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Houston Business Journal, March 27, 2009

Friday, March 27, 2009

Looking south to the future: Mexico becomes viable option for energy needs

Houston Business Journal - by Ford Gunter

As America looks to solidify its energy supply for the next decade, experts are examining current facts and geopolitical realities.

Amid talk of energy independence and replacing oil with alternative energy sources, industry specialists in the short term are focusing on prominent sources of American oil: Saudi Arabia and the politically sensitive Middle East; Venezuela and its controversial president; Russia and its increasingly problematic administration; Nigeria and its civil strife; Canada and its difficult oil sands, once all the rage at $140 a barrel, but now not so much.

And there’s Mexico, a strong trading partner and America’s third-largest supplier of imported oil, covering about 11 percent of all oil imported in the United States and 6 percent of all oil consumed here.

But Mexican officials are now trying to address domestic increases in population, automobiles and overall gasoline and electricity demand in the face of four straight years of dwindling production and decaying oilfield infrastructure. Mexico’s flagship field, the Cantarell, is on the way out. Its new hope, the Chicontepec Basin, has plenty of oil — estimated last month by De Goyler & McNaughton to equal about half the reserves in all of Saudi Arabia — but it’s hard to get, which is a problem for Pemex and its aging infrastructure. Fortunately, it’s attractive for others because of pockets of light and super-light crude.

To counter the widening gap between domestic demand and supply, the Mexican Congress voted in the fall to open up the nation’s notoriously closed-off oil and gas industry, paving the way for outside companies to sign agreements with Petróleos Mexicanos, or Pemex, the national oil company that ranks among the world’s largest.

For some, like Eduardo Pérez Motta, chairman of Mexico’s Federal Competition Commission since 2004, it’s the only way to solve Mexico’s “original sin.”

“We are not using our resources in an efficient way,” Motta said at a World Affairs Council luncheon at the Petroleum Club of Houston on Feb. 27.

Motta has been chief of advisers to the minister of trade and industrial development and worked in the Ministry of Finance. He’s also a veteran of the North American Free Trade Agreement negotiations. His February talk was bluntly titled “Opening the Mexican Economy,” and his presentation left even less to the imagination.

“It is important to promote market efficiency to face economic crisis,” he said. “You can promote efficiency in your markets through competition.”

Motta said foreign companies with factories and facilities in Mexico list banking, telecommunications, electricity and transportation as the most overpriced and problematic, and backed it by rattling off numerous international organizations that agree, including the International Monetary Fund, the World Bank, the World Economic Forum and the Mexican Central Bank.

“The lack of competition in Mexico is something that has been recognized by many people in our country and in international organizations as well,” Motta said. “We are facing a very important crisis in our country.”

Grand possibilities Veracruz Gov. Fidel Herrera Beltran calls his state the “energy state” of Mexico. Like Motta, Beltran has also been busy drumming up interest in Mexico. He spoke at Rice University’s Baker Institute For Public Policy one day before Motta was in Houston.

“The new reforms passed by the Mexican Congress recently changes dramatically Mexico’s oil exploration, production and exportation,” said Beltran, whose state is one of three that can claim part of the Chicontepec Basin. “This could potentially make Mexico the third- or fifth-largest producer in the world.”

Pemex has committed to spending $2.3 billion on several thousand wells in Chicontepec in 2009, and recently inked a $687 million deal with Schlumberger Ltd. to drill 500 wells in the region starting in April and running through 2012, a clear sign that Mexico wants to maximize its resources.

According to Pritchard Capital Partners LLC, a New Orleans-based energy research firm with offices in Houston, Weatherford International Ltd. is the frontrunner for another 500-well contract expected to be announced in the next few weeks.

Overall, Mexican officials have estimated that maximizing Chicontepec could be a $30 billion endeavor over the field’s life, which doesn’t sound like too much trouble for one of the biggest oil companies in the world, one with $77 billion in revenue in 2008 — enough to take the top spot on a Latin Business Chronicle list of the 500 largest companies in Latin America by revenue.

But it’s not simple.

The Mexican government taps Pemex’s revenue with taxes and royalties to the tune of 60 percent, which in turn accounts for about 40 percent of the country’s federal budget. To keep up, Pemex has resorted to borrowing and is now more than $40 billion in debt, with more than half that off the balance sheet.

As part of the new agreement to allow foreign companies in, the Mexican congress offered Pemex tax breaks on money spent on exploration, according to Jim Kingsdale, who operates the blog, Energy Investment Strategies, but it’s not yet clear where the government plans to make up that money.

Steps to reform What is clear is that Mexico is vigorously courting foreign capital and working hard to assuage fears stemming from well-publicized in-country violence and kidnappings the last several months.

“This is the right time to invest,” Beltran said last month at Rice. “Some investors are concerned with Mexico’s future (but) our new energy reform will definitely create growth in our country.”

Motta goes one step further.

“If you are an investor and you want to wait until the problem is completely solved, you are going to find that the opportunity has been taken by someone else,” he said.

Kingsdale and others say that if Mexico can’t start pumping the Chicontepec, and soon, the nation is in danger of becoming an oil importer in as little as four to six years. Not only a disaster down south, Mexico ending oil exports would also leave the U.S. looking to make up more than one in every 10 barrels of imported oil.

“Mexico remaining an oil exporter is clearly key to U.S. national security and U.S. law and order in addition to the U.S. ability to obtain enough oil,” Kingsdale wrote in March. “China is out gobbling up all the oil supplies it can obtain from any country that will contract with it. All those deals diminish the amount of oil available on the ‘global free market’ for the U.S. to import if it can no longer depend on Mexico.”


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