Mexico's dream of being the next global oil-boom story

Mexico hopes to achieve its potential as a more important player on the world oil stage after years of underinvestment and decline.

But industry officials say with the collapse in oil prices, it may take longer for Mexico to realize the benefits of the outside investments it hopes to attract. It will also take time for offshore and onshore exploration to pay off.

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A worker looks up while changing a drill pipe on the Laurus oil drilling rig operated by Petroleos Mexicans (Pemex) in the Ku-Maloob-Zaap oilfield at Campeche Bay off the coast of Ciudad del Carmen, Mexico.
Susana Gonzalez | Bloomberg | Getty Images
A worker looks up while changing a drill pipe on the Laurus oil drilling rig operated by Petroleos Mexicans (Pemex) in the Ku-Maloob-Zaap oilfield at Campeche Bay off the coast of Ciudad del Carmen, Mexico.

"It's a historic moment for the company," said Emilio Lozoya, CEO of Petroleos Mexicanos, or Pemex, speaking at the annual IHS CERAWeek energy conference in Houston. "It's the most important transformation Pemex has carried out since its inception."

President Enrique Peña Nieto's government is pinning its hopes on energy reform as a way to bolster the Mexican economy.

"The biggest challenge is declining production. We used to rely on one field," Lozoya said, noting that field produced 2 million barrels a day and now produces 250,000. The aging Cantarell field has been declining for years.

The international industry is lining up to participate in Mexico, now that the government has allowed outside investment in its energy industry for the first time in 75 years.

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Lozoya, in an interview with CNBC at IHS CERAWeek, said Pemex can deal with oil prices in the current $55 to $60 range, since the company has a very low "all-in" production cost of $25 a barrel.

Mexico's energy infrastructure has also lagged demand. Lozoya said that demand for gasoline and diesel fuel rose 40 percent in 10 years but pipeline capacity increased just 2 percent to 3 percent.

Lozoya said Pemex is remaking itself, creating a new governance structure. It developed a new corporate structure with upstream and downstream divisions and is also spinning off five new companies from its departments. "Pemex is moving to be an enterprise," he said.

"Energy reform is not only about oil but fueling the Mexican economy." -Emilio Lozoya, CEO of Petroleos Mexicanos (Pemex)

A more productive Mexico, which has oil reserves of about 10 billion barrels, would also become a bigger part of an already powerful North American production bloc alongside the U.S. and Canada. Mexico will make awards in the first round of bidding for participation in 14 shallow water fields July 15.

"It's a phenomenal opportunity when we look around the world and say where are hydrocarbon resources available in a democratic state with low risk. …You have a few advantages on your side here," said Carlos Pascual, senior vice president at IHS and former U.S. Ambassador to Mexico.

There are 34 companies participating in the first round of bidding, and a second round for nine fields will be awarded in September. After that, there will be bidding for deep-water assets and unconventional onshore fields. Seventy-five percent of Mexico's production is offshore.

BP is one of the companies possibly looking to expand in Mexico. BP group CEO Robert Dudley told CNBC he is interested in deep-water assets.

Mexico is remaking its oil industry after watching the success of U.S. shale drilling, which doubled U.S. production in just a few years. The U.S. oil industry is now pushing to have a ban on exporting crude lifted, at the same time Mexico is seeking to import U.S. light sweet crude.

The U.S. allows crude exports to Canada, but not to Mexico. The U.S. imports 900,000 barrels a day of Mexican heavy crude.

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"I do see the market as one market," Lozoya said. Mexico now imports U.S. natural gas, and Pemex just signed an agreement with BlackRock and First Reserve to help finance two pipelines to bring more Texas natural gas to Mexico for electricity generation.

"The broad story is Mexico is unfolding, and we have been looking at it for a while," said Anne Valentine Andrews, BlackRock managing director and chief operating officer for BlackRock Infrastructure, in a recent interview. "They're very interested in doing it with international best practices. They're very interested in doing it the right way."

The agreement with Pemex was to acquire about 45 percent in the two natural gas pipelines. They are the first major Pemex midstream assets to be built in partnership with foreign funding since the approval of Mexico's Constitutional Energy Reform in 2013.

"Energy reform is not only about oil but fueling the Mexican economy," Lozoya said.