Mexico Opens Oil Fields, Expects Rush Of International Companies Across The Border

CREDIT: AP/Rebecca Blackwell

Mexican President Enrique Pena Nieto, center, Senate leader Raul Cervantes Andrade, left, and House Speaker Jose Gonzalez Morfin hold up signed documents at a ceremony to mark the signing of a historic energy reform bill, at the National Palace in Mexico City, Monday, Aug. 11, 2014.

On Wednesday, Mexico outlined long-anticipated updates to its fossil fuel sector that are designed to usher in an energy boom led by the arrival of international companies with extraction expertise and financial savvy. The government made final the announcement that for the first time since 1938 private companies will be allowed to bid on prospective oil and gas resources, thus ending state-run Pemex’s monopoly.

Mexico’s oil production has been declining for the last decade, and has dropped about one million barrels a day to 2.5 million bpd — and even this number might be exaggerated due to water being included in its oil output.

Under the new laws, Pemex will maintain 83 percent of Mexico’s proven and probable reserves, around 20 billion barrels of crude oil equivalent, while it will only keep a fifth of prospective resources, including yet-to-be-discovered resources. The rest will be made available to international companies, which are especially keen to start developing offshore resources in the Gulf of Mexico, an area that has yielded serious output from the U.S. side but is yet to be tapped in Mexico. Pemex has become associated with bloated bureaucracy and corrupt practices and the arrival of international companies is meant to bring efficiency, expertise, reduced costs, and deep pockets to the country’s oil sector.

The government has identified 109 blocks for the first round of bids and expects investments of around $50 billion over the next four years, including partnerships with Pemex. Officials hope to raise national production to three million barrels a day by 2018.

Tim Samples, a professor at the University of Georgia who follows the Mexican oil sector, told the Wall Street Journal that “the extent and scope of the areas to be offered in the first round show that the government wants to move as quickly as possible and make it as broad as possible,” and that “it looks ambitious, I wasn’t expecting such a broad array of projects.”

At the same time that Mexico is bracing for an oil boom the country is also seeing significant growth in renewables. According to new research by Bloomberg New Energy Finance, investment in clean energy in Mexico totaled $1.3 billion in the first half of this year, compared to $1.6 billion in the whole of last year. At this rate 2014 will be a record year for renewable energy investment in the country, and more increases in wind and solar development are expected in the next couple years.

Electricity is expensive in Mexico and a surprising amount comes from costly diesel generation.

“Yet these countries have unusually good wind, solar, geothermal, and hydro-electric power resources,” BNEF’s Latin America analyst Yayoi Sekine said of Central America. “Using these to meet much of the additional electricity demand in coming years, and replacing that costly oil and diesel power, makes sense. It is becoming a key plank in the region’s energy policies.”

Mexico also recently signed a climate pact with California and there is speculation that the country is moving toward developing a carbon market that could eventually work in conjunction with California’s cap-and-trade program.