North America to Drown in Oil as Mexico Ends Monopoly

The flood of North American crude oil is set to become a deluge as Mexico dismantles a 75-year-old barrier to foreign investment in its oilfields.

Plagued by almost a decade of slumping output that has degraded Mexico’s take from a $100-a-barrel oil market, President Enrique Pena Nieto is seeking an end to the state monopoly over one of the biggest crude resources in the Western Hemisphere. The doubling in Mexican oil output that Citigroup Inc. said may result from inviting international explorers to drill would be equivalent to adding another Nigeria to world supply, or about 2.5 million barrels a day.

That boom would augment a supply surge from U.S. and Canadian wells that Exxon Mobil Corp. (XOM) predicts will vault North American production ahead of every OPEC member except Saudi Arabia within two years. With U.S. refineries already choking on more oil than they can process, producers from Exxon to ConocoPhillips are clamoring for repeal of the export restrictions that have outlawed most overseas sales of American crude for four decades.

The revolution in shale drilling that boosted U.S. oil output to a 25-year high this month will allow North America to join the ranks of the world’s crude-exporting continents by 2040, Exxon said in its annual global energy forecast on Dec. 12. Europe and the Asia-Pacific region will be the sole crude import markets by that date, the Irving, Texas-based energy producer said.

Exxon’s forecast, compiled annually by a team of company economists, scientists and engineers, didn’t take into account any changes in Mexico, William Colton, the company’s vice president of strategic planning, said during a presentation at the Center for Strategic and International Studies in Washington on Dec. 12.

The bill ending the state monopoly was approved by the Mexican Congress Dec. 12. Before becoming law, the proposal must be ratified by state assemblies, most of which are controlled by proponents of the reform. Oil companies will be offered production-sharing contracts, or licenses where they get ownership of the pumped oil and authority to book crude reserves for accounting purposes. The contracts will be overseen by government regulators.

Though some foreign companies already operate in Mexico under service contracts with Petroleos Mexicanos, or Pemex, the reform could increase foreign investment by as much as $15 billion annually and boost potential economic growth by half a percentage point, JPMorgan Chase & Co. said in a Nov. 28 report.

A doubling in production as suggested by Citigroup analyst Ed Morse would put Mexican output at 5 million barrels a day, an unprecedented level for Pemex, the state oil company created during nationalization in 1938.

The U.S. and Canada are expected to produce a combined 17.6 million barrels of crude and ethanol in 2015, rising to 18.7 million in 2020 and 19 million in 2040, according to the U.S. Energy Information Administration.

The first assets that will attract foreign investment will be mature oilfields drilled decades ago and reservoirs that need injections of steam or carbon-dioxide to coax more crude out of the ground, Medina said. Deep-water prospects, shale and other technically-challenging endeavors will follow later, he said.

The level of investor interest will be partly determined by which assets Pemex chooses to keep and which it will put up for auction, Medina said.

The Chicontepec field northeast of Mexico City may be among the richest prizes Pemex surrenders after its problems overcoming low pressure and disconnected crude deposits that have limited output, Medina said. Production that has averaged about 60,000 barrels a day could be lifted to more than 100,000 by an international producer experienced in handling such fields, he said.

The reforms are especially important to open up exploration in Mexico’s deep-water fields, where additional capital, as well as better technology and expertise are needed, Carlos Solé, a Houston-based partner at Baker Botts LLP, said in a telephone interview. Pemex estimated the country’s deep-water Gulf of Mexico prospects may hold the equivalent of 26.6 billion barrels of crude.

Onshore, the potential is even greater with more than 60 billion untapped barrels, according to a Pemex presentation last month.

Full article: North America to Drown in Oil as Mexico Ends Monopoly (Bloomberg)

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