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Mexico aims to open oil industry to private investment

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Marco Ugarte/AP/File

(Read caption) A truck drives past a refinery in Salamanca, Mexico, 170 miles northwest of Mexico City. Mexican oil production has fallen 30 percent in the last eight years.

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Mexican President Enrique Pena Nieto unveiled plans this week to amend articles of the Constitution that prohibit private investment in the country's oil industry. The state company Pemex would remain in government hands, as would the oil reserves themselves, but the government would break the monopoly on production, in order to attract private investors.

It is not yet clear that the proposed reforms will pass. But the Mexican industry clearly needs help. Oil production has fallen 30 per cent in the last eight years. The country has impressive natural gas resources but is dependent upon imports. The pipeline system desperately needs to be modernized.

All this means that the electricity generation and distribution systems lack capacity to promote industrial expansion. The high price of electricity and energy costs in general are a drag on industrial output. (Related article: What's the Future for Your State Monopoly?)

According to government estimates, an annual investment of $20 billion in infrastructure and new production is required to start the modernization of the industry and its networks. 

The response in Canada to these proposals has been ambivalent. The Mexican ambassador to Canada has assured journalists that his country does not seek to compete for the U.S. market. On the contrary, he said to the Globe and Mail in Toronto, "I think this opens great possibilities for Canada not as competitors but as complementary economies. I think this offers enormous opportunities for the relationship between Canada and Mexico."

In the best of all possible worlds, with cutting-edge foreign technology and intensive capital investment, the decline in Mexican petrochemical production could be halted within two years. And Canada's oil and gas service companies are well placed to take advantage of the opportunities, with their expertise in shale oil, shale gas, and both offshore and onshore fields.

But Canadians have been anticipating that their own energy crude production would replace Mexico's in the U.S. market as the latter's market share continues to decline. U.S. government figures shown that imports from Mexico are down 41 per cent over the last six years while from Canada they are already up 25 per cent. If Canadian services help to rehabilitate the Mexican industry, then Canadian sales expectations to the U.S. might have to change.(Related article: OPEC Set to Suffer at the Hands of Mexico’s Energy Market Reform)

In fact, it is more like that U.S. service companies would enter the Mexican market and convince their partners there not to work so much with the Canadians. An exception is TransCanada, which already works on gas pipelines in Mexico. A spokesman there says the company might consider investment in electricity generation.

A big sticking point is that it appears foreign companies would still be prohibited from owning the reserves themselves. Particularly since details of the reform concerning foreign involvement in the sector are not all spelled out, it is not clear what kind of contracts would be permitted and what kind would not.

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If the state continues to own the reserves and wishes to restrict foreign involvement to "service" contracts for the production, then there is not likely to be much interest, at least from the U.S. side.

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