Post-Energy Reform, Mexico Signs First Oil Deal with Russia

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Russia's Lukoil has announced an agreement with Mexico's state-run oil company Pemex for exploration, extraction and cooperation on environmental best practices.

The cooperation memorandum was agreed on the sidelines of the World Economic Forum in Davos, Switzerland, and represents the first foreign partnership to be forged since Mexico moved to reform its energy sector in December and to Pemex's 75-year state monopoly over exploration and production.

Since 1938, Pemex has controlled the entire hydrocarbons production chain in Mexico. In the past decade, however, falling investment and a sharp drop in production from 3.8 million barrels per day in 2004 to 2.6 million barrels in 2013, has forced a government rethink that will open doors to international oil companies.  

The entrance of international oil companies on the scene is expected to lead to a revival of production in Mexico to 3 million barrels per day by 2018 and 3.5 million barrels by 2025.

Mexico's Congress is currently debating and drafting secondary laws to implement a sweeping energy reform bill passed last month that will open up the market to international oil and gas companies.

Congress is expected to issue a draft and negotiate secondary legislation within 120 days, but there remains some ambiguity as to when bidding rounds would actually be opened up to international oil companies, with most predicting sometime next year.

Mexican Congress has 12 months to develop energy-related environmental regulations and to establish the National Center of Natural Gas Control and the National Energy Control Center. Regarding downstream, the Ministry of Energy will issue permits for processing and refining.

Among the companies that have expressed interest in partnering with Pemex to explore untapped deep-water reserves in the Gulf of Mexico are Shell, Exxon, Repsol and Petrobras.

According to Southern Pulse, the language of the bill they are considering now allows for "risk contracts" in which the "owner of the resources [Mexico] transfers the economic risk of exploiting those resources to a third party without lessening its ownership." The third party, called a "contractor" or "operator" receives compensation tied to their success in exploiting said resource, though the state would retain the majority. Companies will not be permitted to count unproduced reserves on their ledgers, although they can list final contracts and projected profits.

At Davos last Friday, Mexico drew in over $7 billion in investment from Pepsico, Nestle and Cisco as a result of economic reforms to boost foreign investment and growth.

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