With Mexico moving closer, step by step, to relaxing its 76-year energy monopoly, the Texas oil and gas exploration industry is poised to head south into a newly-opened market. For San Antonio, it could mean further expansion of the city’s growing energy economy.
The Eagle Ford Shale Play knows no legal boundaries, of course, and extends south of the border, and mineral-rich Mexico is eager to invite in companies that will come with what Mexico’s state oil monopoly badly lacks: capital and advanced exploration, drilling and extraction technology. Texas companies, re-energized by the fracking boom, have both.
The Eagle Ford has exceeded all expectations in terms of economic impact in South Texas, yet much of San Antonio was somewhat caught by surprise when the first Eagle Ford wells were drilled in 2008 and the boom began. That same sense of unawareness could be in play once more. Talk to people in San Antonio’s business community today, and most seem only vaguely aware of the constitutional reforms being pushed through Mexico’s Congress by President Enrique Peña Nieto that will open state-controlled oil and gas fields and the country’s closed energy markets to international investment.
Some local business leaders watching developments say they remain wary. A lack of confidence in Mexico’s ability to implement reforms, its notoriously weak legal system and widespread institutional corruption all serve to dampen interest and enthusiasm in South Texas.
Even with constitutional reforms and a Peña Nieto administration eager to accelerate Mexican economic growth and cement the return of the Institutional Revolutionary Party (PRI) to power, most U.S. companies are uncertain how Mexico will move from monopoly to a competitive, open market for contracts.
Changing Mexico’s business culture in the energy sector won’t be easy, either. Petróleos Mexicanos, the state oil monopoly known as PEMEX, has been famously closed to outside collaboration, a posture that dates back to Mexico’s nationalization of the oil and gas industry in 1938 when President Lázaro Cárdenas expropriated the assets of foreign oil companies operating in Mexico and prohibited foreign oil companies from returning.
For all its history and distrust of U.S. political and economic incursions, Mexico has demonstrated the ability to undertake profound political and economic reform in recent decades and San Antonio has been witness to that change. On Dec. 17, 1992, the city played host to President George H. W. Bush, Mexican President Carlos Salinas, and Canadian Prime Minister Brian Mulroney, the leaders who led the efforts in each of their countries to win approval of the North American Free Trade Agreement. The agreement was ceremonially initialed by the three leaders under an old oak tree in La Villita.
Now Mexico is inching closer to the most significant constitutional reform since NAFTA was passed. The Congress passed historic legislation in December 2013, and Peña Nieto last week sent a series of so-called “secondary laws” to the Congress for passage. The new bundle of laws are, in effect, the enabling legislation spelling out the rules of play for opening long-closed markets.
“It’s an extraordinary moment,” Tony Garza, a former U.S. ambassador to Mexico under President George W. Bush and an adviser at law firm White & Case LLP in Mexico City, told Bloomberg News. “There’s potential to attract additional investment into shale and ultra-deep waters so that those resources can be exploited in a way that’s ultimately good for the country.”
Some economists believe the short-term investment in new energy exploration, drilling, production, and refining will exceed $20 billion, much of it by Texas-based oil and gas exploration and pipeline companies. By opening its long sacred monopoly, Mexico will benefit from badly-needed foreign capital investment, and inevitably, a huge technology transfer as the latest techniques in fracking and horizontal drilling are introduced south of the border.
The San Antonio Clean Technology Forum, which was early to recognize the potential impact locally of the Eagle Ford boom, is presenting “Mexico’s Historic Energy Reform: An Opportunity for Texas” on Tuesday, May 13, at a luncheon program at the Pearl Stable.
A four-person panel will include Duncan Wood, the director of the Mexico Institute at the Woodrow Wilson Center in Washington D.C.; Edgar Rangel Germán, commissioner with Mexico’s Comisión Nacional de Hydrocarburos; Marcelo Mereles Gra, a principal with EnergeA and a former senior executive with PEMEX; and Eduardo Andrade Iturribarria, a corporate director with Iberdrola Mexico. I will serve as moderator. The program will be in English. Raul Rodriguez Barocio, chairman of the U.S.-Mexico Foundation and distinguished professor of banking and finance at the University of Incarnate Word, will deliver opening remarks.
“Mexico has been blessed with enormous reserves of natural resources: solar, wind, geothermal, hydro-power, and petroleum reserves,” said Michael Burke, founder and chairman of the Clean Tech Forum. “Business and political leaders in Texas and San Antonio can play a significant role in helping to turn that potential into economic gain and an improved standard of living for our neighbors and friends to the south.”
A key challenge for Mexico, if the Congress there gives final approval to Peña Nieto’s reform initiatives, is whether it can manage the openings of closed markets with efficiency and transparency and reap what economists say could be significant job growth, a stronger peso, and a reversal of the country’s brain drain and outflow of workers seeking opportunity north of the border.
The potential for abuse is enormous. The government will be issuing contracts worth tens and even hundreds of millions of dollars, and traditionally, in Mexico, such sums of money do not trade hands without a percentage siphoned off by corrupt political and business leaders. Many U.S. energy operators would be scared off by demands for kickbacks or illegal payments, and institutional corruption also would greatly reduce the revenues available for Mexico to invest in its own people and infrastructure.
One measure of how intensely such matters are debated in Mexican society is reflected in an exchange that occurred after Peña Nieto publicly congratulated Mexican film director Alfonso Cuarón for the best Director Oscar he won for “Gravity.” Cuarón thanked the president, but last week also issued an open letter posing 10 questions to the president about the pending energy reforms. Click here to read the 10 Questions in Spanish. Click here to read them in English. Peña Nieto posted a lengthy response to the questions days later.
Click on the link to read a Los Angeles Times story reporting the president’s responses to Cuarón’s 10 questions. Here is a link to the president’s responses in Spanish. Click here to read a Spanish-language story about the pending legislative action.
Clearly, Mexico faces many hurdles in opening its long-closed energy economy, and San Antonio will not see significant short-term gains, but already local exploration interests are involved in drilling wells south of the border, and what has been a trickle of activity will gain momentum.
“Seventy-six years after the expropriation of its oil industry, Mexico displays one of the most entrenched, monopolistic and inefficient energy sectors in the world,” Raul Rodriguez said last week. “Proven reserves and production have been dwindling, leading the country to import a third of its natural gas, half of its gasoline, and two-thirds of its petrochemicals needs. Mexico’s deep water and shale exploration and production are almost nonexistent.
“Mexico is not only missing huge export opportunities, but the domestic implications include paying close to 75 percent more in electricity rates than we pay in the U.S.,” Rodriguez added. “The energy sector reform being considered in Mexico could result in momentous change, with enormous economic and social implications. If successful, it would be parallel in relevance to NAFTA and would open significant business opportunities for Texas. It behooves us in San Antonio to understand the intricacies and nuances of this reform process, the challenges and opportunities it presents, and the important prospects for our business community.”
Individuals and organizations interested in purchasing luncheon tables or seats for the Clean Tech Forum event can contact Scott Storment, executive director of Mission Verde at firstname.lastname@example.org.
*Featured/top image: Pemex (Petróleos Mexicanos). Photo courtesy of IMER.