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Dave Forest

Dave Forest

Dave is Managing Geologist of the Pierce Points Daily E-Letter.

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What's the Future for Your State Monopoly?

Big news from Mexico about reforms to oil giant Pemex.

The government is pushing to end the state entity's monopoly control on the oil & gas sector. Allowing private investment in Mexico's fields.

This would end one of the longest-standing closures of a national petroleum industry to outside investment. And potentially offer major opportunities for incoming firms.

Mexican shales, for example, have huge potential. The cross-border extensions of basins like the Eagle Ford are sizeable, and could be attractive targets for company's applying the same technology being used north of the border.

But the move to shoulder aside Pemex is also interesting as a cautionary tale.

Related article: Miners Become Currency Traders

For anyone watching the numbers, it's been obvious for some time that a state-run oil sector wasn't working for Mexico. Pemex's production fell rapidly between 2005 and 2009, as the company's massive Cantarell field plunged into decline.

One of the big issues is a lack of re-investment in production and exploration. The Mexican government takes about 75% of Pemex's yearly earnings. Leaving very little to spend on maintaining or expanding output.

Looking at the results, it's clear this isn't a sustainable path. And that could be an important lesson for state-run enterprises in other parts of the world.

One striking comparison is Chilean state copper producer Codelco.

Codelco recently asked Chile's government for permission to reinvest the $4.2 billion it made during 2012. The firm said it needs to spend the money maintaining existing operations and developing new mines and expansions, to meet current production targets.

Related article: Improving Shale Well Profits with Enhanced Oil Recovery Techniques

But the government only approved a fraction of the request - $1.2 billion. The rest will be turned over to the state.

It's true managers sometimes ask for more cash than they actually need. But given Codelco's project portfolio, the $1.2 billion figure looks very low.

Cutting the company's capital then could be borrowing from the future to pay the present. The Mexican example might be instructive on where such a strategy leads.

Here's to necessary spending,

By. Dave Forest


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