OPEC Set to Suffer at the Hands of Mexico’s Energy Market Reform

The recent reforms that President Enrique Peña Nieto plans to introduce to Mexico’s energy sector, has the potential to boost the country’s oil output to 1980 levels, whilst at the same time reducing US dependence on OPEC, and creating more stability in the global market.

Mexico was the first country in the world to take full control of its oil industry, and one of the major parts of the new reforms will see state-owned Pemex’s monopoly reversed, allowing, for the first time in more than 50 years, foreign companies to invest in exploration and production ventures in the country.

US oil companies are enthusiastic about the potential for working in Mexico, whose shale formations, and deep-water oil fields remain largely untouched, due to the lack of investment and technological expertise offered by Pemex.

Related article: Junior Time in the Gulf of Mexico Shelf

Kurt Glaubitz, a spokesman for Chevron, told the NY Times that they’re “optimistic about the reforms that are taking place and the opportunities that Mexico is presenting to international oil companies.”

In the 1980s Mexico had proven reserves of 60 billion barrels of oil, but as shallow-water fields have been drained those proven reserves have fallen to just over 10 billion barrels. According to Citi Research, Mexico could have another 29 billion barrels of oil and gas in deep-water plays in the Gulf of Mexico, and an additional 13 billion barrels of recoverable shale oil reserves. However, Pemex does not have the capital, nor the expertise, to develop these resources on its own. Citi Research estimates that with foreign backing and expertise, Mexico could increase production to nearly four million barrels a day by 2024.

Whilst adding an extra million barrels a day, or so, to the international market would not revolutionise the market economics, it would provide a cushion that would protect prices from spiking during times of instability in the Middle East or North Africa.

Related article: Mexican State Oil Monopoly Pemex Posts Massive Loss

OPEC nations are already worried by the diminishing demand from the North American market as the US shale boom continues to drive domestic production ever higher, and increased production from Mexico would only further reduce OPEC’s power in the market.

David L. Goldwyn, a State Department coordinator during Obama’s first term in office, explained that “the impact on the global market could be very significant. You could have increased production of light sweet crudes from the deep water Gulf, which would provide significant pressure on OPEC production. It means pressure on the Saudis, Kuwaitis, the Venezuelans and Russia.”

MR. Goldwyn also suggested that the increased attention in new exploration and production projects in Mexico could draw investment away from the likes of Angola, Venezuela, Nigeria, and the Arctic, where costs are far higher.

Source: http://www.nytimes.com/2013/08/14/business/global/in-mexico-a-proposal-to-revamp-oil-policy.html

By. Charles Kennedy of Oilprice.com