Mexico: The Missing Piece In The North American Energy Revolution
In December 2013, Mexico‘s Congress approved the energy reform that ends Pemex‘s 75-year monopoly on crude production. Although full implementation of the reforms will require the Mexican Congress to pass additional secondary laws no later than April 20, 2014, the constitutional amendments have already paved the way for the complete overhaul of the sector.
Although oil production has experienced a steady decline over the past decade, Mexico’s dependency on foreign gas imports played a key role in instigating change. Despite the 1 million barrels per day (mbpd) of lost production – on par with the production levels of a country like Colombia – soaring oil prices compensated for the decline in volumes and so failed to significantly impact the national psyche. While production declines were steep, the increases in prices were even steeper, subduing any sense of urgency. On the other hand, volatile gas prices and concerns over energy security have made a bigger impression on government and industry leaders, setting the stage for the most significant transformation of the country’s energy sector since 1938.
Mexico still ranks among the world’s ten largest oil producers and is the third-largest in the Western Hemisphere, despite the decline in oil production by 25 percent from its 2004 peak to just over 2.5 mbpd. Mexico has abundant oil and natural gas reserves, but they are increasingly difficult and expensive to reach, far below the waters of the Gulf of Mexico and trapped in shale deposits deep below the earth. Whereas new technology has unlocked oil and gas sources around the world, particularly in the United States, Mexico has fallen behind. Until now, that is.
By eliminating a restrictive legal framework and ending the monopoly of the national oil company, Petróleos Mexicanos (Pemex), the reforms are expected to generate many gains for the country by boosting private investment and foreign participation in the industry. According to President Enrique Peña Nieto’s aides, the ultimate goal here is to stimulate Mexico’s sliding oil production and catapult the country into the developed world by tapping vast pockets of oil and natural gas deep under the earth and sea.
Taking a broader view, the repercussions of the energy reforms will extend well beyond Mexico’s borders.
The United States has also been experiencing an energy revolution of its own. For the first time in two decades, in 2014 the US will import less oil than it produces as a result of the continued development of shale resources. Ranked third globally in terms of production, the US in 2013 produced 9 mbpd and the US Energy Information Administration expects this figure to expand to 9.5 mbpd by 2016, the highest since production last peaked in 1970.
All around the world, the continued surge from US shale developments have headlined energy discussions, from China to the Middle East and Europe and represents a new element in global geopolitics.
Further north, Canada too has become a major energy player thanks to swelling oil sands production. So much so that, in a 2006 meeting with world leaders, Prime Minister Stephen Harper declared his country to be an “emerging energy superpower”. Since then, Canada has indeed boosted its output and is currently the sixth largest oil producing country in the world yielding just under 3.6 mbpd in 2013.
Although estimates by industry experts on Mexico’s production increases resulting from a robust and seamless implementation of the energy reforms vary wildly, optimism is rife. Riccardo Bertocco, partner at Bain & Co. in Dallas, told Bloomberg that an increase of 1 mbpd 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 US.
At current production levels, the US, Canada and Mexico together already represent 18.2 percent of world crude output. By comparison, OPEC member countries produce approximately 40 percent of the world’s crude oil.
As shale continues to flourish in the US, coupled with a strong growth in Canada’s energy sector, the development of a thriving industry in Mexico covering conventional and oil and gas, as well as shale, could really upset the status quo and transform North America into a significant oil producer and exporter. We truly are witnessing a monumental shift in the balance of energy power in the world, one that is likely to have a profound impact not only on global energy market dynamics, but also on geopolitics and more. For Mexico, and for the energy sector internationally, this is a very big moment.
Article by Roslan Khasawneh