Houston Energy Firms Await New Rules Before Plunging Into Mexican Waters

Offshore drilling in the Gulf of Mexico accounts for nearly a quarter of all U.S. crude oil production. The line that separates U.S. offshore resources from those of Mexico is a legal boundary. Physically, it’s one giant reservoir.

Drilling south of that boundary has long been the exclusive right of Pemex, Mexico’s state-run oil company. The government derives much of its budget from oil taxes and royalty payments. That leaves Pemex far less than it needs for new exploration and production. Jim Noe is executive vice president of Hercules Offshore, a Houston-based drilling company.

“The Mexicans have been suffering through years, and really decades, of steep decline rates in their fields. And what that means is that you have to drill more wells than you did last year just to produce the same amount of oil or gas that you produced last year. And so it requires more equipment, it requires more technology, and they just haven’t been able to keep pace with the rate of decline that they’re seeing.”

The only way to halt that decline is with foreign investment. Changing the constitution to allow that forced legislators to break a huge political taboo. J. Wayne Ballew is a partner with Houston law firm Looper Ballew.

“One of the keys to the [energy] reform, and I think this is what ultimately allowed it to pass, is Mexico has still retained ownership of all of its oil and gas. And so instead of a concession-based scheme, where the foreign investor can take ownership of the oil and gas, it’s a profit- and production-sharing scheme.”

Hercules Offshore’s Jim Noe says U.S. companies need a lot of questions answered before they’ll invest under those terms.

“What will the Mexicans do to create a regulatory body? You know, for seventy-five years, they haven’t had to regulate foreign companies. How will the leases be allocated? How will they be bid on? Who’s going to pay the oil companies, and when will they be paid? You know, all those details are still up in the air.”

Offshore drilling is only one opportunity Mexico’s energy reforms offer to U.S. companies. Onshore, there’s the Eagle Ford Shale — largely untapped south of the Rio Grande. Mexico wants to attract independent oil and gas companies to the region. They’re the ones who pioneered fracking in the U.S. Bill Herbert is a managing partner with Houston investment bank Simmons & Company.

“They are blessed with an inventory of growth prospects over the next ten to twenty years which is pretty compelling in the U.S., and given the sort of ease of doing business in the U.S. relative to a brand new international market such as Mexico, I think it would take an awful lot of incentive in order to attract the independent into Mexico.”

Whether those incentives will be enough is something U.S. independents and majors alike will learn later this year — when Mexico unveils its second round of energy reforms.

 

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