Mexico: Opening Up �One of the World�s Most Closed� Energy Sectors
Comment of the Day

November 01 2013

Commentary by Eoin Treacy

Mexico: Opening Up �One of the World�s Most Closed� Energy Sectors

This article from Knowledge@Wharton may be of interest to subscribers. Here is a section
On the Texas side of the border, Eagle Ford Shale oil production has grown from just 352 barrels a day in 2008 to 362,936 barrels a day in 2012. Overall oil production in Texas has doubled — an increase of more than one million barrels a day — over the past four years, to a current pace of nearly 2.2 million barrels, according to the U.S. Energy Information Administration. Daily oil production in North Dakota has also skyrocketed in recent years. The robust development of the Mexican side of the Eagle Ford Shale alone would double Mexican oil production, according to Sherr.

Given the deterioration in its production volumes, does Mexico have any other alternative to pursuing these kinds of reform options? According to Kotschwar, “there is a real threat that if [the government doesn't undertake] this [reform], [it] will have to take less popular reforms, such as raising taxes” on income, as well as value-added taxes, in order to compensate for Pemex’s inability to generate more revenues for the federal government.

Eoin Treacy's view Here is a link to a map of the Eagle Ford Shale from the EIA which appears to stop at the Mexican border. However geology pays no attention to national boundaries. It is reasonable to expect that Mexico has some of the same shale and tight oil and gas formations as Texas. Production of course is dependent on the differing regulatory structures evident in the jurisdictions.

Production generally deteriorates when oil companies are nationalised because the motivation for profit alters and political considerations take precedence. As Mexico’s middle class expands and its manufacturing prowess improves, demand for a more enlightened energy policy, that can increase production, is likely to mount further. The country has remarkable energy resources but it will probably need external partners if they are to be developed efficiently.

Today’s news that Pemex may list some energy assets on the local exchange early next year is to be welcomed. From an investor’s perspective, the MEXBOL Index has been a useful reflection of the performance of the listed affiliate of international companies and the rise of the Mexican middle class. However since there are no oil and gas companies listed on the exchange we still have look elsewhere to measure the performance of the energy sector. The Pemex US$ Perpetual 6.625% 2049’s yield has been relatively steady since inception in 2010. Its BBB rating and relatively high yield reflect the perceived risk of the insutrment compared with for example Exxon Mobil which is AAA rated and has a considerably tighter yield.

The Mexican Peso is likely to be one of the more reliable indicators of the positive effects of energy policy reform. The US dollar jumped by 50% against the Peso in 2008. It gave up most of that advance by early 2011 and has been confined to a 20% range since. The Dollar has held a progression of higher reaction lows this year and a sustained move below MXN 12.75 would be required to suggest a return to Peso dominance.

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