Mexico Finally Makes a Deepwater Oil Discovery
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Petroleos Mexicanos, the state-owned Mexican oil and gas company, just reported a major crude oil discovery in the Gulf of Mexico. Pemex said that the Trion 1 exploration well confirmed the presence of oil and gas resources and estimated that the prospect might hold proved, probable and possible reserves ranging from 250 million to 400 million barrels of crude oil. This is the first deepwater crude oil discovery by Pemex in the Mexican area of the Gulf of Mexico.
What Took So Long?
One major reason that Pemex is reporting its first deepwater crude oil discovery compared to the dozens reported in the United States portion of the Gulf of Mexico is that the private sector is not allowed to own oil and gas resources in Mexico.
Article 27 of the Mexican Constitution, adopted in 1917, specifies that the nation has direct ownership of all natural resources, including oil and natural gas deposits, both on the land or on the offshore continental shelf area. This right of ownership is referred to as “inalienable and imprescriptible” meaning that it cannot be taken away. Despite this rather definitive language, privately owned and foreign oil and gas companies continued to operate in Mexico for many years after the constitution was adopted.
Gulf Oil and Texaco, both now owned by Chevron (NYSE: CVX), entered the Mexico oil and gas market in 1912. Chevron itself, operating back then as Standard Oil of California, entered Mexico in 1917. Royal Dutch Shell (NYSE: RDS-A) also started up here in 1912, and in 1919 purchased a large ownership stake in Mexico’s largest oil and gas company.
Other operators involved in oil and gas production and related industries in Mexico at that time include Union Oil, later known as Unocal, and eventually purchased by Conoco Phillips (NYSE: COP).
ExxonMobil (NYSE: XOM) seems to be everywhere and Mexico was no exception. The company, operating back then as Standard Oil of New Jersey, made a major acquisition here in 1932, becoming the largest oil and gas producer in Mexico.
In 1938, the government nationalized these assets during a labor dispute, offering compensation to these operators. After several years of negotiations, threats and boycotts, and assisted by diplomatic intervention by the Roosevelt Administration, the parties settled on $24 million in compensation for the seized assets.
All the companies mentioned above have operated for decades in the U.S. deepwater section of the Gulf of Mexico, and found significant deposits of oil and gas resources. Since it’s fairly obvious that geological formations buried thousands of feet below the surface don’t respect national boundaries, these operators would probably been happy to explore in Mexican waters if private ownership and the proper financial regime had been set up.
Eagle Ford Shale
The deepwater is not the only area impacted by this prohibition on private ownership of oil and gas resources. The Eagle Ford Shale in south Texas is one of the fastest growing unconventional resource plays in the United States and undoubtedly runs across the border into Mexico. Despite this potential horde of resources, there has been little development of the Eagle Ford Shale by the Mexican government.
Mexico already imports natural gas from the United States and plans to invest $8 billion to expand its pipeline system to import even greater quantities in the future. Kinder Morgan (NYSE: KMI) is also investing to handle additional exports and plans to expand its pipeline system in Arizona to bring natural gas to the Mexican border.
Time To Change
Mexican crude oil production peaked in 2004 and has been steadily declining since that time, with the Cantarell Field often cited as evidence of the approach of peak oil. This decline can be arrested if Mexico loosens its prohibition on the private ownership of these resources. Many other countries already allow foreign oil and gas companies to explore and develop oil and gas properties while still maintaining control and sovereignty over these resources.
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