Mexico’s Pemex Oil Monopoly Nears an End – WSJ

An energy bill was passed by the Mexican senate this week that may end a 75-year-old monopoly held by Petroleos Mexicanos, also known as Pemex, which is state-owned. Mexico’s energy sector has largely been sealed off from foreign investment for the better part of a century, but now, as The Wall Street Journal reports, that the bill will allow private companies to drill for oil and gas through flexible contracts and licence. As it stands, private companies have been kept out of oil and gas production, except for those working under contract to Pemex. However, the bill gives private companies a share in oil production in return for taking all the exploratory risks. Importantly, it also allows them to mark reserves as expected cash flow.

An earlier proposal by President Enrique Peña Nieto would have allowed companies to receive cash payments, called profit sharing contracts, in exchange for participation. But this proposal goes much further, allowing companies the option to share in the actual oil production, or to contract independently of Pemex.

If, as expected, the bill is passed by Mexico’s lower house and implemented, Mexico could add one and half million barrels of oil a day and double gas output by 2025, which would lift annual economic growth by as much as 1.6 points, according to estimates.

According to The WSJ, the end of Pemex’s monopoly is seen by some as the biggest economic change in Mexico since the North American Free Trade Agreement in 1994.  Economic and political consultant, Pedro Burelli has described the outcome as “seismic shift” in Mexico that should have a considerable impact on global oil markets, most notably to the detriment of Middle Eastern producers. Gabriel Salinas, an attorney, said the proposals were “groundbreaking” and that the bill will help Mexico develop a competitive energy sector, like those seen in Brazil and Columbia.

Furthermore, by overhauling the energy sector, Mr. Pena Nieto has fulfilled his promise to lift oil production that has stagnated at around 2.5 million barrels a day in recent years and tap shale-gas deposits in the north.


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