The flood of North American crude oil is set to become a deluge, analysts say, as Mexico dismantles a 75-year-old barrier to foreign investment in its oil fields.
After almost a decade of slumping output that has degraded Mexico’s take from a $100-a-barrel oil market, President Enrique Pena Nieto is seeking an end to the state monopoly over one of the biggest crude resources in the Western Hemisphere. The doubling in Mexican oil output that Citigroup Inc. said may result from inviting international explorers to drill would be equivalent to adding another Nigeria to world supply, or about 2.5 million barrels a day.
That boom would augment a supply surge from U.S. and Canadian wells that Exxon Mobil Corp. predicts will vault North American production ahead of every OPEC member except Saudi Arabia within two years. With U.S. refineries already choking on more oil than they can process, producers from Exxon to Conoco Phillips are clamoring for repeal of the export restrictions that have outlawed most overseas sales of American crude for four decades.
“This is going to be a huge opportunity for any kind of player” in the energy sector, said Pablo Medina, a Latin American upstream analyst at Wood Mackenzie Ltd. in Houston. “All the companies are going to have to turn their heads and start analyzing Mexico.”
The revolution in shale drilling that increased U.S. oil output to a 25-year high this month will allow North America to join the ranks of the world’s crude-exporting continents by 2040, Exxon said in its annual global energy forecast Thursday. Europe and the Asia-Pacific region will be the sole crude import markets by that date, the Irving, Texas-based energy producer said.
Exxon’s forecast, compiled annually by a team of company economists, scientists and engineers, didn’t take into account any changes in Mexico, William Colton, the company’s vice president of strategic planning, said during a presentation at the Center for Strategic and International Studies in Washington on Thursday.
Opening Mexico’s oilfields to foreign investment would be “a win-win if ever there was one,” said Colton, who described the move as “very good for the people of Mexico and people everywhere in the world who use energy.”
The bill ending the state monopoly was approved by the Mexican Congress on Thursday and will be sent to Nieto for enactment after a majority of states ratified the proposal. San Luis Potosi, Puebla and Yucatan were among states that approved the legislation over the weekend, bringing the number of those that have endorsed the plan to 17 of 31.
The new law allows for production-sharing contracts, or licenses where companies get ownership of the pumped oil and authority to book crude reserves for accounting purposes. The contracts will be overseen by government regulators.
Though some foreign companies already operate in Mexico under service contracts with Petroleos Mexicanos, or Pemex, the reform could increase foreign investment by as much as $15 billion annually and raise economic growth by half a percentage point, JPMorgan Chase & Co. said in a Nov. 28 report.
A doubling in production as suggested by Citigroup’s Ed Morse would put Mexican output at 5 million barrels a day, an unprecedented level for Pemex, the state oil company created during nationalization in 1938.
The U.S. and Canada are expected to produce a combined 17.6 million barrels of crude and ethanol in 2015, rising to 18.7 million in 2020 and 19 million in 2040, according to the U.S. Energy Information Administration.
During that time span, combined U.S. and Canadian demand is expected to remain stagnant at 21 million barrels a day, the Washington-based Energy Information Administration said in its annual energy outlook in April.
A doubling of Mexico’s output may be slower to realize than the most bullish predictions as companies confront barriers in accessing capital and human resources needed for development, said Riccardo Bertocco, a partner at Bain & Co. in Dallas.
An increase of 1 million barrels a day in output is the most realistic upper limit of what Mexico could achieve by 2025 based on the cost for new infrastructure, competition for new fields and opportunities all over the U.S., Bertocco said.
“The opportunities are there, but they are still far from being materialized,” he said. “The CEOs we’re speaking with are cautiously optimistic, but we don’t think it is game-changing in the short or medium term.”
Drilling in Mexico will beheld back by a lack of infrastructure, such as pipelines, in some of the potential shale developments. The government will need to decide on details for development such as tax rates, royalty structures and standards for booking reserves, Kurt Hallead, an analyst at RBC Capital Markets, wrote in a note to clients.
It will take time to organize and conduct bidding rounds for licenses, and additional exploration, such as seismic tests, will need to be done, Hallead said.
“We are not expecting any significant impact from the reform to be felt in the next two years,” he wrote.
Business, Pages 23 on 12/17/2013