Pressure grows for Pemex opening

Foreign investor participation is becoming inevitable to allow Mexico to exploit deep water oil reserves

  • By Philip Alexander
  • 21 Dec 2007
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As the Mexican government of President Felipe Calderon prepares to discuss reform of the state oil monopoly Pemex, analysts have told Emerging Markets that foreign investor access is essential to prevent a catastrophic decline in output.

Eduardo Lopez, Mexico specialist for the International Energy Agency (IEA) – the Paris-based policy advisory unit of the OECD – said that among existing oil fields, there were “no clear alternatives” to the giant Cantarell field. This accounts for almost two-thirds of Mexico’s oil output, but a recent IMF report warned that the government needs to prepare for a likely sharp drop in total national oil production from 2012 as the field matures.

The IEA estimates that this decline could begin even earlier, in 2010, but Lopez emphasized that “you can use different assumptions on the steepness of the fall, in the end you will probably come to similar conclusions.” These include Mexico losing its historic status as a net oil exporter within the next decade.

In particular, he noted that efforts to increase production at the existing onshore Ku-Maloob-Zaap (KMZ) field, as well as exploring the Chicontepec field north-east of Mexico City, would only “retard” the decline in the next decade.

“Even though KMZ has outstripped analysts’ expectations, there are simply no viable sources to offset the decline at Cantarell,” Lopez told Emerging Markets.

The success of expanded operations at KMZ and Chicontepec is not assured, he added, because exploration and drilling conditions are “geologically challenging”.

Roger Tissot, director of Latin American country strategies at consultancy PFC Energy in Washington, agreed that the outcome of onshore and shallow water developments is uncertain. As a result, Tissot told Emerging Markets, the Mexican authorities “have no choice but to put Pemex through structural reforms,” including opening up to foreign investment, so that deep water fields can be developed.

Foreign ownership of Mexican oil is currently forbidden under the constitution, and left-wing members of the Mexican congress, together with some in the ruling National Action Party (PAN), have so far opposed radical change. Instead, they advocate using Pemex’s own retained profits – which are set to increase after the fiscal reforms passed in September this year – to step up production in fields that are already in operation or have been explored.

“The problem is they would be spending money on more mature or expensive fields that are small, rather than raising reserves significantly by finding huge fields in deep water in the Gulf of Mexico – that is the position of those on the right of Mexican politics,” said Tissot.

New exploration was all the more urgent, he added, because there would be a time-lag of up to 10 years before deep water fields could come onstream once discovered. This development needs a level of finance and technology not available to Pemex in isolation, but one oil sector analyst told Emerging Markets off the record that foreign companies would not consent to be “mere service providers”.

So far, only Brazil’s Petrobras has agreed to limited technical cooperation with Pemex. The analyst believes the firm sees this as a “beachhead” to greater involvement in deep water projects, on the assumption that the Mexican government will eventually be obliged to change course.

“Foreign companies will want clear profit-share contracts, and may well want to book oil reserves for accounting and valuation purposes,” he warned.

But Tissot argued that there was flexibility for the government to reach a compromise with potential foreign investors, depending on the PAN’s “political pain tolerance”. He pointed out that multinationals are coming to terms with the global revival of national oil companies such as Pemex, which had restricted opportunities for direct ownership of reserves.

“The traditional view of booking reserves as a yardstick for investment is being revised. It is up to the private companies to come up with a creative way to account for these reserves without undermining national sovereignty,” said Tissot.

The pressure on multinationals to change their own approach is also increasing due to growing competition for fresh oil fields “from new players in countries such as China that are focused on energy security rather than owning reserves,” Tissot added.

  • By Philip Alexander
  • 21 Dec 2007

All International Bonds

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5 Credit Agricole CIB 18,157.63 105 5.08%

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