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Round Zero and the Mexican Energy Sector

Monday marked the conclusion of “Round Zero,” a yardstick in a process initiated as part of the Mexican energy reforms. During Round Zero, Petróleos Mexicanos (Pemex), the Mexican state oil company, sent regulators a list of which fields it wants to keep for its own development.

Pemex currently owns and operates all oil and gas assets in Mexico. After the reform, private companies will theoretically be able to partner with Pemex after the fields are auctioned to private investors.

While Pemex’s exact wish list was not released publically, the company proposed to keep 83 percent of proven and probable reserves (known as “2P”), and 31 percent of proven, probable and possible reserves (known as “3P”). The 3P fields are potential hydrocarbon resources. Much of the acreage that Pemex left aside contained deepwater and shale resources, where it does not have as much expertise and experience.

In declaring that it would like to hold on to most operating fields, Pemex is showing that it will keep its most profitable onshore and shallow-water fields, as well as the few deepwater fields where it has already drilled. As it will now operate as a profit-seeking business, it makes sense that Pemex would aim to hold on to its most productive assets.

Will private companies seek to bid and partner with Pemex? The answer is likely yes. First of all, 17 percent of 2P reserves remain, which is still a big number. Companies will also likely seek to partner with Pemex in these areas, where the company has deep knowledge of the acreage and the seismic footprint.

The Round Zero results may be more notable for what Pemex left out. Deepwater and shale deposits are prized areas for private investment. Pemex decided that those areas were not playing up to its competitive advantage, and thus left most of them open to foreign competition.

The shale play is of particular interest. The Eagle Ford shale in Texas extends into the Mexican side of the border. The United States has issued over 13,000 drilling permits for shale wells in the Eagle Ford, with an output of 688,000 barrels per day. This compares to just 175 shale test wells in Mexico to date. Pemex does not have the technical knowledge to exploit Mexico’s expansive shale potential, and is leaving these opportunities to more skilled companies.

However, looking at the results from Pemex’s point of view, they win. Pemex focuses its efforts on the acreage that most benefits them and fits in their competitive space. This approach minimizes risk while providing for expansive profit-making potential. Furthermore, it allows the company to bring on foreign partners in some of these aging fields, which promises added production.

The Mexican Ministry of Energy has until mid-September to respond to Pemex. Once the list is approved, Pemex would be free to partner with other companies in “Round One,” through contracts that would be signed next year. The secondary legislation of the energy reform, which is set to be released on April 20, is likely to provide favorable conditions for private companies to enter Mexico. Once that is in place, sizable foreign investment in the energy sector would lead to benefits for both Pemex and the Mexican economy, although the details have yet to be worked out.

*Christian Gómez, Jr. is a contributing blogger to AQ Online. He is director of energy at the Council of the Americas. Follow him on Twitter at @cgomezenergy.

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Mexico energy reforms, Pemex, Round Zero

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