PRD Presidential Candidate Obrador Holds Final Campaign Rally In Mexico City

The impending restructuring of Mexico’s national oil company – Pemex – from a state-owned monopoly to a public-private entity will have a profound effect on the energy security and economy of Mexico. It may also have far reaching implications for its North American neighbors, the United States and Canada, who are both experiencing what has been described as an energy revolution due to prolific oil and gas production growth coming primarily from shale resources.

There is significant potential for offshore production in Mexico, where reserved deposits of crude oil amounting to 26.5 bn/barrels of oil available for extraction has recently been discovered in the Gulf. The combined 2013 oil production of Canada, Mexico and the United States totaled 16,826,000 b/d, and while Mexican output declined 1.1% year-on-year from 2012 to 2013, that relatively minor production decrease was overwhelmed by surging production growth from its NAFTA partners, where output rose 13.5% and 6% in the US and Canada respectively from 2012 to 2013. This compares with OPEC’s 2013 oil production which totaled 36,829,000 b/d, or about 42% of total world output. North American oil production accounted for a little under 20% of the 2013 world total, but if Mexico arrests its production declines while the US and Canada continue their upward oil production growth trajectory, a North American energy alliance could begin eroding OPEC market share to the encouragement of North American industry leaders. These developments have attracted interest from a number of the world’s major oil companies, most notably Chevron who have begun negotiations with Pemex over securing offshore drilling rights.

OPEC members will be casting a worrying glance towards potential US-Canadian-Mexican public-private ventures that could facilitate the emergence of a new trifecta oil bloc. This historic development could potentially challenge OPEC’s leverage over supply and demand economics in world oil markets.

However, there are still a number of issues that must be resolved if large-scale international investment is to occur in Mexico’s energy industry. Firstly, there are a number of domestic issues that could potentially deter external investment. Although reform legislation has passed through the Mexican senate, there is widespread dissent from the opposition National Action Party and the general public over relinquishing the country’s exclusive ownership rights of natural resources. The degree to which IOCs will be able to book reserves is still being determined. It must be remembered that as a developing nation, Mexico has many sectors of its economy that require heavy investment. The risk of high-level corruption and a low redistribution of profits from oil and gas production along with relatively weak long-term social infrastructure could only serve to intensify opposition to the reform and any foreign investment that could follow.

Apart from the deep-rooted nationalist symbolism that state-owned companies like Pemex represent, there is also the fear that investment from IOCs could lead to a failure to harness the growth dividend. This has traditionally been a common reoccurrence in numerous developing countries with large reserves of natural resources, particularly fossil fuels, as a result of the so-called resource curse. Pemex has already stated they intend to maintain exclusive rights over certain territories with high reserves and disputes over the negotiating procedure could be long and contentious, particularly in the Gulf, where the US and Mexican territories are split along nautical lines.

IOCs, such as Chevron and Shell will also consider the political and financial risk of investing in a country where there is continued drug-related violence through the cartels controlling large areas around the northern border with the United States.

The potential for cross-border collaboration with the United States could represent an opportunity for long-term mutual benefit for the two countries in terms of investment, energy security and could possibly ease tensions over immigration reform. If the proposed restructuring of Mexico’s energy industry can be implemented, the potential prosperity from foreign investment and employment opportunities may not only stem the tide of emigration to the United States but possibly result in an influx of returning migrants.

In terms of international energy markets, Mexico’s regional neighbors in Central and South America, such as Venezuela, Brazil and Argentina will be concerned over how this radical legislative reform will affect their offshore and onshore production and investment prospects. Like Mexico, these countries have significant oil and gas reserves – including shale resources in Argentina’s case. The relative speed of Mexican legislative reform – after years of prevarication – shows the priority given by the Mexican government in securing foreign investment ahead of these countries in order to overtake them as an energy and investment hub for the entire Central and South American region.

OPEC, whose members have long exerted considerable influence over the world’s oil supply and demand economics, using it to their political leverage on numerous occasions, could view international investment from Western IOCs in Mexico as a potential threat to their privileged position, particularly if hydrocarbon resources can be exploited from tight geologic formations as successfully as they have been north of the border. The transformation of the United States and Canada into major oil and gas exporting nations and the geostrategic ties of the three nations could lead to a harmonized energy bloc. This production wave could also be buttressed by the United States’ military and economic might that could challenge OPECs previously uncontested superiority.

The long-term prospects for the Mexican energy industry and its impact in geopolitical terms will only become apparent in the years to come. However, despite the domestic, regional and international constraints mentioned, Mexico’s energy sector potential is considerable and the legislative reform could be the first step taken by a rejuvenated energy player emerging to shift the dynamics of the old order. Whether it materializes will require shrewd economic policy and diplomacy on behalf of the Mexican government to attract sustainable investment that will benefit the entire country and make it a much stronger, regional actor.