What the Mexican oil reform really means —for both Mexico and the industry

Now the state of affairs could change. The energy reform approved by the Mexican Legislative may put Pemex “at the head of the national oil company class, after Norway’s Statoil, for a combination of competitiveness, transparency, and bureaucratic autonomy,” according to former Special Envoy and Coordinator for International Energy Affairs at the US State Department David Goldwyn.

The reform basically allows privately-owned firms to enter contracts directly with the Mexican government to explore and drill, and to open gas stations. Pemex’s bureaucratic structure will be streamlined, and politicians’ ability to interfere its management will be stopped. A sovereign fund, controlled by the Mexican central bank, will manage a substantial chunk of the oil revenues, thus limiting the Mexican government’s petrodependency (Pemex still provides one third of the Government’s revenue).

However, the expectations of massive foreign investment in Mexico’s oil industry seem exaggerated. First, the reforms must be implemented in a country that suffers from a massive corruption problem, so the outcome of the whole process is uncertain. Secondly, some industry experts believe that the main investors in Mexico will be small oil companies, interested in occupying the market holes left by Pemex. The same type of small, agile small oil firms that triggered the shale revolution in the US will cross the border and follow the Eagle Ford Basin, which starts in Texas and goes deeply into Mexico. Only the deepwater fields of the Gulf of Mexico will attract the ‘Supermajors’—Shell, Exxon, BP, Chevron, and Total—, although that will take time.

And third, Mexico is next to the southern United States, where that country’s refining facilities concentrate. This means that oil extracted from Mexico will be sent to the US to be transformed, and then shipped back into Mexico. This is already happening: six refineries are processing two thirds of the Mexican oil output, and are unable to work with the best types of crude, which must be shipped to the US. Pemex is obsessed with upstream activities, and barely sends 17 percent of its investment to its aging refineries.

Bottom line is, the reform may be a very good first step yet we must wait and see how it is implemented.