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Mexico is considering plans to end a seven decade long monopoly that Petroleos Mexicanos (Pemex), the country’s national oil company, has had over the oil and gas space, possibly allowing foreign oil companies such as Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) to participate in the Mexican oil industry. The move should allow the country to attract more investment into the industry, which has seen a decline in production over the last several years. We also see the move as opening up additional opportunities for U.S. oilfield service providers such as Halliburton (NYSE:HAL) and Schlumberger (NYSE:SLB) in the Mexican market.

Declining Oil Production But Pemex Has Been Unable To Boost Investment

Mexico has the third-largest proven oil reserves in Latin America, amounting to around 13 billion barrels. State run Pemex has largely produced oil from easy-to-access sources located in shallow waters and areas that are relatively easy to drill. However, most of the Mexico’s largest oilfields such as the Cantarell field are currently in their mature stages and the country’s total oil production has been on the decline since 2004. While Mexico is still able to meet its domestic oil demand, oil exports, which are a significant component of the country’s exports earnings (16% in 2011), have trended lower. Pemex has not been able to garner the investment needed to boost exploration and production in new frontiers as it has been in a tight spot financially, reeling under large losses and massive pension liabilities. According to the the U.S. EIA, if these declines were to continue without new investment, the country may even become a net oil importer by 2020.

Mexico has had constitutional limits on foreign investment in the oil exploration and production space, but Mexico’s President Enrique Pena Nieto presented a bill to the Mexican Congress on August 13 that would allow foreign oil companies to participate in the country’s oil and gas space under a profit and risk-sharing model with Pemex. In order to make the deal more attractive to private oil and gas companies, the model would enable firms to book a percentage of the reserves on their balance sheets under U.S. Securities and Exchange Commission rules, although the oil would still be owned by the Mexican government. According to Bloomberg, oil majors such as Exxon, Chevron, Royal Dutch Shell (NYSE:RDS.A) have already shown interest in entering the Mexican market.

Deepwater And Unconventional Activity Could Increase

Unlike the United States’ portion of the Gulf of Mexico, Mexico’s acreage is largely underdeveloped. According to Pemex, with proper investments, exploring these deep-water reserves could add as much as 27 billion barrels, effectively tripling the country’s proven oil reserves. Mexico is also facing a severe shortage of natural gas and has been boosting imports of costly liquefied natural gas (LNG). Progress in tapping into the country’s unconventional gas reserves has been slow. Despite the fact that Mexico has the fourth largest shale gas reserves in the world, Pemex has only drilled around three shale gas wells to date.

U.S. oilfield services firms such as Halliburton and Schlumberger have already been doing work in Mexico for Pemex. However, if the Mexican government’s plans to reform the sector come through, it could push the opportunities for oilfield companies to a new level given the possible growth in activity brought about by new investment as well as a potential increase in the complexity of exploration and production activities. Schlumberger has been making a big push in subsea technologies and could see greater demand as more activity is undertaken in the Mexican portion of the Gulf of Mexico. Halliburton, a leader in pressure pumping services, could see greater demand for its fracking and unconventional plays expertise.

Disclosure: No positions.

Source: Mexico's Planned Oil Reforms Can Help U.S. Oilfield Services Companies