Our team landed in Mexico shortly after President Peña Nieto started his campaign to change the constitution to allow foreign investment in Mexico's upstream hydrocarbon sector. Getting to the hotel was a three-hour journey from the international airport, because protests had erupted around the capital due to several proposals that involved labor, education, and fiscal reforms.
President Peña Nieto's reform movement kicked off with education reform, quickly followed by the arrest of the teacher's union leader, Elba Esther Gordillo, known as La Maestra (the teacher), for embezzlement. The arrest tracks a script out of the playbook used by former President Carlos Salinas when he took down Pemex union boss Joaquin Hernandez Galicia for arms trafficking, in 1989. Peña Nieto is demonstrating that he has the same resolve as Salinas, who opened up the Mexican economy in a process that culminated in the passage of the North American Free Trade Agreement in 1994.
Opposing the hydrocarbon reform is Andrés Manuel López Obrador (AMLO), from the left-leaning PRD (Democratic Revolution Party), who was the runner-up in two consecutive presidential elections. He has promised widespread protests. AMLO cut his teeth as a union organizer in the state of Tabasco, rallying cohorts to occupy oilfields after Salinas put Pemex's union boss behind bars. AMLO also paralyzed the Federal District several times with hundreds of thousands of protesters. Another left-leaning politician, Cuauhtémoc Cárdenas, son of Lázaro Cárdenas, who nationalized the oil industry in 1938, has also come out against the constitutional reform.
Ownership of hydrocarbon rights remains an emotional issue in Mexico. The Mexican Congress sponsored a survey where 55% of the respondents characterized foreign investment in the country's oil patch as a threat to sovereignty.
A bigger threat to sovereignty is the 20% decline in oil production since 2004, from 3.47 million barrels to 2.59 million barrels a day in 2012. Although Pemex has been able to roughly stabilize oil production since 2011, many experts believe that Canterell and the KMZ fields (Ku, Maloob and Zaap) will face a steeper decline going forward. Proven reserves now stand at only nine years of production.
Minor reforms to hydrocarbon-enabling laws in 2008 have yet to stem the decline. The country needs a constitutional reform with a broader legal and regulatory framework that accelerates economic pragmatism and reserve accumulation. Mexico is now decades behind in modernization and technology, such as developing its shale reserves and deepwater offshore fields.
Currently, 30% of Mexico's national budget is funded by proceeds from Pemex. Both the PAN (National Action Party) and Pena Nieto's PRI (Institutional Revolutionary Party) have voiced support for constitutional change to the hydrocarbon law. The difference is that the PAN would lay out the enabling laws along with the constitutional reform vote in order to gain support for the measure. The PRI has put forward a short and ambiguous bill to get the constitutional change first; then it would pass the enabling laws to provide clarity.
Regardless of the strategy it pursues, Mexico needs a constitutional reform to amend its hydrocarbon law to reverse the decline in production. The last Mexican president who saw a rise in production during his tenure was President Vincente Fox of the PRI. Although Peña Nieto is pushing hard, it is unlikely that his presidency will reverse the fall-off. Estimates provided by the Secretary of Energy suggest that if Mexico could open up the industry quickly, oil production could reverse its decline and by 2018—the last year of Peña Nieto's six-year term—hit 2.8 million barrels per day on the way to 3 million barrels per day by 2020. Let's hope that the reform passes quickly and these production targets are reached.
Recommended Reading
Diamondback Closes $26B Endeavor Deal, Forming Last Permian ‘Sandbox’
2024-09-13 - Diamondback Energy’s merger with Endeavor Energy Resources forms a company with pro forma production of 468,000 bbl/d (816,000 boe/d) on total Permian acreage of about 838,000 net acres.
Occidental Closes $12 Billion Acquisition of CrownRock
2024-08-01 - Occidental has already started the process of reducing debt incurred through its acquisition of CrownRock LP with an $817 million sale in late July of Delaware Basin assets to Permian Resources.
Post Oak Minerals Acquires Permian Basin Interests for $475MM
2024-07-29 - Post Oak Minerals V, an affiliate of Post Oak Energy Capital, has closed 10 transactions since the onset of 2024, including 24,000 net royalty acres from APA Corp. subsidiary Apache.
Permian Resources Announces Financing Moves Following Oxy Deal
2024-07-29 - Permian Resources’ will offer cash for its senior notes Due 2026, among other financing moves, following a July 29 agreement to buy Delaware Basin assets from Occidental Petroleum for $817.5 million.
Debt, Politics and Gas: Ecopetrol Explains Rejecting $3.6B Oxy Deal
2024-08-16 - Ecopetrol said its decision to not move forward with a $3.6 billion deal to acquire Oxy’s CrownRock LP assets was mainly due to the impact on its leverage, but also political shifts under Colombian President Gustavo Petro.
Comments
Add new comment
This conversation is moderated according to Hart Energy community rules. Please read the rules before joining the discussion. If you’re experiencing any technical problems, please contact our customer care team.