Inviting Foreigners to Boost Drilling Hits Nerve
Comment of the Day

August 07 2014

Commentary by Eoin Treacy

Inviting Foreigners to Boost Drilling Hits Nerve

This article by Jonathan Roeder for Bloomberg may be of interest to subscribers. Here is a section: 

Supporters of opening the oil, gas and electricity monopolies to competition say it will attract $20 billion a year in foreign investment and increase economic growth by at least 1 percent every year. Opponents, led by former presidential candidate Andres Manuel Lopez Obrador, argue that letting foreigners bid and drill for oil is a violation of national sovereignty and will lead to corruption and a loss of control over the oil revenue that could be used to develop a more modern national economy. Mexico would be better served, they say, by reducing Pemex’s tax burden, increasing transparency and attacking persistent corruption –- Pemex is missing over 32 million barrels of oil this year, worth about $3 billion. The opposition points to Saudi Aramco as an example of a successful state monopoly. Pena Nieto’s team disagrees, saying that Mexico’s days of easy-to-access oil are over, and that the nation’s future as an oil producer depends on technology and know-how that private companies are best positioned to bring. To cushion the change, however, he assured Pemex workers that none of them would lose their job.

Eoin Treacy's view

If it is to reverse declining production Mexico has little choice but to attract both investment and expertise to its energy sector. One of the reasons Saudi Arabia’s state controlled energy company has been able to maintain high standards of efficiency is because they have aggressively invested in enhancing production and hired the brightest minds from the around the world to help achieve their goals. The problem for many state owned oil companies is that they are treated as utilities by politicians who tend to use them as piggy banks. Introducing competition may help Mexico’s Pemex to adopt a more professional attitude and private companies have a profit incentive to maximise production. 

The embedded link to a report from the US Congressional Research Service dated January 6th also contains some interesting information on the USA’s exports of gas to Mexico which would potentially be impacted by successful exploitation of Mexico’s considerable shale gas resources, not least over the border from the Eagle Ford formation. The development of Mexico’s shale gas resources enhances the argument for additional investments in the USA’s gas export facilities.

The MEXBOL Index has returned to test its all-time highs near 45,000 and while there is potential for some consolidation in this area, a sustained move below 42,000 would be required to begin to question medium-term scope for a successful upward break.    

 

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