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A New Middle East?
Mexican Senate Passes Energy Reform

Mexico’s Senate voted 95 to 28 in favor of an historic energy reform bill last night, setting the stage for a massive turnaround of the country’s oil and gas production. The bill is now headed to the lower house, which is expected to pass it later this week.  The reform, if passed, will be a defining victory for President Enrique Peña Nieto, who has already made a name for himself as a reformer in his first year in office.

But this is much more than a boost to his legacy; it’s a chance for Mexico to really take advantage of its resource bounty. Mexico has large reserves of conventional onshore and offshore oil and gas, and the world’s sixth and eighth largest shale gas and shale oil reserves, respectively. Despite these riches, the country’s state-owned oil monopoly Pemex has struggled in recent years to keep production up. It added 22,000 employees over the past nine years, yet saw production fall a whopping 23 percent. The fact that the Mexican government treats Pemex as a piggy-bank, deriving about a third of its budget from Pemex revenues, isn’t helping matters. After forking over all that money, there’s precious little to reinvest in oil and gas projects; it’s no wonder then that Pemex is losing the Red Queen’s race to stay in place.

These imminent energy reforms would open up Mexico’s hydrocarbons to foreign firms, which will be eager to bring capital and expertise to bear on a new market. Citigroup commodities guru Ed Morse was bullish on the country’s post-reform energy future, telling Bloomberg, “With reform there will undoubtedly be a spurt of production growth as Mexico is a very rich hydrocarbon area both onshore and offshore…Realistically, it could double the amount of oil that Mexico produces.”

The reforms will be especially beneficial for Mexican shale exploration. Fracking was so successful in the US because of our relatively simple geology—geology Mexico shares—and our deep pool of firms willing to compete with one another to develop the technology and take the risks on unproven techniques and reserves—something Mexico lacks. But that could change if this bill goes through. These changes could help the country realize the Pemex CEO’s dream of becoming the world’s “new Middle East.”

Mexico is poised to join the US and Canada as new major players in the global oil and gas market, and if these reforms are successful, it will make the shale boom a truly North American phenomenon. We hear plenty of dire, dour news out of neighbors to the south; the world watched with bated breath when thieves (unknowingly) hijacked a truck filled with radioactive materials last week. But there’s plenty of reason for optimism.

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  • Jacksonian_Libertarian

    “the country’s state-owned oil monopoly Pemex”

    If the Bill doesn’t privatize the oil industry, and break up the monopoly, it will fail to improve anything. The Monopoly may be able to contract for one of the US drillers with proprietary fracking technology to come develop their oil. But, they are going to have to pay competitively with the profits these drillers are already making drilling on private land in the US. If I was an oil driller I would demand cash up front, from a country that has already proven it will steal everything you develop.

  • Hubbub

    And, suddenly, Mexico will evolve into a first world country with plenty of jobs, good schools, and a surging middle class. The Mexican government and people will, in short, welcome with open arms United States citizens looking for work – work that Mexicans won’t do. Oh, yes, a new day is dawning for our neighbors, nay, our partners, to the south. Optimism – oh, doubt, where is thy sting?

    • El Gringo

      Snide comments aside, Mexico’s economy has performed rather well over the past decade, outperforming the United States every year but one since 2004. The country is rapdily growing into a middle-class economy. While it still faces massive challenges, including it’s continued drug cartels and endemic corruption, Mexico’s future is as bright as any time since the signing of NAFTA. And yes, Mexico does now and will increasingly welcome, with open arms, United States citizens looking for work – work in jobs requiring educated and skilled labor. Such as the petroleum industry.

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