Mexico May Open Up Oil Market on Heels of Major Finds

These are good times for Mexico, with a potential 1 billion barrel crude discovery this week in Tabasco state, on the heels of two major deep-water discoveries of an estimated 26.5 billion barrels in the Gulf of Mexico and shale gas wells on the Mexican side of the Eagle Ford region on the Texas border.

The discoveries belong to Petroleos Mexicanos (PEMEX), the world's fourth-largest oil producer--a state-owned monopoly constitutionally forbidden to share with private investors. By all accounts, PEMEX will have a hard time developing these finds alone, and we could see an opportunity here for an opening of the market to private investors-eventually.

Let's look at the potential.

This week, PEMEX announced a crude deposit in Tabasco state that may contain up to 1 billion barrels of reserves in the on-shore Navegante 1 well. For now, the well, at a depth of 6 kilometers, shows promise of some 500 million barrels, but PEMEX plans to expand drilling and double that estimate.

Shortly before that, PEMEX discovered an estimated 26.5 billion barrels of untapped crude in deep-water deposits in the Gulf of Mexico.

In October, the company announced a shale gas well discovery in the Mexican side of the Eagle Ford region. Next year, PEMEX will open this up to tenders for development.

Here's the problem: PEMEX's major discoveries require investment that it can't finance. Earlier this year, Mexican Congress granted PEMEX $22.7 billion for new development and infrastructure investments, but it needs about $35 billion a year to develop its existing and new discoveries.

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Mexican President Felipe Calderon has one foot out the door already, with his term ending on 1 December. His successor, Peña Nieto, will be left to decide how to handle the country's oil and gas wealth. It's definitely an issue that needs to be addressed. Despite PEMEX's major finds, Mexican oil production peaked in 2004 and then went through a six-year slump. The reserves are there, but the state can't keep pace in terms of development and production.

That PEMEX has even managed with its resources to make these discoveries came as a bit of a surprise, but now the question is whether PEMEX can produce. The Navegante well might not be much of a problem because it's on-shore, but the off-shore discoveries will require massive infrastructure and development investment, as will the shale gas discoveries.

But here's what's promising: President-elect Nieto wants to open up the oil industry to private investors and his inner circle thinks they will be able to convince the opposition to go along with the necessary reforms.

For companies already operating in the Gulf of Mexico-like Royal Dutch Shell (NYSE:RDS.A), ExxonMobil (NYSE:XOM), and BP (NYSE:BP)-opening up the Mexican oil market could be a windfall.

Private investors are already being prepped, so to speak. As of 2012, there is a new integrated contract model that allows private companies to run drilling operations but not to keep extracted oil and gas. PEMEX pays contractors a per-barrel fee, with a bonus if production targets are exceeded. Until legislation is reformed, this same system will be used for deep-water drilling in the Gulf of Mexico.

By Charles Kennedy for Oilprice.com