The biggest energy opportunity since the collapse of the USSR

Pemex has left much of Mexico unexplored

If you look at a satellite picture of the Gulf of Mexico taken at night, you’ll notice a weird pattern. The northern half is pricked with hundreds and hundreds of tiny lights. But then there’s a sharp divide, which runs from the north west to the south east, roughly halfway across it. Below the line, there’s nothing but black.

The lights are coming from oil drilling platforms. The capital of the US oil industry is Houston, right on the coast, and the US oil industry has used all of its money and know-how to get every drop of oil from its part of the gulf.

The black part, to the south of that dividing line, belongs to Mexico. And there’s plenty of oil there. But the problem is politics.

Mexico’s 76-year oil problem

When Lazaro Cardenas nationalised the oil industry in 1938, the move was greeted by spontaneous nationwide celebrations as hundreds of thousands of Mexicans poured onto the streets. But little did he know that the historic decision, which made sense at the time, would eventually create a monster.

After a prolonged oil workers’ strike, the Mexican president shocked the world by setting up Pemex, a state-run oil monolith. It was the first time that an oil-producing country had stood up to the Western oil companies, encouraging producers from Venezuela to Saudi Arabia to start taking a tougher line.

However, state control has proven to be a strait jacket for the Mexican oil industry. Geologists estimate that Mexico is sitting on reserves of 150 billion barrels of oil equivalent (BOE), yet Pemex has only explored 20% of the country for further reserves.

A combination of poor governance, bad investment decisions and structural problems has seen the company squander these enormous opportunities.

Thankfully, Mexico is finally taking steps to address this and for the first time in 76 years, the country is opening its energy industry to foreign investors.

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Here’s what Mexico’s been missing out on

This map shows the distribution of oil wells along the Gulf of Mexico. While there are almost 4,000 wells on the US side, the Mexicans have barely started in their part.

As you’ll see in the video, state oil producer Pemex believes that there could be up to 50 billion BOE in Mexico’s part of the Gulf of Mexico. However, much of this is located in deepwater and getting it out requires billions of dollars worth of investment – which means the government is keen for international oil companies (IOCs) to help out.

Mexico also has great shale oil and gas reserves. According to the US Energy Administration Agency, the country has the world’s fourth-biggest shale oil reserves. The Mexicans themselves are a bit more conservative, but even they put the figure of their shale oil and gas reserves at around 60 billion BOE.

Recently, I spoke to Gustavo Hernandez, head of exploration and production at Pemex, to ask him about the scale of the opportunity and the competition he expects to face from the IOCs.

You can find out more in the video below:

The last time this happened, the results were phenomenal

The Soviet Union had the world’s biggest oil and gas reserves, but like Mexico, they had been inefficiently exploited by a creaking state oil company and hampered by poor technology and corruption. The fall of the Berlin Wall allowed an influx of IOCs to take advantage of the new Russia’s amazing oil wealth.

Fast forward to today and Russia is now the world’s leading oil producer, cranking out almost 11 million barrels per day. From Azerbaijan to Siberia, IOCs have invested hundreds of billions of dollars in new projects in the borders of the old Soviet Union. The new bets have made some very rich, while others (just ask BP) have struggled.

Yet, the fact is no international investor could ignore the theme. Mexico now has the potential to become an oil giant in its own right. Here’s hoping it will be able to capitalise on the enormous opportunity.

This article is taken from The New World, MoneyWeek's FREE regular email of investment ideas and news from Asia and Latin America. Sign up to The New World here.

  • robmellors

    Being a Brit living in Mexico I found this article of great interest, not least because it’s good to see a British financial group recognising where Mexico is standing. The recent passing of the “Energy Reform” bill in Mexico was a major landmark political event in this country and opens the door to yet another dimension of the growing presence of Mexico in Latam and world economics. Whereas Brazil was the Latam power country, Mexico has been having its say in that particular matter in the last few years. The explosion of major car manufacturers opening shop and production in Mexico has been interesting to observe and of course its proximity to the USA is a driving force in the Mexican Economic story. Watch this space!

  • Sage of Aldershot

    Nice one, thanks James!

  • Hazza

    Rather than ‘squandering these enormous resources’, haven’t Pemex played a (accidental) blinder by not exploiting these reserves when oil was $20, rather waiting until the current $100 dollar level?
    Perhaps it is the UK that has squandered the enormous resources in the North Sea?

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