What Changes Are Coming to the Oil and Gas Industry

In many countries throughout the world, oil and gas reserves are nationalized.

In many countries throughout the world, oil and gas reserves are nationalized. This means that the government has full control of them, which keeps both foreign and domestic corporations away from these reserves. Mexico has been in this situation since 1938, when Petróleos Mexicanos, or Pemex, which is an oil company that is owned by the state, took control of the country's oil. This oil monopoly is set to change, however, as the country is preparing to open its doors to private oil and natural gas investment in the near future.

Reason for Change

The main reason for this change is that Pemex does not have the capital to pay for exploration and development programs. As a result, the country's oil industry remained relatively stagnant and was leaving money on the table every year. Keep in mind that this will create a massive change in Mexico, as Pemex is currently responsible for funding over 30 percent of the government's expenditures. The government hopes that allowing outside investment will create additional money for the government, which can be used to grow the country's economy.

Local Content Rules

Despite this change, the Mexican government is aiming to prevent foreign corporations from completely taking control of the country's oil reserves. While these local content rules have not been fully implemented yet, the idea is that a certain percentage of the goods and services that are used to explore and develop the oil reserves will have to come from Mexican companies. 

The Institutional Revolutionary Party wants 100 percent of the goods and services to have to come from Mexican companies, while a lobby in the country is aiming for a percentage of between 45 and 60 percent.

Economic Growth                            

While it remains to be seen how these new laws will affect the Mexican economy, President Enrique Pena Nieto believes that it could provide a 6 percent growth every year. It is also important to note that Pemex will retain control of roughly 83 percent of the oil reserves, which will prevent foreign oil and natural gas companies from completely taking over. It is worth noting that Brazil implemented local content rules of 55 percent, but this slowed down development and might have actually hurt the country’s economy in the short-term by driving up the costs of development in the area.

Foreign Investment

Mexico is very rich in oil reserves, and if even a fraction of this oil is made available to foreign companies, it will increase their oil production exponentially. Eagle Ford is one company that could benefit because its gas plays in southern Texas extend into Mexico. These plays in Mexico have yet to be explored, but investors should expect Eagle Ford to bid on them. There are also a number of offshore oil reserves in the Gulf of Mexico that oil companies are sure to hold in high demand. Some estimates state that there could be over 50 billion barrels of undiscovered oil offshore, so oil companies are sure to fight for the right to explore these areas.

If this oil is made available to American and European oil companies, we could see prices decrease as this product hits the market. While you will still want to take precautions like properly insulating your house and buying replacement windows, these cold winters might not hurt as much if natural gas prices decrease.