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Haley Zaremba

Haley Zaremba

Haley Zaremba is a writer and journalist based in Mexico City. She has extensive experience writing and editing environmental features, travel pieces, local news in the…

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Can Private Investment Turn Mexico’s Ailing Oil Industry Around?

Offshore

Five years after Mexican President Enrique Peña Nieto made campaign promises to open his country’s oil reserves to foreign interests, a private well been has drilled in Mexico for the first time in nearly 80 years. London’s Premier Oil Plc, Houston’s Talos Energy LLC and Mexico’s Sierra Oil & Gas began offshore drilling on the joint venture on Monday, according to a statement by Premier. It marks the first private exploration in Mexican waters since the country nationalized its oil industry in 1938.

The last time foreign interests invested in Mexican oil, it did not have a happy ending. Then-President Lázaro Cárdenas seized their assets, created the nationalized oil monopoly Pemex, and banished all foreign competitors. Now, nearly 80 years later, Mexico is re-opening its largely untapped, massive oil and gas reserves, and foreign companies are eagerly accepting the invitation.

The Zama-1 well is being installed in the Sureste Basin off the shores of Tabasco, and according to estimations in Premier’s report, contains between 100 million to 500 million barrels of crude oil. The three companies won the rights to begin drilling back in 2015 when Mexico opened their oil reserves to foreign auction. This is sure to be the first of many such ventures, as companies from Malaysia, China, Norway, the U.K., France and the U.S. also won rights to drill in Mexico’s first international deep-water offshore auction back in December, which awarded rights to 14 oil exploration areas in the Gulf of Mexico.

Elaine Reynolds, an analyst for Edison Investment Research Ltd., said that all eyes will be on Zama-1 as it begins production. “As the first non-Pemex well to be drilled since the opening up of Mexican waters as part of the country’s energy reform process, this well will be keenly watched by the industry." Drilling is expected to be completed within 90 days, with a price tag of $16 million fronted by Premier.

Related: OPEC Deal: 9-Month Extension Looking Increasingly Likely

Mexico is hoping that revolutionizing their oil industry by opening it up to the global market and private interests will revitalize what has been a long slump in oil production. They estimate that the move will bring in an estimated $40 billion in investments to push Mexican oil to full production capacity over the next 35 to 50 years, as much as 900,000 barrels a day.

Within weeks of President Peña Nieto's August 2014 announcement that Mexico was opening their oil industry to the private sector, the U.S. Energy Information Administration boosted Mexico’s oil and gas projections by 25 percent. As foreign interest in Mexico’s vast untapped reserves began pouring in, the EIA readjusted by a whopping 75 percent.

In the years between those projections and this week’s drilling of Zama-1, development has faced some serious speed bumps, with the global crash of crude prices after OPEC flooded the market in November 2014 and major policy reform needed to reverse 8 decades of public oil in Mexico. But now, as the market is recovering and development is finally beginning to get underway, a black gold rush is sure to follow.

The International Frontier Resources Corporation, a Canada-based oil development company, estimated that untapped Mexican reserves could aggregate as much as 115 billion barrels. According to the CIA’s 2016 World Factbook, Mexico has less than 10 billion barrels of proven reserves, meaning that if the IFRC’s estimates are correct, Mexico’s new proven reserves would skyrocket to 125 billion barrels, more than the United States, the UAE, Russia, and Kuwait. Related: Is Canada’s Oil Production Ready For A Resurgence?

It must be noted that not everyone is excited about the new influx of industry money and drilling developments. There has been widespread backlash from environmental groups including Greenpeace, who have expressed concern over exploitation of Mexico’s natural resources and loudly criticized the UK for investing $1bn in Pemex and other fossil fuel companies. There is also great concern about the embrace of oil instead of a step towards more renewable resources in Mexico, home to some of the worst air pollution in the world.

As part of the push for foreign investors, in January, Mexico also removed fuel subsidies to make the market more attractive to private companies and combat the plummeting peso. The result, however, has been an enormous increase in gas prices and even less support on the ground for Mexico’s new investor-friendly policies.

Despite public outcry, however, 125 billion barrels is a number that will not be ignored. Zama-1 may be the first private drilling experiment in 80 years, but it will certainly not be the last.

By Haley Zaremba for Oilprice.com

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