Skip to main content

The Globe and Mail

Mexican oil reforms both challenge and opportunity for Canada

The U.S. government has run new numbers on the potential for Mexican oil production as the country finalizes sweeping reforms to allow billions of dollars in foreign investment in the sector. Canadian oil producers need to take a good look.

The projection by the U.S. Energy Information Administration, published Monday, shows healthy gains in Mexican output in the coming decades, wiping away previous fears of steep declines. That stands to reward Canadian companies wanting in on the action, but also spells risk for Canada's own oil as competition heats up in the sought-after U.S. Gulf Coast market.

In 2013, the EIA said Mexican crude production was likely to dwindle steadily to 1.8 million barrels a day by 2025, from around 2.5 million in 2015 and three million in 2010, as state monopoly Pemex struggled with operational problems and insufficient cash to employ the necessary technology to arrest declines.

Story continues below advertisement

Now, the agency expects output to surpass three million barrels a day in the next decade, with production stabilizing at 2.9 million through 2020, due to an expected deluge of foreign dollars directed at exploration and production, as well as rejuvenation of older oil fields.

Of course there are potential snags aplenty, as politics, finance and geology are fraught with risks, but in the EIA's current view, Mexican output could hit 3.7 million barrels a day by 2040. That's up 76 per cent from its pre-reform prediction.

This month, the government of Enrique Pena Nieto signed the final pieces of the energy reform legislation into law, essentially scrapping the ban on direct foreign investment in the oil and gas sector that has existed in Mexico since 1938.

Private interests, both foreign and domestic, will be offered joint ventures with Pemex as well as independent investment in onshore and offshore fields in licensing auctions set for the first half of next year.

Wood Mackenzie, the global energy consultancy, said the keys to boosting production will be horizontal drilling in the Chicontepec region on Mexico's east coast, heavy oil development in the southern part of the country, and the use of enhanced oil recovery technology at mature oil fields.

These types of operations fall neatly within in the wheelhouses of Canadian energy companies, which have been successful at deploying such technology at oil fields across the Western provinces.

The legislation features simple and transparent fiscal terms, with a sliding-scale royalty regime for the the profit-sharing, production-sharing and licensing contracts on offer, WoodMac said.

Story continues below advertisement

Mexican authorities are well aware of foreigners' concerns about security in a country that has spent the past several years fighting a deadly war against drug cartels, especially in regions near the U.S. border where Mexican officials hope to find a rich extension of the Eagle Ford shale in Texas.

Last week, Pena Nieto's government launched a 5,000-member federal police unit charged with guarding oil and gas, mining and agricultural operations against organized crime, according to a Reuters report.

Security is not the only risk for Canada, though. For the oil patch, a big presumption that has long guided efforts to boost transport capacity between Alberta and Texas has been dwindling imports in the U.S. Gulf region from Venezuela and Mexico as their state-owned oil companies struggled.

Many of the big refineries on the Gulf Coast are configured to process heavy crude and Canadian supply has similar characteristics to those imported grades. The long-delayed Keystone XL pipeline, and other, smaller pipeline expansions due to start up this year, were designed to meet that need.

The EIA's new numbers show it has been premature to rule Mexico out as a tough competitor, and that Canadian oil producers will do well to keep up efforts to diversify exports into markets beyond North America.

Report an error Licensing Options
About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in energy, finance and environment for The Globe and Mail’s Report on Business, based in Calgary. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general  topics. More

Comments

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

We’ve made some technical updates to our commenting software. If you are experiencing any issues posting comments, simply log out and log back in.

Discussion loading… ✨

Combined Shape Created with Sketch.

Combined Shape Created with Sketch.

Thank you!

You are now subscribed to the newsletter at

You can unsubscribe from this newsletter or Globe promotions at any time by clicking the link at the bottom of the newsletter, or by emailing us at privacy@globeandmail.com.