Mexican Standoff

October 15, 2013

Mexican Oil Industry

Mexico is a country with incredible energy potential – one that the new administration is keen to exploit.

The most abundant energy source is oil. Mexico has plenty of the stuff, especially offshore. The trouble is that while state-owned Pemex has exclusive rights to the country’s oil, it lacks the capital to develop new fields. Lack of funding means that production has fallen from 3.4 million barrels per day (bpd) in 2006 to 2.5 million today. It’s expected to slip to 2.2 million by 2016.

Pemex needs private-sector funding and expertise to unlock more of its offshore oil and gas production

So Peña Nieto has proposed partial privatisation. This won’t be easy: Pemex’s position is enshrined in the constitution. However, Eduardo Gonzales, a lawyer with Mexican firm Creel, believes it can be done. “Private equity funds are already raising the finance to take advantage of it.” As a corporate finance lawyer specialising in mergers and acquisitions, Eduardo is involved in some of the country’s biggest business deals and has a pretty good idea of the mood among international investors.  If Peña Nieto can pull it off, Capital Economics reckon it would add almost 1% a year to Mexico’s GDP.

One of the challenges is that Pemex currently provides much of the country’s tax revenue. Indeed in 2012 the oil company financed approximately 1/3rd of the country’s budget. This onerous tax burden would have to be eased if Pemex is to be partially privatised. And that would mean reforming the country’s wider tax laws so that the government can finance its revenue from another source. Unsurprisingly, politicians are cagey about confronting this – telling people they have to pay more tax is rarely a vote winner. That said, a combination of corporate and consumer taxes may be deemed acceptable.

Another challenge is public opinion, says Gonzales. Oil is a populist issue and privatising Pemex would require a change to the constitution. “Many Mexicans believe they own the oil”, says Gonzalez, “and it is hard to convince them that it is more valuable to make money by selling it than leaving it in the ground”.

It’s clear that this will be one of the most difficult reforms to execute. However, if successful it offers massive potential both to local people and to the international investment community.