Report: Mexico’s Energy Reforms Could Attract $30B of Foreign Investments per Year

Mexico’s energy reforms will create “abundant opportunities” for U.S. energy companies and shrink the socioeconomic disparities between Texas’ booming metro areas and its border cities, according to the latest BBVA Compass research.

Mexico’s Congress approved energy reform legislation last month that allows private firms to invest in the state-owned energy industry for the first time in 75 years. It was lauded as the biggest economic breakthrough in the nation since the North American Free Trade Agreement was signed in 1992.

The reform’s objective is to attract private investments to share the risks of much needed projects to increase the productivity of the energy sector (oil, gas, and electricity), while maximizing revenues for the state, increasing the efficiency of PEMEX and CFE, and ultimately boosting potential GDP, BBVA Compass report reads.

“The 2013 reform promises to create abundant opportunities for private companies that have the technology and expertise to revive Mexico’s hydrocarbons and electricity industries,” BBVA Compass economist Marcial Nava wrote in his report on the reforms.

The reform retains the state’s ownership of hydrocarbons below the surface while prohibiting the privatization of PEMEX and CFE (Comisión Federal de Electricidad, the state-owned electricity company). Nevertheless, the new legal framework allows for private ownership of hydrocarbons at the wellhead through service, profit-sharing, production-sharing, and license contracts (for more information see Appendix). The reform could increase Mexico’s foreign direct investment inflows by $20bn to $30bn per year (1.5% to 2.3% of GDP).

While secondary laws are still needed to translate the reforms into a workable framework and legal processes, U.S. oilfield services, shale gas and infrastructure companies, among others, stand to benefit from the reforms, Nava wrote.

He predicts the reforms will pump around $1.2 trillion to the Texas-Northern Mexico region in the next decade. In the U.S., Mexico’s reforms will create faster growth, helping to narrow the socio-economic disparities between Texas’ border cities and metro areas like Houston, Dallas and Austin.

“If these border towns effectively seize the opportunity,” Nava said, the U.S.-Mexico border “could see one of the most dramatic transformations in its history.”

Underexplored Waters

Nava says that with the inflow of private capital there is potential for a significant increase in energy production as Mexico has the sixth largest technically recoverable reserve of shale gas and the eight largest technically recoverable reserve of shale oil in the world. However, reserves in deep waters and shale formations are literally unexplored. In fact, the country has less than 5% of total deep water rigs in the Gulf of Mexico, while in 2012 it authorized the drilling of 3 shale oil and gas wells. In the same year, 9,100 wells were authorized in the U.S.

Large U.S. and foreign multinational companies with economies of scale and the technological expertise have the biggest competitive advantages in deep and ultra-deep drilling. For example, Shell recently announced plans for a 9,500ft ultra-deep well in the Gulf. Exxon, BP, Chevron, Hess and Anadarko are also going to be immediate contenders. Other companies that could benefit from increased activity in deep water drilling include Diamond Offshore, National-Oilwell Varco, Cameron, FMC, Trico Marine, SeaDrill, TransOcean, Geoservices, Baker-Hughes, Smith International and Schlumberger.

“Mexico is expected to regain its position as one of the top producers of hydrocarbons in the world,” Nava writes in the report.

Read the full report here