Will U.S. Companies Gas up in Mexico?

There's at least a reasonable probability that you've spent time basking on the beaches of Cancun, Acapulco, Cabo San Lucas, or one of Mexico's other glorious getaways. Nevertheless, despite the country's proximity to the U.S., I'm willing to wager that, even if you're a longtime energy aficionado, you're less familiar with its oil and gas scene than you may be with those of some more distant Latin American locations, such as Brazil or Venezuela.

Mexico clearly has vast reserves of oil and gas. Indeed, its northern shale fields just might contain reserves amounting to nearly 700 million cubic feet of gas, making the country potentially the world's fourth-largest supplier of hydrocarbon, behind only China, the U.S., and Argentina. As for crude oil, the country's production has been sliding steadily, from an average output of 3.3 million barrels per day (bpd) in 2006 to 2.54 million bpd in 2011. However, our neighbor to the south is outranked only by the country to our north as a supplier of crude to the U.S.

The vastness of the Eagle Ford
Much of the country's gas lies to the north, in an extension of the Eagle Ford, the hot Texas gas and oil play that has taken the U.S. energy industry -- and that of much of the rest of the world -- by storm in recent years. You see, geology doesn't always follow the dictates of state or national boundaries, and Mexico's portion of the play extends from its Rio Grande border with the Lone Star state, south through the Burgos basin, and along the Gulf of Mexico all the way to the Vera Cruz basin. That's a distance of nearly 700 miles.

But while more than 550 wells were producing in the U.S. Eagle Ford as of last summer, at the same time only five wells had been drilled south of the Rio Grande by Petroleos Mexicanos, or Pemex, Mexico's national oil company. What's causing both the disparity in gas well drilling and the steep decline in Mexico's oil production? The answer is simple: In Brazil, for instance, Petrobras (NYSE: PBR  ) , the state-run oil company, has welcomed technical, operating, and financial assistance from the likes of Houston-based Anadarko Petroleum (NYSE: APC  ) .

In Mexico, however, for the past 75 years the oil and gas has constitutionally been the province of Pemex and the country's people. While service companies and drillers are permitted to provide assistance -- Diamond Offshore (NYSE: DO  ) currently has five rigs working in for Pemex in Mexican waters -- the state company is the sole operator allowed to ply its trade in the country. Unfortunately, Pemex lacks the expertise and the financial wherewithal to take anything but minimal advantage of the country's vast resources.

Changes in the works?
But for probably obvious reasons, this state of affairs may be on the verge of changing. Enrique Pena Nieto, Mexico's new president, has announced a desire to induce private investment into his country's energy scene. As Pena Nieto noted toward the end of 2012, this likely wouldn't involve privatizing Pemex, a la Petrobras. But as he said, "I have publicly talked about Mexico's need to open ourselves up to participation of the private sector in the energy sector."

The rub is that such a move would involve altering the company's constitution. And that may be only a starting point. As Roger Wallace of Dallas-based Pioneer Natural Resources (NYSE: PXD  ) -- and Eagle Ford operator -- noted last year, "Without reforms, you're not going to see a significant amount of foreign capital going into Mexico."

The crude picture
In addition to the vast amounts of natural gas that's hiding in Mexican shale, the country's ability to reverse the declines in its oil output will at the very least require a little help from its friends. Most of the country's oil production occurs in the Bay of Campeche off the Gulf of Mexico, near Veracruz, Tabasco, and Campeche states. The two primary producing locations are the Ku-Maloob-Zaap and Cantarell fields. Nearly a half-dozen years ago, I told Fools that the giant Cantarell was, from the perspective of its daily output, a shadow of its former self.

That hasn't changed, but there's clearly fresh oil to be uncovered off the country's coast. Indeed, just 60 days ago, Pemex announced a discovery little more than 15 miles from Villahermosa, Tabasco, that may contain 500 million barrels of crude oil. in any event, 2013 may usher in big changes in the Mexican oil picture and reverse three-quarters of a century of national solipsism.

In the meantime, in addition to Diamond Offshore, oil-field service companies already present opportunities for investors to participate in the country's energy picture. Halliburton (NYSE: HAL  ) , for instance, has already chalked up success in helping Pemex to produce oil from the unconventional Chicontepec basin, northeast of Mexico City. And last year, Schlumberger (NYSE: SLB  ) , which dates its Mexican involvement back to 1943, was named one of the winners in an auction of rights to revive the declining Panuco field in northern Mexico.

The Foolish takeaway
Clearly, potential changes in the world of Mexican energy will, at the very least, provide interesting theater during the next couple of years. In the meantime, circumstances in the country constitute one more example of the desirability of Fools keeping a close eye on the services side of the all-important energy sector.

Yet another oil-field services company whose products find their way to Mexico is National Oilwell Varco. NOVis clearly among the safest investments in the energy sector due to its industry-leading 60% market share. This company is poised to profit in a big way. Its customers are both increasing the number of new drilling rigs as well as updating an aging fleet of offshore rigs. To help determine if NOV is a nice fit for your portfolio, check out our premium research report with in-depth analysis on whether NOV is a buy today. For instant access to this valuable investor's resource, simply click here now and claim your copy today.


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