Mexico Is Fed Up With Being Overshadowed by the United States Oil Boom, but Won't Do Enough to Change It

If Mexico really wants to revamp its oil and gas industry, PEMEX will need to be willing to hand over control of more assets than what it is willing to so far.

Apr 13, 2014 at 10:45AM

Mexico

Source: commons.wikimedia.org/pixeltoo

The lure of private capital investment can be a very powerful thing in the world of oil and gas. Former state-owned enterprises like Petrobras (NYSE:PBR) and Statoil both raised billions in capital by going public, and the desire to attract private investment is leading the Chinese government to root out graft and corruption in its three large oil firms. Mexico has heard the siren call of private investment, and the oil-and-gas boom in the United States has Mexican officials hoping that success will head south of the border. Unfortunately, based on regulations the government is looking to implement and the amount of assets that the national oil company PEMEX is willing to give up, Mexico is trying to have its cake and eat it, too. Let's take a look at why Mexico is looking to attract foreign investors and why it will be a struggle based on the regulations it wants to put in place. 

Pemex

Source: PEMEX investor Presentation

PEMEX: The Mexi-can't oil company
The oil industry has been a point of national pride in Mexico ever since the entire industry was nationalized back in 1938, and the day it went under state control is celebrated as a national holiday. Based on the performance of PEMEX over the past decade, though, there isn't much to celebrate. Over the past decade the company has seen its production slip by over 25% to 2.4 million barrels per day. Even worse, PEMEX has lost over $50 billion during that stretch.

Aside from this issues of overstaffing and very generous pension plans, its money-losing woes can also be attributed to an inability to economically access some of the nations more complex oil and gas reserves both in the offshore regions as well as its own rather large shale assets.  

Turning around the prospects of the Mexican oil industry has been one of the primary goals of President Enrique Pena Nieto's administration. It recently changed the country's constitution to allow foreign companies to claim Mexican oil on their respective reserves and allow them to bid for working interest in certain fields. The goal of this monumental change is to encourage investment from other companies as well as bring in technical and operating expertise to access some of its more hard-to-reach oil reserves, such as the Chicontepec basin as well as the western edges of the Eagle Ford shale formation that has been such a success in Texas.

The country believes that by opening up the Mexican oil industry to foreign investment, it will be able to grow production to 4 million barrels by 2025. To do that, it analysts estimate it will need to increase capital spending from the $25 billion today to over $60 billion per year. 

You need to give up something to get something

Mexico Potential In Gulf

Oil operations off the coast of the U.S. and Mexico (pipelines and wells in red). There are lots of opportunities for PEMEX to grow production in offshore waters, but they need to cede control of some of these assets to make it possible. Source: PEMEX Investor Presentation

Even though there has been constitutional changes, the country still has several barriers in the way that can prevent any real foreign investment. One of the items that is floating around is to implement local content laws very similar to the ones in Brazil. These would mandate that a certain percentage of all equipment and labor in the oil industry come from Mexican sources.

In theory, these sound like a good idea. They protect the local workers and should in turn boost the domestic economy. These rules have been in place in Brazil for quite some time, but they have in some senses backfired as development costs for Petrobras are considerably higher than other parts of the world and it deters from foreign investment. Just look at the last bidding rounds that took place in the pre-salt formation off the Brazilian coast. Despite being one of the most prolific oil finds in the past decade, Petrobras and its partners only submitted a minimum level bid partially because of the high operating costs. 

What is also making Mexico's investment options unattractive is the rather small amount of oil and gas assets PEMEX is making available. The company wants to retain control of over 83% of its current proved reserves and make about 4 billion barrels of oil equivalent in proved and probable reserves available for foreign investment. Not exactly the most generous of offers for a country that wants to nearly triple capital expenditures. 

What a Fool believes
Mexico may want to return to prominence as an oil and gas producer, but it will take a much more open market to get it there. Looking at the offer that Mexico has put forth so far makes me think of a bad trade in sports: It is trying to acquire star talent by only offering marginal bench players in return. To really get the country's oil production and profitability back on track, it will need to be willing to open up the oil market more than what it plans to.

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Tyler Crowe has no position in any stocks mentioned. You can follow him at Fool.com under the handle TMFDirtyBird, on Google+, or on Twitter @TylerCroweFool.

The Motley Fool recommends Petroleo Brasileiro S.A. (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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