March 11, 2015    3 minute read

Mexico’s Oil Liberalisation

   March 11, 2015    3 minute read

Mexico’s Oil Liberalisation

Since November 2014, Mexico has enhanced development of its oil sector. It introduced oil liberalisation reforms and it has been announced that production will rise by 500,000 barrels per day by 2018. This innovative change to a historically monopolistic domestic market is highly important for the country, as nothing similar has been done since 1938. Recently it proposed the second slot of oil assets. But are the goals for the reforms realistic?

From one point of view, the optimism of these expectations can be measured by taking into account the number of private companies who are willing to invest $1bn to the Mexican oil market. Among these companies are Pacific Rubiales (Canada-based) with an investment of $1bn, Sierra Oil & Gas with starting proposals of $525m and Alfa (Mexico-based) with expectations to raise $1bn via issuance of stocks.

These private companies, as well as others, will have following opportunities – to make joint ventures with state oil company Pemex, invest alone or make investments together with international partners. Several state banks have also announced energy funds in order to boost implementation of such oil reforms.

However, recent vulnerability of the oil market worldwide has significantly deteriorated Mexico’s prospects. Mexico’s oil output, which has plunged by more than 1m barrels a day since its peak a decade ago, in addition to declining 4.3 per cent in the third quarter of 2014, compared with a year earlier. The government had to cut the 2015 budget by 3 percent after the aforementioned decline in the oil market. Moreover, if oil prices begin to decline once more, Mexico’s expectations could be found unrealistic and unattractive for potential investors. According to Melissa Stark, Director of the Accenture Energy Business, the price in the market should be above $80 in order to make Mexican shale attractive for investors. She also suggested that there is a need for further government pressure and certain incentives to make these reforms adequate for investors.

It seems as if the Mexican government has unfortunately chosen rather difficult times for oil liberalisation. The unfavorable oil production environment globally put risk not only on the expectations for the Mexican state, but also international investors.

The next few months will determine the stability of the global oil economy and the level of investor sentiment. However, despite the current state of the oil market the Mexican bidding round is still rather lucrative for companies. Mexico has a lot of potential and natural resources to offer to the world and according to the Energy Minister, Pedro Joaquin Coldwell, the new era in energy in Mexico is coming and it will be ‘’for the good of Mexico.’”

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