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Tuesday, January 21, 2014

U.S. Companies Ponder Plunge Into Mexico's Oil Reserves

Aerial view of the Centenario exploration oil rig, operated by Mexican company 'Grupo R' and working for Mexico's state-owned oil company PEMEX, in the Gulf of Mexico on August 30, 2013. (Omar Torres/AFP/Getty Images)

Aerial view of the Centenario exploration oil rig, operated by Mexican company ‘Grupo R’ and working for Mexico’s state-owned oil company PEMEX, in the Gulf of Mexico on August 30, 2013. (Omar Torres/AFP/Getty Images)

You might think the fact that U.S. oil production rose 15 percent last year — the fastest growth of any country in two decades — would be good news. But the International Energy Agency is warning that the production surge is approaching the “crude wall,” the point at which infrastructure and regulatory constraints limit potential markets.

So the debate has begun on lifting a 40-year-old ban on raw crude exports. There’s no legislation to do that yet, but U.S. Energy Secretary Ernest Moniz, Alaska Senator Lisa Murkowski and a number of oil companies are calling for the ban to be reexamined.

Our neighbor to the south is also re-examining its oil industry. Last month, Mexico approved a constitutional amendment that would reopen its energy sector to private investment for the first time in 75 years. The regulatory framework has yet to be worked out. But those rules will make a big difference in determining which U.S. companies will enter the market.

From the Here & Now Contributors Network, Andrew Schneider of KUHF in Houston reports.

Reporter

Transcript

JEREMY HOBSON, HOST:

And from the film industry to the oil industry now. News today from the International Energy Agency that global demand for oil will increase 1.4 percent this year thanks to stronger economies in the developed world. And one country hoping to benefit from that increase in demand is Mexico. Last month, lawmakers there approved a constitutional amendment that would re-open the Mexican energy sector to private investment for the first time in 75 years. That's a move that is being closely watched over the border in Texas. From the HERE AND NOW Contributors Network, KUHF's Andrew Schneider reports.

ANDREW SCHNEIDER, BYLINE: Offshore drilling in the Gulf of Mexico accounts for nearly a quarter of all U.S. crude oil production. The line that separates U.S. offshore resources from those of Mexico was a legal boundary. Physically, it's one giant reservoir. Drilling south of that boundary has long been the exclusive right of Pemex, Mexico's state-run oil company. The government derives much of its budget from oil taxes and royalty payments. That leaves Pemex far less than it needs for new exploration and production. Jim Noe is executive vice president of Hercules Offshore, a Houston-based drilling company.

JIM NOE: The Mexicans have been suffering through years, and really decades, of steep decline rates in their fields. And what that means is that you have to drill more wells than you did last year just to produce the same amount of oil or gas that you produced last year. And so it requires more equipment, it requires more technology, and they just haven't been able to keep pace with the rate of decline that they're seeing.

SCHNEIDER: The only way to halt that decline is with foreign investment. Changing the constitution to allow that forced legislators to break a huge political taboo. J. Wayne Ballew is a partner with Houston law firm Looper Ballew.

J. WAYNE BALLEW: One of the keys to the reform, and I think this is what ultimately allowed it to pass, is Mexico has still retained ownership of all of its oil and gas. And so instead of a concession-based scheme, where the foreign investor can take ownership of the oil and gas, it's a profit and production sharing scheme.

SCHNEIDER: Hercules Offshore's Jim Noe says U.S. companies need a lot of questions answered before they'll invest under those terms.

NOE: What will the Mexicans do to create a regulatory body? You know, for 75 years, they haven't had to regulate foreign companies. How will the leases be allocated? How will they be bid on? Who's going to pay the oil companies, and when will they be paid? And, you know, all those details are still up in the air.

SCHNEIDER: Offshore drilling is only one opportunity Mexico's energy reforms offer to U.S. companies. Onshore, there's the Eagle Ford Shale, largely untapped south of the Rio Grande. Mexico wants to attract independent oil and gas companies to the region. They're the ones who pioneered fracking in the U.S. Bill Herbert is a managing partner with Houston investment bank Simmons & Company.

BILL HERBERT: They are blessed with an inventory of growth prospects over the next 10 to 20 years, which is pretty compelling in the U.S. And given the sort of ease of doing business in the U.S. relative to, you know, a brand new international market such as Mexico, I think it would take an awful lot of incentive in order to attract the independent into Mexico.

SCHNEIDER: Whether those incentives will be enough is something U.S. independents and majors alike will learn later this year, when Mexico unveils its second round of energy reforms. For HERE AND NOW, I'm Andrew Schneider in Houston.

HOBSON: And you're listening to HERE AND NOW. Transcript provided by NPR, Copyright NPR.


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