What Mexico's Oil Reform Means for International Energy Companies

If you thought Texas Sen. Ted Cruz was outrageous when he read Dr. Seuss' Green Eggs and Ham on the Senate floor as part of his protest against Obamacare, head south of the border.  

In Mexico, Congressman Antonio Garcia Conejo took it to another level when he stripped down to his skivvies in opposition of the country opening its doors to private investment into energy projects. He lambasted officials who support the measure, suggesting it was shameful to allow foreign investment into a region that billionaire investor Carlos Slim calls home.

Slim is known for his telecom prowess, but in recent weeks rumors surfaced that Petroleos Mexicanos, or Pemex, Mexico's state-run oil company, was trying to persuade him to up his stake in Repsol, Spain's oil and gas giant, to 10%. Reports, which were originally published in ABC newspaper, said Pemex officials were then looking to Slim to engineer a Pemex/Repsol partnership.

Those rumors were eventually squashed, and while there were talks unfolding among Mexican, Argentinian, and Spanish oil execs, Slim wasn't named among them despite the fact that he's widely expected to participate in Mexico's new competitive energy market.

Something Pemex can't deny is that it has been the poster child of Mexico's failed energy policy, and with that the responsibility for a lagging economy. The Pemex monopoly has had a grip on Mexico's energy industry for almost a century, but has failed to provide adequate investment to capitalize on the country's vast energy resources. If things don't change, Mexico will go from being one of the world's greatest exporters of oil to a net importer of the commodity before the decade is done.

This past weekend Pemex's grip was loosened when the majority of state legislators passed the energy reform bill to usher private investment into Mexico's economy. 

Paving the way
Mexican President Enrique Pena Nieto in July called for investment of $315 billion in the 2013-2018 period into the country's infrastructure, including energy assets via public-private partnerships. Indeed it was vital for Mexico to change its constitution to support foreign investment into the energy sector for this to materialize and provide the supply to meet the rising demand in segments of Mexico's economy such as manufacturing. 

For the past 75 years international oil companies have been sidelined from participating in energy production, and in the meantime Mexico's economy has paid for it. It makes little sense, as Mexico's energy resources are comparable to those found in the Middle East, yet the country has been facing natural-gas shortages and importing liquefied natural gas from Africa amid an infrastructure fail. All of this has been blamed for slow economic growth in the region.

To his credit President Nieto seems to have turned the tide during his first year in office. In a Platts article, however, Energia's George Baker suggested that while Mexico's energy reform makes for good headlines it misses on execution.  

The bold step would have been to have announced an IPO for a Pemex 2.0, a mixed capital company with open shares in the NYSE. It would be this company that would enter into [joint ventures] with foreign oil companies in Mexico and beyond.

Mexico's economy has been crippled by declining direct foreign investments, which were slashed nearly in half in 2012 compared with the 10-year average, according to The Economist. Part of the decline was a consequence of Banco Santander's (NYSE: SAN  ) decision to spin off its Mexican unit in a deal that raised $4 billion. Perhaps Mexico should reconsider Baker's IPO idea. 

Conclusion 
Sen. Cruz's rendition of a Dr. Seuss classic drummed up some attention, but did little to change the outcome of the policy he was so dramatically fighting against. In Mexico's case, it appears the rhetoric surrounding the pending reform won't interfere with the much-needed private capital making its way to where it's needed, in a floundering energy industry and the broader regional economy.

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