Elements of change are in place in Mexico. Nothing guarantees they'll be activated. But as new promise for oil supply comes to light in the US and Canada, the mere possibility that Mexico will make essential reforms enhances the promise of a North American boom.
With oil and gas, Mexico has been xenophobic since its beginning as a nation in 1938. State ownership of oil and gas resources is a source of national pride, embodied in state-owned Pemex. It's also the reason Mexico produces far less oil and gas than its resource base indicates it can.
Unmet potential
As was noted here last week, oil production is surging in Canada and the US but fading in Mexico (OGJ, Dec. 3, 2012, p. 26). In Canada and the US, producers are using sophisticated technology to develop unconventional resources such as shales, other low-permeability reservoirs, and oil sands as well as oil and gas deposits under thousands of feet of water. Mexico has potential in unconventional reservoirs and deep water, too. To reap the harvest, however, it needs capital and know-how from foreign operators. Until recently, it relied on Pemex for all oil and gas development—and for funding of much of the national budget.
Under President Felipe Calderon, who left office when his term expired on Dec. 1, the government took the first steps toward reform. And while campaigning to succeed Calderon, new President Enrique Pena Nieto supported the opening of Pemex to private investment. Whether he can or will push the effort and continue the progress Calderon started remains to be seen.
Under Calderon, the government eased its financial strangling of Pemex and allowed the company to offer service contracts to non-Mexican operators for exploration and development. It also set up a watchdog agency called the National Hydrocarbons Commission to oversee the state oil company, which had become bloated and insular, riddled through its history with corruption scandals. Last February, deepwater drilling received a boost when Mexico and the US signed an agreement allowing work along their Gulf of Mexico border and preparing for joint development of overlapping fields.
These initiatives reflect healthy recognition in Mexico of the need for change. But they hardly do the whole job. Service contracts won't attract all the foreign participation Mexico needs. And the government claim on Pemex revenue, while lower than it was before 2008, remains so high that the company lost money last year. Still, reform must start somewhere.
Continued progress depends on Pena Nieto. His election last July returns the Mexican presidency to the Institutional Revolutionary Party, better known by its Spanish abbreviation PRI. Before Vicente Fox of the National Action Party (PAN) won the election of 2000, to be succeeded in 2006 by fellow PAN member Calderon, all Mexican presidents since 1929 had belonged to the PRI. The party gained a reputation for cronyism, fiscal irresponsibility, and heavy-handedness. Worry in Mexico about PRI's historic authoritarianism became evident in violent demonstrations that accompanied Pena Nieto's inauguration.
Yet the new president lacks the power base of his PRI predecessors. His party holds a majority in neither house of Congress and didn't win enough seats to block constitutional changes. He'll have to govern through compromise. The PRI and PAN showed their ability to cooperate recently by reforming labor laws unchanged since the 1970s.
Sensitivities in question
Pressure to reform oil and gas policy might subside after recent reductions in the rate of Mexico's oil-production slide. For a president needing to manage a full range of touchy issues through political consensus, the temptation will be strong not to agitate national sensitivities over petroleum resources.
But those sensitivities have been called into question by developments to the north. Mexicans must wonder why their country is missing the boom. And other North Americans should wonder how much more their continent might be able to reshape global energy trade if Mexico met its potential.
