” Mexico, however, will now grant licenses,”which permit private ownership after the petroleum leaves the wellhead;”
  • the government is “empowered to select the fields that will be put up for bid” for oil and gas exploration in Mexico. The Energy Ministry will play a role in establishing the terms of contracts,while the Finance Ministry will set the fiscal terms. According to Foreign Affairs, these include issues dealing with “fees, royalties and tax rate.”
  • the reform of oil and gas exploration in Mexico, does not fully privatize Pemex, but designates it as a “productive state enterprise”. The reform gives Pemex the “exclusive right to work eighty-three percent of Mexico’s currently producing oil fields and twenty-one percent of its prospective reserves.”

Even after the reform of the terms of oil and gas exploration in Mexico, Pemex will continue to hold its position as the country’s dominant force in the sector.

The outcome of the reformative actions taken with respect to oil and gas exploration in Mexico, as well as the results of the current shale oil and natural gas energy boom that is kick starting the US energy sector will be the creation of a continental market that will, over time, do much to secure North American regional energy independence. In addition to resulting in lower energycosts which will ignite increased activity in North American manufacturing and other oil and gas dependent industries, the energy partnership that is developing between the US, Mexico and their, northermost neighbor, Canada will do much to advanced the interests and security of all parties, as well as will instigate the creation of:

  • A “common market structure’ that creates efficiencies for all involved parties:
  • A set of “harmonized regulations” that create transparency and the ease of conducting oil and gas exploration in Mexico and throughout North America;
  • A growing cadre of Mexican, American and Canadian “engineers, geologists, andd geophysicists” capable of providing the human resources necessary to sustain and propel the industry forward in order to create long term energy security in North America.
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