International interest is heightening for exploration of Mexico's oil and gas fields following the country's 2014 energy reforms, but a new president in 2018 could reverse the laws and halt foreign investment.
International interest is heightening for exploration of Mexico’s oil and gas fields following the country’s 2014 energy reforms, but a new president in 2018 could reverse the laws and halt foreign investment.

On July 12, London-based Premier Oil announced that it, along with its operating partners Talos Energy (Operator) and Mexico City-based Sierra Oil & Gas, found more than 1 billion barrels of oil at its Zama-1 exploration well in the gulf, just off the coast of Mexico.

According to a Premier Oil press release, Zama-1 is the first offshore exploration well drilled by a private company in Mexico’s history, and this recent find is being hailed as a “world class discovery” by Tony Durrant, Premier’s chief executive.

“The oil discovered in the Zama-1 well is an extremely important event for Premier, the joint venture and for Mexico and we look forward to working with the Government and our partners to realise the full potential of this exciting discovery,” he said.

According to Reuters, Premier Oil’s shares rose by 38 percent on the London Stock Exchange following the news, and the value of the peso increased 0.70 percent to 17.785 per dollar as well.

That same day, Italian energy company Eni announced that they too learned of the presence of over 1 billion barrels of oil at one of their exploration sites. In March, the company stated it discovered oil deposits at its Amoca-3 field, 124 miles (200 kilometers) west of Ciudad Del Carmen. The company, however, did not provide an estimate on how much was found at the time, as further research was needed.

“The Amoca field, which is located at a water depth of only 25 meters, represents an optimal opportunity for a phased development approach with a low breakeven,” said Claudio Descalzi, Eni CEO in a press release. “Eni’s objective is to become the first international company to establish operating production in Mexico, which would be the first tangible success of the country’s important ‘Reforma energetica'[Mexico’s energy referendum] campaign.”

Eni’s initial discovery in March created excitement, which probably would have been absent otherwise, within the industry for a shallow-water site auction in July which, coincidentally, fell on the same day as the Premier and Eni announcements.

Since the passing of President Enrique Pena Nieto’s energy referendum in 2014 that released a decades-long energy monopoly held by the state-owned Pemex, international oil and gas companies have been slow to see Mexico as a viable location for investment.

But the hesitancy is beginning to show signs of reversing, as exhibited by the July 12 auction during which 10 of 15 available blocks were sold to large international companies like Shell, Total and Lukoil.

Pemex releases closed grip on Mexican oil and gas with referendum

Pemex was originally derived from a state-owned company named Petromex, a regulatory agency that guides the domestic market, train workers and creates “downstream” products.

After the Mexican revolution, foreign companies primarily took over the country’s oil and petroleum industry and exploited the resources and labor. Country-wide strikes were held at the majority of these companies and President Lázaro Cárdenas used Article 27 of the Constitution of 1917 to nationalize all foreign companies, paying them back for the losses they incurred in the process. Soon after this, Pemex expanded its offerings and scope until full vertical integration was reached and it became the Mexico’s oil and gas monarch. Its reign continued unchallenged for over 70 years until the passing of the 2014 reforms, allowing for private work contracts to be bid on by international companies.

As of late, Mexico’s oil output has been struggling, with production reaching only 2.15 million barrels daily last year, the lowest amount in 30 years, according to Bloomberg. Pemex’s ability to explore new oil sites was limited due to a lack of foreign technologies available after nationalization occurred. The oil was there, there was just no way for Pemex to access it, according to Jeremy Martin, vice president of energy and sustainability at the Institute of the Americas.

Twenty percent of Mexico’s public budget is dependent on oil profits and with the energy reforms, President Nieto sought to bolster the country’s production and profit rearing by opening the market to international investment. The plan was also meant to in effect lower energy costs for citizens.

The reforms were campaigned for when oil prices were over $100 a barrel but did not actually take effect until after prices had drastically fallen.

The drop in barrel price coupled with the lack of sufficient evidence of commercially workable oil stores made foreign investors reluctant to come to Mexico.

Excitement and risk abound as Mexico’s energy sees uncertain future

The country “took a really difficult decision for them politically after 40 [sic] years of 100 percent Pemex-ownership,” Durrant told Bloomberg. The timing of the energy referendum “caught them at absolutely the worst time because of the collapse in oil prices. But to be fair to them, they persevered and they have now got very strong industry interest.”

The Premier and Eni finds are creating more buzz about the region and alleviating some fears of investment by foreign companies.

“There are a host of companies on the U.S. side of the Gulf that may now consider participating in upcoming auctions because this is a way of showing them that the process works, and can lead to a discovery,” Martin said.

The next auctions are set to occur either by the end of the year at the start of 2018, and prices are expected to rise as interest in Mexican oil and gas continues to heighten.

“Future bids will likely be more aggressive,” said Pablo Medina in a Bloomberg interview, an analyst at the consulting firm Wood Mackenzie Ltd. “This obviously increases the attention people will pay.”

But the reforms whose existence allow for international investment could be reversed depending on the outcome of the upcoming July 2018 presidential election.

President Nieto, the referendum’s champion, is ineligible for reelection, and the current leader of the polls, Andres Manuel Lopez Obrador, has been highly critical of the energy reforms and plans to either enhance them, or abolish them all together.

According to Bloomberg, Nieto’s approval ratings hit a record low of 12 percent in January after the government raised gas prices to a 20 year high and the country’s growth stagnated in 2016 due to faltering oil production.

Obrador, disapproving the current results, pledged to hold a public forum if elected during which Mexican citizens could choose whether they wished to withhold or revoke the energy referendum. If they wish to stay, Obrador will foster more investment – if they wish to revoke, he will use legal action, even the use of international court, to abolish Nieto’s laws.

If Obrador wins the presidential election, the fate of Mexico’s oil and gas could ultimately be decided by the country’s people. This creates a risky situation for potential international investors hoping to take advantage of the underground energy stores, as they could be taking a gamble worth hundreds of millions, if not billions, of dollars.

The oil is there, it’s just a matter of if they can access it.