North America isn't the only country about to experience an energy revolution; our neighbor down south is about to embark on one as well. For decades, Mexico's vast energy reserves were taboo for foreign energy companies. But perpetually declining production over the past few years and a new president is about to change all that.
Time for a change
Enrique Pena Nieto, Mexico's new president, campaigned on reforming Mexico's lagging energy sector by amending the country's constitution. Since 1938, Mexico's constitution prohibited private companies from Mexico's oil and gas reserves, leaving it all to a state run monopoly known as Pemex.
Pemex's crude output has fallen from 3.4 million barrels a day in 2004 down to just 2.54 million bpd in October. This has been a huge drag on the Mexican economy, which is why Nieto plans on revamping the entire sector.
Part of the revamp will include allowing private companies to operate Mexican oilfields and enter profit-sharing agreements with Pemex. While Pemex will still retain full ownership of its reserves, the output is jointly owned. This, of course, is subject to change as the amendment hasn't passed yet.
ExxonMobil (NYSE: XOM ) is one of several oil majors that has expressed interest in investing in Mexico. Pemex needs ExxonMobil's expertise in developing the Gulf of Mexico because that's where Mexico sees roughly half of its potential recoverable reserves.
29 billion reasons to explore
Pemex sees 29 billion barrels of potentially recoverable oil equivalent in its part of the Gulf of Mexico. 29 billion barrels would be over double the size of Pemex's current proven reserves, which would substantially increase Mexico's oil production if it can be tapped into.
ExxonMobil is heavily invested in the Gulf of Mexico and has plenty of experience in deep water drilling. ExxonMobil discovered the Julia oilfield back in 2007 and has spent $4 billion to bring production online by 2016.
ExxonMobil sees six billion barrels of recoverable oil equivalent that can be extracted if you know how to drill the ocean floor through 7,000 feet of water. While Pemex lacks the resources to successfully develop the Gulf of Mexico's oilfields, ExxonMobil doesn't. ExxonMobil can leverage its knowledge of deep water drilling with Pemex to fully exploit 29 billon barrels of valuable hydrocarbons.
The buck doesn't stop with ExxonMobil. Pemex has reached out to Chevron (NYSE: CVX ) as well. Chevron is another key player investing billions in the Gulf of Mexico.
Jack's Big Foot
Chevron is going to spend $12 billion on expansion projects in the Gulf of Mexico, with part of that going to build two deep-water drilling platforms. Chevron's two new platforms, Big Foot and Jack St. Malo, are going to tap into the Gulf.
Chevron will operate the Jack St. Malo platform 7,000 feet above the ocean floor, while the Big Foot platform will operate 5,000 feet above the bottom of the ocean. Chevron wants to bring production online from its new investments by the end of 2014.
Chevron's experience in the region makes it an important company for Pemex to win over. Like ExxonMobil, Chevron has expressed interest in Mexico and has the necessary experience to develop the Gulf's hidden treasures.
Mexico needs to reverse the decline of Pemex's production. Its economic future depends on it. The company is the source of 35% of Mexico's revenue, and if production keeps falling, budgetary pressures could intensify. Mexico needs Pemex to fund itself, but lacks the capacity to explore deep below the ocean to increase output.
Thankfully, international experience exists with ExxonMobil and Chevron in the Gulf of Mexico, and both are more than willing to share in the production growth. ExxonMobil and Chevron both are about to complete projects that involve drilling through 7,000 feet of water, and if all goes as planned there is no reason why it can't do the same thing in Mexican waters.
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