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In Major Shift, Mexico Allows Oil Drilling by Outsiders

Wednesday, 8 Dec 2010 | 12:48 PM ET
AP

A Mexican supreme court decision Tuesday is paving the way for dramatic changes in the country's oil industry—allowing for private investment for the first time in more than 70 years.

Juan Jose Suarez Coppel, the CEO of Pemex, the Mexican state-owned oil company, told CNBC Wednesday that the company will begin accepting bids in February for three onshore, mature oil fields in the Tabasco region.

Pemex will pay the private companies a percentage of their production costs and also a fee per barrel. Mexico will own the oil.

These first fields will likely be of interest to smaller companies, said Suarez Coppel. He believes the large majors like BP and Shell will have more interest in the deepwater contracts it will begin auctioning in 2012.

This is a significant shift for Mexico, where private investment has been outlawed since the 1930s. Pemex became a monopoly in 1938, when Mexico nationalized American and British oil interests. The country marks the change on National Appropriation Day, March 18, to honor the day it seized those private assets.

Over the decades, state ownership has lead to terrible mismanagement, corruption and lack of reinvestment. The country produced 3.4 million barrels of oil per day as recently as 2004, but that amount has since fallen to 2.58 million barrels per day.

Out of desperation, the country passed a reform law in 2008, which would allow for more outside investment. There were numerous legal challenges thrown at it, but Tuesday's court decision eliminated the last one.

Suarez, who has a doctorate in economics from the University of Chicago, says he believes Mexico can reach 3 million barrels per day within 10 years.

According to the USEnergy Information Agency (EIA), Mexico is a major supplier of oil to the US depending on the year. From 2004-2007, Mexico was the second-largest source of US oil imports, but fell to third-largest in 2008 due to falling production. However, Mexico regained second place in 2009, helped by a large decline in imports from Saudi Arabia.

The US is Mexico’s biggest customer, receiving the vast majority of its crude oil exports, which mostly arrive by tanker at the Gulf Coast. The EIA says in 2009, the U.S. imported 1.1 million barrels a day of crude oil from Mexico, all of which went to the Gulf Coast.

The US also imported about 140,000 barrels a day of refined products from Mexico in 2009, mostly residual fuel oil, naphtha and other unfinished oils. Mexico is consistently one of the top three exporters of oil to the US, along with Canada and Saudi Arabia.

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