RIYADH: Is nationalisation of energy assets out of fashion, finally?

Monopoly of Mexico’s state-owned Petroleós Mexicanos’ (Pemex) on the energy riches of the country has come to an end. On Aug 11, Mexican President Enrique Peña Nieto signed a bill into law ending the 76-year state control over the country’s vast oil and gas resources.

The new law introduces profit- and production-sharing contracts for foreign companies, as well as licences that allow companies to be paid with the oil and gas that’s extracted in mining projects.

As per details, Pemex would be allowed to keep 83 per cent of the country’s proven and probable reserves, including current oil fields and discoveries awaiting development. However, Pemex will only be permitted to keep about a fifth of prospective resources, including the as-yet undiscovered deposits. Pemex had initially requested for 31pc of prospective resources.

Upon the passage of the bill, Nieto underlined optimism. “With this reform we can extract deepwater oil and more effectively use our great shale deposit to obtain gas that allows us to generate electricity at a lower cost. The country will reduce its dependency on foreign supplies and will guarantee its energy security.”

However, sections of the Mexican society appear uneasy. Left-wing legislators have been strongly criticising the privatisation bill during debates. “This is not an energy reform, this is a clear dispossession of the country’s oil,” underlined Dolores Padierna, a senator of the leftist Party of the Democratic Revolution (PRD), the third largest party in Mexico’s Congress.

Mexico has an estimated 60 billion untapped, onshore and deep-water barrels of crude oil. The most promising part of fields to be explored and most appealing to major US oil majors, are the deep waters of the Gulf of Mexico. Bidders will be vying for the estimated 27bn barrels of deepwater oil reserves in the Gulf of Mexico. The Mexican side of the maritime border is largely unexplored and has no oil in production, a striking contrast to the level of activity in US waters.

Oil majors preferred to remain tight-lipped during the entire process, so as to avoid accusations of interference in a politically sensitive issue. Reports now say, Pemex was planning to partner with Exxon Mobil, Chevron, Shell, BP and Brazil’s Petrobas for deepwater drilling.

The areas up for grabs reportedly include a broad mix, from deep waters to mature fields and nonconventional reserves such as shale gas. The Ministry of Energy in Mexico has estimated a $100bn in investment is needed over the next 10 years to develop Mexican shale resources.

The prolific Eagle Ford shale formation in Texas extends south across the border into Mexico’s Burgos Basin and accounts for two-thirds of Mexico’s shale gas resources. Mexican recoverable shale gas resources are reported to be touching 600 trillion cubic feet mark — the 6th largest in the world. Mexico is also estimated to have 13bn barrels of recoverable shale oil resources.

The policy shift could produce a bonanza of cheap oil and gas in the Americas. “Profound” change could be coming to Mexican oil production, says the US Energy Information Administration. The country’s oil and natural gas production could rise by as much as 75pc compared to EIA’s assessment last year.

The EIA’s International Energy Outlook last year predicted Mexican oil production to decline from three million barrels per day in 2010 to 1.8m in 2025. However, with the new law, the 2014 report, expected to be released this fall, says production will stabilise at about 2.9m barrels per day through 2020, then rise to a high of 3.7m.

If the model succeeds, it may herald a change in the overall direction in many other resource rich areas too. Yet, the gap between the proverbial lips and the cup is still to be covered. Eyes remain glued on Mexico.

Published in Dawn, August 31th, 2014