Mexico’s Government Ends Ban on Foreign Investment in Oil Industry

BY RACHEL WALKER–

New Law. On Thursday December 12, 3013, the Mexican government opened up its 95-billion-dollar a year industry to foreign investment.[1]  This decision was not without controversy.  By allowing foreign investment in its oil industry, the Mexican government has essentially engaged in the largest reform of its oil industry in the past 75 years.[2]

Expropriation.  In 1938, the Mexican government expropriated the assets of nearly all of the foreign oil companies and banned them from operating in Mexico.[3]  The government also created Petróleos Mexicanos (PEMEX), a state-run company, which has held a monopoly over Mexico’s oil industry ever since.[4]  Expropriation came about, in part, because prior to 1938, foreign companies conducted approximately 90% of Mexico’s oil production.[5] In the 1920s, Mexico was the world’s second largest producer of oil.  However, even though Article 27 of the Mexican Constitution of 1917 declares that the “subsoil,” including any natural resources discovered below ground, belong to Mexico, most of the profits from the oil production did not remain in Mexico because Mexico did not have a large domestic market and these companies exported most of the oil they produced.[6]  Additionally, labor disputes among Mexican workers and the foreign companies spurred the government to act.[7]

Need for Reform. Since expropriation in 1938, PEMEX has held a monopoly over the Mexican oil industry.   However, accessing Mexico’s oil and gas reserves has become increasingly difficult, and PEMEX does not have the technology or the ability to access them.[8]  Indeed, Mexico has abundant reserves, but many of them are located far beneath the Gulf of Mexico and trapped in shale deposits.[9]  Advances in technology have given some foreign companies the ability to access these resources.[10] The new law will allow for profit- and production-sharing contacts with foreign companies like Exxon Mobil and BP.[11]  These contracts will allow these companies to explore and drill for oil and gas that Mexico hasn’t been able to reach.[12]  Furthermore, the Mexican government will be able to auction oil and gas licenses, mostly for deep-water projects, and then collect taxes and royalties from companies for the amount extracted.[13]Allowing foreign companies to access these deposits has the potential to increase Mexico’s production by about 2.5 million barrels per day.[14]

Worldwide Impact.  The surge in Mexican production would supplement increases already occurring in U.S. and Canadian production.[15]  Exxon Mobil Corp predicts that within two years, these surges will put North American oil production ahead of every OPEC member except for Saudi Arabia.[16]  Furthermore, predictions indicate that this surge could lower the price of Brent crude oil from an average of $108.62 per barrel this year to $88 per barrel in 2017.[17]

Potential Problems.  While the new law provides a huge potential for the increase in Mexico’s oil production, it is not all smooth sailing.  First, the Mexican government still needs to draft legislation that will specify how the government awards contracts and how to manage profits.[18]  Furthermore, a lack of infrastructure, such as pipelines, in certain areas may slow down drilling.[19] Additionally, foreign investors may face challenges from locals.  Polls indicate that most Mexicans oppose foreign investment in oil.[20]