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North American Energy Boom
Energy Reforms Promise Bright Future for Mexico

As things currently stand, Mexico’s energy fortunes look grim. The graph above, sourced from the Energy Information Administration’s International Energy Statistics, shows a remarkable decline in Mexican oil production over the past decade under the control of Pemex, the country’s state-owned oil firm. Pemex has been running the Red Queen’s race, expending more energy and effort (having hired some 22,000 additional employees since 2004) just to try and maintain production levels. The days of a state-run monopoly controlling Mexico’s oil reserves are coming to a close, however, as President Enrique Peña Nieto recently signed off on a raft of reforms that will invite private competition in an attempt to reinvigorate oil and gas production. The EIA reports:

On August 11, Mexico’s president signed into law legislation that will open its oil and natural gas markets to foreign direct investment, effectively ending the 75-year-old monopoly of state-owned Petróleos Mexicanos (Pemex). These laws, which follow previously adopted changes in Mexico’s constitution to eliminate provisions that prohibited direct foreign investment in that nation’s oil and natural gas sector, are likely to have major implications for the future of Mexico’s oil production profile. As a result of the developments in Mexico over the past year, EIA has revised its expectations for long-term growth in Mexico’s oil production.

Although there are many complexities to the new reform and many details that still must be settled before the reforms can take effect, reform is expected to improve the long-term outlook for growth in Mexico’s petroleum and other liquids production. Analysis in EIA’s upcoming International Energy Outlook 2014 (IEO2014) will include the potential effects on upstream oil exploration and production and the potential for foreign participation.

The EIA’s outlook for Mexican production has changed considerably with the announcement of these reforms, as the following graph indicates:

Foreign firms can tap unconventional and offshore reserves more effectively than Pemex, and that will provide Mexico a leg-up to joining in on the North American energy boom. A number of hurdles remain to be cleared for our southern neighbor, but its future is looking brighter than ever, and that’s something worth cheering.

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  • Jacksonian_Libertarian

    All this talk about things getting better for Mexican oil production is just hot air. As long as Pemex is a state owned monopoly nothing will change. For real change Pemex would have to be broken up and sold, and that just isn’t in the cards. To be broken up and sold the Mexican government would have to admit that they made a huge mistake nationalizing the oil industry to begin with.

    We can expect massive resistance from Pemex and its political cronies, to any outside oil interests looking to develop Mexican oil. With a history of nationalizing the oil industry, no business is going to want the risk of entering the Mexican market, when much less risky plays are all over the world.

    At the moment the only companies with the experience and proprietary knowledge are developing in the US, and until they no longer see the US as the most profitable place to develop, they are unlikely to go elsewhere.

    • Corlyss

      I agree as long as the implication is a better life for Mexicans such that they’ll stay in their own damn country. I had an exchange with someone earlier here about whether Mexico was or wasn’t a failed state, with me taking the position that it IS a failed state and the only thing that keeps the US govt from classifying it, or any of the other Southern Banana Republics as such is what it would do to the political classes that make their money off illegal immigration from those same countries. And lo, what should I read but a fresh article in the most recent issue of Economist:

      “SET beside a lake two hours’ drive from Mexico City, Valle de Bravo brands itself a Pueblo Mágico (“Magical Town”). Normally it is a place where the capital’s wealthy residents come to sail, jet ski and show off their SUVs. Now its cobbled streets look as if they had been cursed. It is patrolled by soldiers, marines and federal police bristling with machineguns. Holidaymakers stay away.

      “Everyone is responding to a spate of kidnappings in the town and the surrounding pine-covered mountains that serves as a reminder of how vulnerable parts of Mexico remain to violent crime—even the playgrounds of the rich. That is an impression President Enrique Peña Nieto has spent more than 18 months trying to dispel in his drive to reform the economy and attract foreign investment. On the rare occasions when he discusses crime, he argues that his security strategy is making the country safer.”

