Oil joke Mexico set for last laugh after exploration bids

An Italian, a Colombian and a Russian walked into Mexico last week – part of the transformation of a country that had long been something of an oil industry joke.

Mexico’s latest bid round for shallow-water oil exploration was highly successful – promising more production, and demonstrating the virtues of openness to international investment.

The Italian national champion, Eni, won a block in 2015’s “Round One”, and has already enjoyed success, finding light oil in March in the shallow waters of the Bay of Campeche, in the south-east. This was the first private discovery in the country for 75 years.

Last month, the United Kingdom’s Premier Oil, in partnership with Talos Energy of the US and the local firm Sierra Oil & Gas, also began drilling offshore in the south.

The Colombian state firm Ecopetrol, Russia’s Lukoil, and the majors Shell and Total, are among others that won blocks in the latest auction. In December, ExxonMobil, Statoil, BP and Chevron secured deepwater acreage. Attractions include Mexico’s proximity to the US petroleum capital of Houston; its relative familiarity to Americans; its need for new investment and technology; and the geological continuity of both US shale formations and deepwater Gulf of Mexico reservoirs across the border.

But Mexico has also made its own luck. Its March 18, 1938 oil nationalisation, the world’s first outside Soviet Russia, remains a proud moment and its legacy made the energy reform controversial.

So the opening to private and international corporations has been carefully executed, overcoming domestic opposition and making use of the international expertise on its doorstep. Local oil companies, such as Sierra and Citla have emerged. The bid rounds are highly transparent, broadcast on television and online. They have been structured to build interest gradually, and create competition, so the government gets a good deal. Not all blocks are awarded, diminishing charges that the state is giving away national assets too cheaply.

Exploring in Mexico still faces special problems – oil theft from pipelines, drug-related gang violence and corruption. Offshore production at least should be immune from the first two, but US shale plays such as the Eagle Ford stretch into Tamaulipas and Coahuila, two of the country’s most violent states.

Previous oil privatisations in Latin America have mostly turned out badly for investors. When the wheel of left and right-wing politics turned, companies found their assets in Argentina, Venezuela, Bolivia and Ecuador expropriated. Brazil’s once-admired Petrobras, a pioneer in deepwater exploration, blundered into a swamp of debt and corruption. Its shares, that peaked at US$72 each in 2008, slumped to $3 in early 2016, and have recovered only a little since.

On the other hand, despite its own violent history, Colombia’s upstream industry has done well since state firm Ecopetrol was part-privatised in 2007. The government still holds 88.5 per cent, but with middle-class Colombians as well as New York investors holding shares, the company has doubled its output. It has benefited from an influx of skilled Venezuelan petroleum workers, fleeing the economic crisis and crime wave next door.

Mexico’s oil reform is one more headache for Opec. Output peaked at 3.38 million barrels per day in 2004, but then declined sharply as key fields such as the giant Cantarell matured, helping to underpin the last decade’s rising global oil prices. In November, the country agreed to cut output from 2.4 million barrels per day to 2.3 million, as part of its cooperation with the producers’ organisation. Now, the new investment should at least halt the decline, and turn it around during the 2020s.

Mena countries that are opening to investors, such as Iran and Iraq, or that have scared them off, such as Algeria and Kuwait, can learn from the Mexican approach.

But Middle East oil exporters will have to contend with yet another growing competitor a hemisphere away.

Robin M Mills is the chief executive of Qamar Energy, and author of The Myth of the Oil Crisis.

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