Oil Dorado

Mexico’s discovery of large new oil deposits is likely to kickstart a new production surge reminiscent of its heyday back in the 1980s. But constitutional changes need to be enacted first to enable it to partner with foreign firms to exploit the new finds.

Although Mexico remains the tenth largest crude oil producer in the world, according to OPEC figures, its output has fallen by nearly 9% between 2008 and 2012, as its existing shallow-water reserves discovered back in the 1970s and 80s have begun to dwindle. By contrast, Brazil’s oil production has risen by 14%, while the United States’ has jumped by 30% during the same period.

Mexico’s declining output is not due to a lack of reserves. The country has roughly 42bn barrels, according to recent research by global investment bank Citi. The problem is they are relatively hard to reach.

Citi estimates that 29bn barrels are in reserves deep under the waters of the Gulf of Mexico, with the remainder trapped in shale rock formations across the country. Extracting them requires cutting-edge technology, such as high-pressure, high-temperature horizontal drilling and so-called “fracking” techniques. But decades spent pumping oil from easy-to-reach finds has meant Pemex lacks some of the expertise and technology to take advantage of the huge new discoveries on its own.

As a result, President Enrique Peña Nieto introduced new legislation into Mexico’s Congress in August to allow foreign oil companies to partner with Pemex in exploring these new fields in return for a share of the profits.

Mexico is hugely interesting to us. We know Pemex well, having supported its recent shallow water construction activities for many years now

The move is likely to lead to an influx of foreign oil majors, which have the deep pockets and technical knowhow to help Pemex extract oil from these tricky deposits. The result could be an oil rush in Mexico akin to that currently underway in Brazil.

Carl Day, Upstream Energy Line Underwriter at Hiscox, says: “Mexico is hugely interesting to us. We know Pemex well, having supported its recent shallow water construction activities for many years now. We have also worked with local service and drilling contractors for a number of years, and, through a combination of extensive travel and client visits, we feel we understand the country and its risks well. We hope this experience will put us in a strong position to lead the way in Mexico just as we have in Brazil.”

It could take five to ten years before serious production from the new finds begins. Pemex is currently conducting the seismic testing and exploratory drilling to quantify the reserves; after that, the terms of the auctions for the profit-sharing rights would need to be set before the international oil majors decide whether (and crucially how much) to bid. But the finds have attracted interest from big oil companies, particularly the Americans, as they already have extensive drilling operations in the Gulf of Mexico.

Also, Nieto’s proposal to cut Pemex’s heavy tax burden, so it can invest more in finding and tapping the new oil finds, has provoked a storm of protest. The state oil company currently provides the government with around a third of its budget revenue, but the president’s plan to ease the pressure on Pemex by raising other taxes and cutting costs have sparked political outcry. The president could face a challenge in pushing his legislative reforms through Congress, say commentators, which may delay the start of Mexico’s new oil boom.

But Day adds another cautionary note. “The opportunity is exciting but can also be precarious. In the past, we have seen Pemex’s senior management change soon after a change in government. The state oil company is so important to the economy that its success seems intrinsically linked to that of the current ruling party. But having said that, the potential is enormous. The size of the prize for Mexico and the potential for Pemex to rapidly gain deepwater knowledge by working with the current industry leaders should be a great opportunity for all parties. We hope we can share in that opportunity.”