Is Louisiana's O&G industry ready to head south of the border?
The Mexican government made history earlier this year by constitutionally reforming its oil and gas industry to allow for foreign investment, but despite the opportunities this may create, many local companies are viewing the prospect with skepticism.
The Mexican industry's ban on outsiders traces back to President Lázaro "Tata" Cárdenas, who nationalized the country's oil and gas industry in 1938, kicking foreign interests like Standard Oil and Royal Dutch Shell out and taking their assets to boot.
"In the 1930s, workers in the Mexican oilfield camps were having difficulties - long hours, company stores and being away from home for long periods of time just to mention a few things," says historian Julia Frederick, Ph.D., a longtime Latin America scholar who now heads UL Lafayette's Honors Department.
"Those oil companies were backed by British and American firms that refused to recognize the workers unions," explains Frederick, saying a strike soon followed. "But President Cárdenas was already irritated with the foreign oil companies because they had started shifting their purchases from Mexico to Venezuela and hence exports were getting lower."
Cárdenas would ultimately go on to form Petroleos Mexicanos, or Pemex, a national oil and gas company that has since become one of the biggest contributors to the country's GDP. "The nationalizing of Mexico's oil would only hurt American interests in the sense that we could no longer rape Mexican oil as we'd been doing, but in reality we'd already starting moving elsewhere. Basically, we got greedy and paid for it."
Asked about the country's recent constitutional changes, and what the future may hold for Mexico's oil and gas industry, Frederick laughs. "I'm only a historian, not a wizard."
According to a recent analysis by The Washington Post on the lead up to Pemex's current woes:
Mexico became a major oil exporter after the 1971 discovery of one of the world's biggest oil fields in the shallow waters of the Bay of Campeche. The field was named Cantarell after the fisherman who alerted Pemex when he saw oil in the water.
Cantarell's output has fallen almost 90 percent since 1979. That would have been a catastrophe for the government had the price of oil not increased to more than $100 a barrel during the past decade.
The failure of Pemex and its government overseers to invest in the latest drilling and exploration technology is partly to blame for the decline. A critical issue for the future of Pemex is manpower. The company is overstaffed with unskilled workers whose jobs are guaranteed for life and understaffed with engineers and skilled laborers, says Marcelo Mereles, a former Pemex director and now a partner at EnergeA, a consultancy.
More than seven decades have passed since Cárdenas' industry takeover, and Pemex has increasingly suffered from poor management, decreasing production and aging technology, which is at the center of the reforms enacted earlier this year by Mexican President Enrique Peña Nieto in a historic effort to save the country's oil and gas industry.
"We've decided to overcome the myths and taboos to take a great leap into the future," said Peña Nieto, according to the Washington Post, shortly after he signed the new law on Dec. 20. "A new history begins for our country."
After paying out 50 percent of its revenue in the final quarter of 2013 in taxes to the federal government - $16 billion - Pemex helped fund one-third of the country's budget that year, according to WaPo. That resulted in a $5.8 billion loss for the quarter and a $13 billion loss for the year, and an additional loss of $2.74 billion in the first quarter of this year shows the situation is only worsening for Pemex's bottom line.
But with the new law in effect, Mexican energy officials are now hoping to attract partnerships with American businesses, particularly in South Louisiana - no doubt because of our abundance of oil and gas related companies - as it pushes to expand operations in the state of Tabasco, where government officials are planning for a major expansion of the Port of Frontrera, located along one of the state's biggest waterways, the Gijalva River. The hope is that this project can resuscitate the country's flailing oil and gas industry. And there's no doubt: The oil is there, in abundance, with billions of barrels waiting in its coastal waters. What's missing: the billions of dollars in foreign investments needed to tap into what Mexico considers its most plentiful reserve.
More than 70 percent of Mexico's oil comes from the Tabasco region, according to Christophe Pilut and Vanessa Paredes of Le Centre International de Lafayette - a nonprofit that promotes relationships between Acadiana and international business interests. "They have very similar geography to Acadiana - they're coastal, they have swamps, forests and even alligators," Paredes says. "It just makes sense for us both to cooperate and form these business relationships."
Recently, Pilut and Paredes helped bring a group of Mexican energy officials to Lafayette for an Oct. 2 event at the Louisiana Immersive Technologies Enterprise, where they pitched a range of new opportunities for Acadiana businesses. The Mexican oil delegation followed with a similar event in New Orleans, and is expected to return for a second round of presentations in December, with another visit planned at LITE.
Among the officials at the Oct. 2 event was Mauricio Garcia Palacios, president of the Association of Southeastern Mexico Oil Cos., who asked the crowd of at least 200 representatives from Acadiana's oil and gas industry to make the Tabasco region their "home away from home."
The state of Tabasco, highlighted above in green, is the focus of Mexican energy officials' effort to resuscitate the country's oil and gas industry.
"The difference now in Mexico is that Pemex is just one of the companies; they're no longer a monopoly," says Paredes, explaining the country's recent reforms. "When they decided to reopen the possibility for foreign companies to invest there, it created a huge potential for the companies here that have an expertise in oil and gas exploration. There's such a deep need on the Mexican side, so it's all very exciting for us to help create those relationships."
Despite the excitement, don't expect local businesses to immediately start jumping in with the Mexican oil and gas industry: There's still a lot of skepticism among local companies.
"There is some reluctance from the companies here," says Paredes. "They don't know what to expect. That's why we're doing these events - to make the companies here feel more comfortable."
Angela Cring, executive director of the biennial Louisiana Gulf Coast Oil Exposition, agrees, saying the local companies represented by LAGCOE are definitely taking a cautious approach to the developments south of our border. That, however, doesn't mean the interest isn't there, she quickly adds.
"The great turnout at the [Oct. 2] event is an indication of the high level of interest by local companies in Mexico's oil and gas industry," Cring says. "Overall, there seems to be a healthy mix of excitement over the potential growth in the market and skepticism because of historical difficulties operating in the market and profitability dealing with Pemex under previous regulations. That history may be a deterrent for companies; however, the geographic accessibility of the market is an undeniable positive."
One aspect holding local companies back centers on Mexico's unpredictable tax structure, which in the past resulted in tax rates as high as 35 percent. Yet, Mexico's new laws may have remedied the issue, offering American companies more clarity on what to expect.
While local companies like Frank's International are no stranger to working with Pemex on a contractual basis, the new regulations open a variety of new opportunities. These changes will be rolled out incrementally over the next five years, with proposals currently being accepted for projects related to natural gas distribution, processing and refinery development. That will be followed in 2015 by opening the market to retail gas stations and projects related to oil and gas storage and distribution. The country will then open its market up to companies specializing in oil imports and exports.
In 2017, Pemex will begin taking proposals from companies specializing in land-based shale exploration and natural gas production. The reforms will round out in 2018 with the acceptance of proposals to develop new areas of Mexico's shallow and deep water production of oil and gas.
Ultimately, whether South Louisiana companies will take advantage of Mexico's new industry rules is less a question of if than when. It's only a matter of time before they head south of the border.