      “Some security experts have high hopes. “It came late and it’s smaller than expected, but it will be welcome if it strengthens the federal police,” says Rafael Fernández de Castro, a Mexican academic. Others say it is a symptom of a security strategy that focuses more on appearances than realities. “The gendarmerie is an aspirin to fight a cancer,” says Ernesto López Portillo, head of the Institute for Security and Democracy, a policing consultancy. “Mr Peña is basically repeating history by creating more police. What we need is better police.” ”

      I wish the guy luck with his program, but until they get better people, they ain’t gonna see much improvement. I just wish the US govt would take the threat that is so obvious to so many security specialists as seriously as the criminals take their business opportunities here in the US.

      • El Gringo

        I’m still sticking with my argument that Mexico is far from a failed state. Yes, parts of the country face enormous challenges but the vast majority of the country is peaceful and developing rapidly. You can’t really compare Mexico to say, Nicaragua and definitely not to a Somalia or Pakistan.

        U.S. media loves, loves, LOVES to play up the narco violence in Mexico although it does not reflect reality for the majority of the country. Here, allow me to post another story from the Economist:

        “Ferguson, a suburb of St Louis, Missouri, erupted after Mr Brown, who was black, was shot six times and killed by Darren Wilson, a white policeman, on August 9th. Each day the protests start peacefully, with demonstrators holding their hands in the air and chanting: “Hands up, don’t shoot!” But night after night, they have degenerated into mayhem, with bottles thrown, shops looted and police dishing out tear gas, flash grenades and rubber bullets.”

        “In this context, “it is hard to point to anything that Ferguson police did [since Mr Brown’s shooting] that was not wrong,” says Gene O’Donnell of the John Jay College of Criminal Justice. They left Mr Brown’s body on the street for four hours. They withheld the name of the officer who shot him. They confronted peaceful demonstrators and rioters alike with a stunning show of force—armoured cars with snipers on top—and precious little tact…”

        “On August 18th Barack Obama joined a bipartisan chorus of disapproval, saying that America needs to “maintain a distinction between our military and domestic law enforcement”. The Pentagon supplies local police all over America with surplus military kit of the sort seen this week on the streets of Ferguson…”

        “The police in and around Ferguson have shot and killed twice as many people in the past two weeks (Mr Brown plus one other) as the police in Japan, a nation of 127m, have shot and killed in the past six years. Nationwide, America’s police kill roughly one person a day (see chart).”

        Sounds like the U.S. is descending into a chaotic police state where law enforcement is better armed than the military and more than willing to use force.

        Or not.

        The U.S. can gnash its teeth and wring its hands regarding illegal immigration and narco violence but if it really wants to do something then reforming U.S. drug laws and promoting economic growth in Mexico (and Latin America at large) will do more to resolve both issues than building the Great Wall on the border.

        • Corlyss

          You know, I just don’t see any point in dialoging with someone who can make the analogy you have. If you can’t see the difference between the two, I’m bereft of words that could possibly make a dent in your misconception. If you were going to point to anything, you’d have made more sense pointing to the no-go zones in Chicago for spectacular loss of the state monopoly on the use of force analogous to what’s happened and happening and will continue to happen in the foreseeable future in Mexico.

    • El Gringo

      “With a history of nationalizing the oil industry.”

      It happened once, in 1938. And that was only after the foreign oil companies refused to address some very real issues and tried to steamroll the Mexican oil workers and government. It backfired, and they lost.

      Oil companies have grown much more savvy over the ensuing century which is why they can do busines in places like Libya, Iraq, and Sudan. Mexico is not Bolivia, Venezuela, or even Argentina. I’ll bet American businesses will be knocking down the door to get access to the Mexican market. It has worked very well for Brazil since Petrobras relaxed its ownership regulations.

      Pemex is an ingrained part of the Mexican national psyche so the fact that these reforms even have a chance is quite amazing. Coupled with the legal assaults on the Teachers’ Union and TelMex, this who process really is quite astounding

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