America is a peculiar place in one respect: Our oil and gas reserves are privately owned. In many other parts of the world, including some countries that otherwise have (relatively speaking) free economies, those reserves are nationalized.

For more than 70 years, Mexico was a perfect example. As the third-largest oil producer in the Western Hemisphere, it enjoys massive oil and natural gas reserves: 139 billion barrels of oil and 17.3 trillion cubic feet (Tcf) of proven natural gas reserves.

[ad#Google Adsense 336×280-IA]And all of it has been controlled since 1938 by the state-owned oil company Petróleos Mexicanos, or Pemex.

That’s about to end, thanks to a stunning change in Mexican law that few expected even a year ago.

A handful of companies – and their investors – with interests in the region are likely to profit handsomely.

Change Was Needed

Why would Mexico privatize its oil and gas reserves after 75 years of state ownership?

Simple: Pemex doesn’t have enough cash to fund exploration and development. It needs investment partners.

That’s why Mexican lawmakers last week enacted a change in the country’s constitution to allow licenses for outside producers and production-sharing contracts. Major oil companies have required such provisions as a condition of investing in the Mexican oil and gas business.

Consider the scope of the change from Mexico’s perspective: Pemex funds a third of Mexico’s government. Imagine if a single American company, say Google, was both owned by Uncle Sam and provided payments funding a third of government operations.

What It Means for You

Mexico’s onshore shale gas reserves are the fourth-largest in the world, with 681 TcF of recoverable shale gas, according to an Energy Information Administration (EIA) study.

Yet despite its natural gas riches, Mexico currently imports much of its nat-gas from the United States.

The Eagle Ford oil and gas plays in Texas extend into Mexico. But there’s been no exploration or production of the play in Mexico.

Companies such as ConocoPhillips (NYSE: COP), EOG Resources Inc. (NYSE: EOG) and Chesapeake Energy Corp. (NYSE: CHK) are all well positioned to continue development of the play into Mexico. They are all big players in the Eagle Ford.

Others poised to benefit from the new legislation are oilfield services companies such as Halliburton Co. (NYSE: HAL). It’s been working in Mexico for a number of years already. It recently signed a new contract to provide services in one of Mexico’s new fields.

Mexico also has plenty of undeveloped offshore oil resources – most of them deepwater or ultra-deepwater – in the Gulf. For example, in 2012 Pemex made a significant find in an area of the Gulf called the Perdido Fold Belt.

But Pemex has neither the technical expertise nor the money to pursue promising offshore targets. Mexico’s new legislation will attract the likes of Chevron Corp. (NYSE: CVX) and Exxon Mobil (NYSE: XOM) to Mexican waters.

Because of Pemex’s 75-year monopoly, the size of its offshore oil and natural gas assets is really an unknown. Pemex estimates they could be as high as 50 billion barrels.

In fact, they could be much larger. Mexico’s decision to allow more experienced, foreign E&P companies to develop its resources is a smart one.

Mexico will benefit from opening its oil and gas market. So will the companies mentioned above, and their investors.

Good investing,

David Fessler


Source: Investment U