Mexico Allure to Big Oil Uncertain

THE WALL STREET JOURNAL: Mexico Allure to Big Oil Uncertain

By JOHN LYONS and NEIL KING JR.
April 10, 2008; Page A10

Mexico’s effort to nudge open the doors of its ailing oil industry to foreigners may not be enough to attract the big international oil companies it needs to reverse the country’s slumping crude production.
 
Like other big oil producers, including Kuwait and Iraq, Mexico is betting it can entice major oil companies to hire out their muscle and expertise without offering them a clear prospect for big profits. But so far the majors have remained leery of such arrangements, even though many of the world’s most promising oil fields remain off-limits to them.

Mexico’s plan, sent to the country’s Congress Tuesday by President Felipe Calderón, would allow monopoly Petróleos Mexicános, or Pemex, to enter service contracts with foreign oil companies. Under those contracts the oil companies would receive fees for producing oil from Mexican fields, but they wouldn’t receive any stake in the oil reserves they might find. The country’s constitution prohibits the state oil monopoly from forming risk-sharing joint ventures with other oil companies.

Pemex Chief Executive Jesús Reyes Heroles admitted Wednesday that the oil contracts would be more interesting to up-and-coming oil companies, rather than international giants like Royal Dutch Shell PLC or Exxon Mobil Corp. “Maybe not Exxon Mobil, but other companies,” Mr. Reyes Heroles said when asked what kind of companies would be attracted by these contracts.

Even if big oil companies were interested, it is far from clear when such contracts would be transacted. Moreover, if the law opening Mexican oil fields to foreign companies is approved in Congress, opposition groups are likely to take legal challenges all the way to the Supreme Court, a process that could take a year or more. Critics are likely to argue that performance incentives the Calderón government wants to include in the contracts amount to the kind of profit-sharing prohibited by Mexico’s constitution.

Mexico, the world’s sixth largest oil producer by barrels per day of output, provides the U.S. with about 7% of its daily oil needs. With its production now in steep decline, many analysts predict it could cease being an exporter within the next five to seven years if it doesn’t find new oil. The country is turning to service contracts because Pemex is incapable of getting at untapped deposits believed to lie in deep water off Mexico’s coast. Mexico relies on oil to pay more than a third of the government bills.

Under the right terms, big oil companies would certainly jump at the chance to explore and develop Mexico’s oil fields. “Mexico represents one of the great prizes in the world for the industry,” said J. Robinson West, chairman of PFC Energy in Washington. “It is highly prospective, right next to the U.S., and the geology is familiar to anyone working in the Gulf of Mexico.”

But Mexico’s delayed bid to revive its oil sector also comes at a time of maximum strain within the oil industry. Offshore oil rigs are fetching record prices, while companies on all sides are fighting over a shrinking pool of skilled workers.

“Would large companies be willing to come in and do something on a cash basis? My guess is no,” said George Baker, a Houston-based oil analyst who follows Mexico closely. “We’re talking about devoting scarce resources, scarce manpower and scarce technologies for very little real return.”

Five years ago, Mexico began using service contracts for its gas fields, but the experience has been spotty. The contracts failed to attract a lot of interest as most big companies balked at the terms. Some contracts were eventually issued, but all hasn’t gone well. Spanish oil giant Repsol is currently trying to get out of its gas contract with Mexico because the contract isn’t paying off, industry insiders said.

What’s more, political opposition will be fierce. Andres Manuel Lopez Obrador, a populist former presidential candidate, has vowed to unleash street protests if the contracts go forward. Mr. Lopez Obrador, who said the government is secretly trying to privatize Pemex, has a long history of blockading energy installations.

“If they take the oil away from us, there is going to be an atmosphere of farce, of frustration, and we don’t want to live amid confrontation, disagreement, and conflict,” Mr. Lopez Obrador said in a speech opposing the energy reform.

Mexico’s halting steps toward reform mirror talks under way in two other long-closed oil-producing countries: Kuwait and Iraq.

In Kuwait, after a decade of haggling over how to open the country to foreign involvement, the state oil company has started negotiating with a handful of international companies over new contract models.

In Iraq, Exxon, Shell and BP PLC, among others, are discussing entering into service contracts to help the country boost production at some of its key fields. But their role would be limited largely to technical advice, with most work in the fields being done by the state-controlled oil industry or Iraqi contractors.

–Chip Cummins and Peter Millard contributed to this article.

Write to John Lyons at [email protected] and Neil King Jr. at [email protected]

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