Reforms that would open Mexico's energy industry to foreign investment turned out less aggressive than some oil and gas companies would have liked, but the proposed changes are still likely to make some private firms into winners, analysts say.
Mexico's President Enrique Peña Nieto this week announced a proposal that would give resource-hungry energy companies access to Mexican oil for the first time in more than seven decades. Under the reforms, the state would be allowed to hire companies to exploit and extract oil, sharing risks and profits.
Mexico's energy resources will remain government property under Peña Nieto's proposed changes, and the exact details of reforms will have to be hammered out in subsequent laws. But the very idea of reform is significant for a country where schoolchildren are taught to take pride in the state oil industry and celebrate "Día de la Expropiación Petrolera" every March 18, marking the day when the industry was nationalized in 1938.
"Even though they [incoming oil companies] don't own the reserve itself, they can get a synthetic interest in it, and this is giving them de facto an increase in access, so they will be extremely interested," said David Gee, U.S. energy practice leader of the Boston Consulting Group.
Gee said he expects larger oil companies to come up with strategies on how to play the reforms by the end of the year.
"Even these changes—while not the complete opening of the sector—are a major change, given the history and context of the Mexican oil industry," he said.
The state monopoly Pemex runs the oil and gas sector and accounts for one third of the country's revenue, said Eduardo Leon, senior partner with the Boston Consulting Group in Monterrey, Mexico. The reform proposal, though not "as aggressive and as potential investors would have liked," marks a major shift, Leon said.
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Pemex struggles just to keep production flat, as a large Mexican field called the Cantarell complex wanes, and as shale and deep-water reserves remain unexploited. Accessing those reserves requires intensive capital and specialized skills, Gee said. Pemex has fought for the right to invest in its operations over the years, he noted, but the government holds the company's budget under tight scrutiny, placing it in competition with other state needs such as hospitals and schools.
Mexican oil production slid to 2.94 million barrels per day in 2011, from 3.59 million barrels in 2002, according to the International Energy Agency. By comparison, the U.S. produced 8.13 million barrels a day in 2011, up from 7.91 million in 2002, and Canada produced 3.51 million barrels a day in 2011, up from 2.82 million.
The current Mexican proposal could boost that country's output by 20 to 50 percent in the coming decades, Gee said.
Big Oil players seen benefiting
"I think you will see initial interest from larger U.S. and European firms—Chevron, Exxon, Shell," said Allen Good, senior equity analyst at Morningstar. "Ultimately though, it's really going to depend on the terms of the contracts that Mexico is offering."
The government wants to attract bigger companies with strong balance sheets and the proven experience, but those companies will be looking to maximize their own payoff, Good said. While he said that profit-sharing agreements could be interesting, it depends on the details that would be worked out in the secondary laws.
The benefit for the energy sector would have been more substantial if the reform proposal was more bold, said Antonio Martinez, senior analyst for Latin America at Frontier Strategy Group. "It is definitely less attractive" than the market expected, he said.
He estimates that more aggressive reform could have added 2 percentage points to gross domestic product growth in Mexico. He put GDP additional growth from the currently proposed reforms at 0.5 to 1 percent.
Mexico's Congress will need to approve the energy bill, and doing so would require key constitutional changes. The probability of the bill being approved would have been reduced if the reforms were more radical, Martinez said.
"It's a move in the right direction," said John Felmy, chief economist at the American Petroleum Institute. He said Mexico needs to make its proposal comparable to the offers investors get in the U.S. and Canada, where companies can have a part of the oil production and revenue.
"They need to be on a level playing field with Canada and the U.S.," Felmy said.
Specialists among possible winners
But not only oil "majors" could benefit from the reform, said Bo McKenzie, a managing director in MLV & Co's Energy Investment Banking group in Houston.
Mexico has attractive shale deposits, but Pemex has little experience in that area, he said. American companies can bring their expertise in horizontal drilling, multistage completion and multistage fracking. Companies that could benefit should reforms pass could include Anadarko, Devon Energy, EOG Resources and Noble Energy, he said.
McKenzie said changes in Mexico could help the North American region as a whole gain more independence from Middle Eastern and West African oil providers.
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"We got more and more potential sources of supply that are available here in North America with our closest partners Mexico and Canada," McKenzie said. "North America has a chance to become more energy-independent from the rest of the world."