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Mexico: new president could open the door to foreign investment

After winning the presidential election by the narrowest margin in Mexican history and enduring two months of public protests and legal challenges, conservative candidate Felipe Calderón has officially been declared the successor to Mexico's leader, Vicente Fox, Anne Feltus reports.

That is good news for energy companies that have experience operating in deep waters around the globe. Like Fox, Calderón recognises that the country's energy future depends on its ability to exploit its deep-water oil and gas potential and that the national oil company is not up to the task.

Oil income accounts for more than 40% of federal revenues and for years that income has come primarily from the giant Cantarell complex in the Gulf of Mexico. Total reserves of the five fields that comprise Cantarell rank as the second-largest in the world, smaller only than Saudi Arabia's Ghawar oilfield.

Discovered in 1976, and producing since 1979, Cantarell reached peak production of 2.13m barrels a day (b/d) in 1994 then began to decline. In an effort to prolong its life, state-owned Pemex began pumping nitrogen into the field to increase its pressure and employed production-boosting techniques such as horizontal drilling. Cantarell is expected to yield about 1.9m b/d of oil this year, but production is projected to drop rapidly to between 1.43m and 0.52m b/d by 2008.

To meet future domestic demand and continue participation in the international market, Mexico must find significant new oil reserves and the industry consensus is that those deposits are most likely to be in deep water. Pemex made its first deep-water oil discovery in Campeche Sound in 2004.

Two more discoveries followed before the Noxal 1 well, drilled in 3,000 feet of water off the coast of Veracruz, struck paydirt in March 2006. Initially, it was hailed as a major oil discovery that would yield as much as 10bn barrels and would reinvigorate the Mexican industry by helping offset Cantarell's decline. However, further drilling has revealed only 245bn cubic feet (cf) of gas and no significant oil reserves.

Pemex will continue its exploitation of the Mexican Gulf's deep water, but deep-water development is expensive and Pemex is heavily in debt. More importantly, it lacks experience of deep-water drilling, which is technologically challenging. Compounding the problem, Mexico prohibits foreign companies from investing in oil exploration. Mexican law limits participation by private and foreign oil companies to provision of oilfield services on a contractual basis.

The Fox administration's efforts to ease these restrictions were blocked by the opposition-dominated Congress. If the election had swung in favour of Calderon's opponent, Andres Manuel López Obrador, the impasse would probably have continued. However, now that the election results have been confirmed, Calderon is expected to begin opening the doors to foreign investment. Already, one deep-water veteran, Brazil's Petrobras, has indicated that it is ready and eager to enter.

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