Mexico Seeks Foreign Investment

RelevanceThe likelihood of huge potential reserves in the Mexican area of the deep water Gulf of Mexico (GOM) is well known. This area is largely untested, but the use of the U.S. deep water GOM as an analogue together with limited Pemex exploration efforts would suggest that this is indeed the case (recent U.S. discoveries are right on the territorial sea border with Mexico, and may even cross it).

Also the expanded development of the huge Chicontepec field offers further potential to recovering the Pemex production and reserves decline.

That Pemex needs outside capital and know-how to progress its opportunities is widely recognized. What is not commonly known is that Pemex has made serious strides in attracting such investment.

Pemex has already been attracting foreign capital and know how through a series of service contracts called the Multiple Service Contracts or MSCs. These are risked based contracts rather like those used by Iran, where the third party provides E&P type services and investment (at the investor’s risk). Pemex used the MSC concept to attract outside investment in the Burgoss gas fields a few years ago and now has several such contracts in place.

Additionally, Pemex is in the process of tendering for maintenance and operational services for a large part of its oil and gas pipeline infrastructure.

There have also been public proposals to in the past to extend the MSC concept to other areas, e.g. the Chicontepec field.

Such contracts have been subject to legal challenge in the past, but investors should note that opportunity is already being created by Pemex for involvement in the Mexican oil and gas industry.

AnalysisLike most other countries in the world, Mexico requires that the state has control over its oil and gas resources. This fact is enshrined within the Mexican constitution. But, whereas many (if not most) other countries allow third party access to hydrocarbons through such mechanisms as licensing and production sharing agreements (either through the state or the state appointed national oil company), this has not happened in Mexico. 

The reason is twofold. Firstly, it is deeply ingrained within the Mexican culture that the people own the oil and gas and should therefore (through an elected government) be responsible for exploiting it. And secondly, this belief has been reinforced by a law passed that says that Pemex must be responsible for all exploration and production activities within Mexico.

However, in recent times Pemex’s financial situation has been deteriorating. This has been caused by a fiscal regime only suitable for very low cost land and shallow water work, and Pemex’s increasing use of debt to fund more costly exploration and development activities. In fact, Pemex’s debt is now so high that its credit rating is fast approaching speculative grade.

Also, although Pemex has technical leadership in some areas (e.g. exploiting heavy oils) it has found that it needs outside help to develop some resources in a timely fashion (e.g. deep water).

This has encouraged Pemex to seek commercial relationships with qualified companies that allow it to access investment and technology while remaining within the legal restriction that it must remain responsible for E&P. A further constraint is that Pemex must contract through the rather onerous and antiquated Public Works Law for Mexican state owned companies.

That political change is required is also recognized: a change in the Pemex tax regime was enacted at the end 2005 (effective beginning 2006) and is expected to save Pemex $2B per year in taxes.

The MSC concept is further evidence that there is the political will within Mexico and the capability within Pemex to attract outside investment.

Investors should be alert to further such opportunities.

14 March 2007

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