For 75 years, Mexico's state-controlled Petróleos Mexicanos held a monopoly on oil drilling in the country. Although governments do some things better than the private sector, drilling for oil isn't one of them. The U.S. Energy Information Administration, or EIA, projected that maintaining the monopoly would lead production to fall from 3 billion barrels a day in 2010 to 1.8 billion by 2025. No wonder Mexico is opening up its oil market to foreigners.
What a difference a day makes
For Mexico, ending 75 years of complete control wasn't a small feat. It required a change to the Mexican constitution and the signature of Mexico's president on August 11. However, that little bit of ink changed a great deal for Mexican oil production. Now, instead of Mexico's 3 billion barrels a day in 2010 being the high water mark, production is finally expected to increase.
In the near term, production will still be lower than 2010's level, but by 2025 the EIA expects production to surpass 3 billion barrels a day. By 2040, production is projected to be 3.7 billion barrels a day. The change? Allowing foreign companies to lend a hand, using their expertise to improve Petróleos Mexicanos' results. And, of course, share in some of the riches.
Going forward, foreign companies can participate in one of three ways: profit sharing, production sharing, or licensing. Profit sharing allows companies to receive a percentage of the profits resulting from energy sales. Production sharing will give companies title to a percentage of the oil and gas produced. And licensing would effectively pay foreigners for their efforts in oil or natural gas instead of cash.
And this couldn't have come at a better time. It's becoming increasingly difficult for international oil giants to find new sources of oil and gas. So much so that they have been forced into increasingly inhospitable locals. ExxonMobil (NYSE:XOM) is a poster child for such exploration.
For example, during the company's second quarter conference call David Rosenthal, head of investor relations, highlighted Exxon's efforts off of Russia's Sakhalin Island. A new platform there "set a world record for installation of the heaviest integrated topside structure, weighing over 42,000 tons and using the world's largest ocean-going barge to carry and then set the structure." The platform, the Berkut, "is now the largest offshore oil and gas production platform in Russia." This is a clear display of ExxonMobil's technological capabilities, but also an example of the lengths needed to find new oil.
And then there's the recently announced drilling taking place in the Kara Sea, part of the Arctic Ocean, above Siberia. This particular effort involved Exxon being dragged on stage with Russian President Vladimir Putin and being called an "old and reliable partner."
Why is drilling in Russia such a big deal? First, because both of these projects are in difficult-to-drill locations. Second, because Russia is a difficult nation to do business with. It is, for example, currently facing the Western world's ire over its moves in Ukraine -- including energy industry sanctions. So not only is Exxon working in difficult waters, it's also swimming with the sharks.
Mexico, a friendly neighbor
That's why the opportunity for energy industry giants like Exxon and BP to lend a helping hand to Mexico is such a great opportunity. Everyone ends up a winner. Mexico gets to reverse the downward trend in its oil production -- a really big deal since revenues from Petróleos Mexicanos accounted for nearly a third of the Mexican government's revenues last year.
Oil giants, meanwhile, are gaining access to valuable reserves from which they were once barred. And they get to work in a well-known region with a reliable partner that is close to good customers like the United States. Keep an eye on the oil deals that come out of Mexico. They will be big news for the country and could be even bigger news for the oil companies that sign them.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Seadrill. The Motley Fool owns shares of Seadrill. 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.