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Oil Companies' Uncertain Return to Mexico

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Big Oil returns to Mexico for first time in 77 years with Gulf oil and gas auction

Mexico welcomed international oil companies back into its borders for the first time in 77 years, today, with the announcement of winning bids for rights to explore 14 shallow-water oil blocks in the Gulf of Mexico. Though just two of the available blocks garnered successful bids, the auction was an early step in what will be years-long opening of the country's oil and gas sector—part of a historic energy reform package that president Enrique Peña Nieto hopes will bolster foreign investment and spur growth in the country’s lackluster economy.

But an oversupply of oil and gas in international markets and sustained low prices for crude have made gauging investor interest—and the ultimate impact of reforms—more difficult. Mexico faces tough competition from other oil producing countries in the region, like Brazil and Colombia. The recent deal reached on the Iran nuclear program could also challenge Mexico with the possibility of a glut of new oil entering global markets.

Still, while the downward trend in oil prices limited entrants in the first round of bidding (even Pemex pulled out to focus on later auctions), there remains significant international interest in Mexican oil, especially the deep-water blocks in the Perdido Fold Belt that will be auctioned off in the coming weeks. 

“What has been gratifying is that, despite the low oil price environment, we are seeing a lot of interest,” said the head of Mexico’s National Hydrocarbon Commission (CNH), Juan Carlos Zepeda, in an interview with Bloomberg Business. “The number of companies interested is moving with dynamism and has increased significantly.”

Low oil prices may also push Mexico to expand into new markets. With few export opportunities to the United States available, Mexico could shift its oil exports to Europe, India, Japan and especially China; Chinese President Xi Jinping pledged that his country's direct investment in Latin America would reach $250 billion over the next decade.

The stakes for Mexico are high, and president Peñ Nieto's economic agenda is riding on the difficult task of selling international and domestic investors on the country's oil sector. But with 107.5bn barrels of oil potentially on offer, investors—and government officials—have cause to be optimistic.

“They will make this work,” said Steve Otillar, a partner at law firm Akin Gump and legal adviser to the CNH, “This is too big to fail for Mexico.”

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Mexico, oil, Latin American oil

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