Much is made of our oil relationship with Canada, but our neighbor to the south is our fifth largest source of foreign oil. Though we don't often talk about Mexico, the country is among the top 20 sources for petroleum reserves in the world and will likely continue to play an important role in our energy future. And now that things are starting to change in the way its state-owned oil company is run, Mexico may have an important impact on your investments as well.
Mexico's inefficiency
Roughly 8% of the crude oil we import comes from Mexico. One hundred percent of that comes from Petroleos Mexicanos, or Pemex, Mexico's national oil company. Pemex has held a monopoly over Mexico's oil production since 1938. At 2.5 million barrels per day, the country is the world's seventh largest producer of oil.
Pemex has never realized its full potential, however, and in the world of state-owned oil companies, it sits at the other end of the spectrum from the successful and efficient Saudi Aramco. Pemex regularly operates at a loss and is known primarily for its clandestine operations, powerful unions, and inefficiency.
Take for instance, Pemex's record in the Chicontepec field. The company has spent $9 billion there to little avail. Upon review of these operations by Mexico's National Hydrocarbons Commission, it appeared that in an effort to meet production goals, Pemex was hastily drilling wells without taking into account the area's geology or the best production techniques -- something that is almost incomprehensible to anyone who has ever read anything about exploration and production. The field is producing 65,000 barrels of oil per day, a long way from Pemex's stated goal of 300,000 bpd.
Pemex has long shunned partnerships with foreign companies, operating devoid of any insight on industry best practices and advances in technology. Perhaps "shunned" is not quite accurate, as Pemex's monopoly status is written right into the country's constitution.
This policy has resulted in a disastrous production record. Overall, the country's production has declined since 2004, and some analysts estimate that if things don't change very, very soon, Mexico will become a net importer of oil as early as 2020.
Winds of change
But there is a very strong probability that things will change, and as they do, expect to see many of the energy companies we know and love make a bid for a slice of the pie.
How soon that change is effected may ultimately come down to politics. Revamping Pemex is a key issue in Mexico's upcoming July 1 presidential election. Oil revenue provides about a third of Mexico's federal budget, and the consultancy Capital Economics projects that opening up Pemex to the private sector would increase Mexico's annual GDP by 0.8 of a percentage point over five years. The three top candidates have different ideas for how Pemex should move forward, ranging from taking the company partially public to leaving things as they are.
Our investments
A number of companies are already active in Mexico, while a handful of others are in the mix to start up projects for the first time. Here are five companies looking to build a presence as Mexico begins to encourage private investment.
Chevron (NYSE: CVX)
Chevron is in the mix to win contracts to 22 fields in Mexico, including some shallow offshore fields. Sixteen private firms are bidding for access, which will be awarded next week to the company that can produce the most oil for the least amount of money.
These are all mature fields in decline, but Pemex hopes to increase production from 13,000 barrels per day to 140,000 bpd. It estimates that reserves for the areas in question total 220 million barrels of oil.
Schlumberger (NYSE: SLB)
Schlumberger is also bidding for the contracts described above. The company won a contract to produce crude from an aging field last October and has been very successful on several Pemex projects so far. Utilizing its technological expertise, Schlumberger has been able to do everything from hydraulic fracturing in the north, to reducing water cut in onshore and offshore wells.
Baker Hughes (NYSE: BHI)
Baker Hughes has had a rough go of it in Mexico in the past, subject to project delays and Pemex budget issues. Oilfield service contracts tended to be written in a way that rewarded the level of drilling activity over production levels. As Pemex moves toward a higher number of performance-based contracts, and increases its efficiency to prevent project delays, we could see a positive impact at Baker Hughes and the other oilfield service companies.
McDermott International (NYSE: MDR)
McDermott is building a drilling platform for Pemex in the Bay of Campeche, the southernmost area of the Gulf of Mexico. The platform is set to be completed during the third quarter of next year.
In a move that strongly benefits Pemex long term, and perfectly illustrates the wisdom in contracting with private companies, McDermott will train Pemex personnel in platform operation and maintenance procedures.
Noble (NYSE: NE)
Pemex recently signed multi-year contracts with Noble for two offshore rigs to operate in the Bay of Campeche. One contract is good for 809 days, the other for 1,049 days. Both rigs will get to work this month and command an $85,000 per day rate.
Foolish takeaway
Mexico's presidential election is a mere weeks away, and we should know in short order down what road Pemex is headed, even if we don't know right now exactly how it will get there. Until then, keep an eye on companies making small inroads into Mexico's energy game, like the stock Fool analysts have dubbed "The Only Energy Stock You'll Ever Need."
