Oil Disorder South of the Border

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Oil politics have recently bubbled to the surface down in Mexico. Seeing as the country was our second-biggest supplier last year, we gringos had better pay attention.

Over the past week, a controversial energy reform package has been approved by the Mexican legislature to increase the state oil monopoly's independence in various ways, including its contractual flexibility with foreign companies. It's arguable that very little will change under this bill, but the mere whiff of privatization was enough to send the opposition into the streets.

The exploitation of Mexico's oil wealth has long been a sticky issue. The debate traces back about a century, to the days when Mexico's earliest oil discoveries made the country one of the most promising exploratory regions in the world. Royal Dutch Shell (NYSE: RDS-A  ) (NYSE: RDS-B  ) and other folks with expertise swooped in and helped bring the country into premier producer status. This strong foreign element didn't sit so well -- does it ever? -- and the entire industry was nationalized in 1938.

To this day, Mexico's national oil company, known as Pemex, remains the only game in town. Only the state is allowed to process and distribute oil and natural gas. Petrobras (NYSE: PBR  ) and Repsol YPF (NYSE: REP  ) have tentatively tiptoed into the Mexican oil patch as service contractors in recent years, but this doesn't offer the commodity price leverage enjoyed (or suffered) by an operator.

Mexico desperately needs to have the knowledge of companies like Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) injected into its energy sector. As my Foolish colleague David Lee Smith discussed last year, the country's top field (Cantarell) is declining rapidly. While exacerbated by Hurricane Ike disruptions, the field's 36% year-over-year decline for the month of September is still striking. As recently as 2005, around two-thirds of the country's crude came from Cantarell. Now it's more like one-third.

The International Energy Agency concluded several years ago that Mexico, absent a major overhaul, was headed for net oil importer status by 2030. Other estimates place this reversal somewhere in the next decade. The government leans heavily on Pemex for tax revenue to fund its social programs. Without those exports, things may get ugly, fast.

Bringing it back home, the evaporation of Mexican oil exports would be a real double-whammy for America. Not only would we lose a geopolitically palatable supplier, we could also have a seriously destabilized nation right at our doorstep.

Petrobras is a Motley Fool Income Investor recommendation. For more dashing dividend-payers, check out the service free for 30 days.

Fool contributor Toby Shute doesn't have a position in any company mentioned. The Motley Fool has a disclosure policy.

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  • Report this Comment On October 29, 2008, at 3:08 PM, TexasLonghorns wrote:

    If this happens and Mexico becomes even more destabilized watch the FLOOD of illegal aliens across our border to get even worse. The Mexican government is corrupt to it's core so if I was a CEO of any company I wouldn't invest a dime down there!

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