How Mexico's Oil Industry May Benefit US Investors - CNBC

The political agenda of incoming Mexican president Enrique Pena Nieto has profound implications for Latin America?s second largest economy, including new labor laws, fiscal restructuring to broaden the tax base, and a take-no-prisoners stance against the drug cartels.

Yuri Cortez | AFP | Getty Images Incoming Mexican president, Enrique Pena Nieto.

But no industry, arguably, stands to be potentially transformed the way the energy sector does.

Pena Nieto, who takes office Dec. 1, vowed during his campaign to push for further private sector participation in the state-owned oil and gas monopoly, Petroleos Mexicanos, or Pemex.

Pemex, a major source of revenue for the Mexican government, was partially deregulated in 2008, allowing private and foreign companies to bid on projects for the exploration and production of natural gas and oil refining.

It still limits their ability to share risk, however, or share in the potential upside of any oil finds. (More: Mexico...Surprising Land of Opportunity)

Pena Nieto?s reform initiative would open Pemex to further private sector investment ? and potentially even list the company as a publicly traded stock down the road, a la Brazil?s semi-public energy company Petrobras [PBR? Loading...? ? ? () ? ], which was deregulated in 1997 and began selling shares in 2010.

?If he succeeds, it would have huge beneficial effects for Mexico's economy,? says Shannon O?Neil, senior fellow for Latin America studies at the Council on Foreign Relations. ?The most obvious is an increase in foreign direct investment in the energy sector itself. But the benefits would spread to infrastructure more broadly, to services, and would lower the energy costs for companies in general ? improving competitiveness.?

Oil contributes to roughly one-third of Mexico?s total federal budget.

Pena Nieto has publicly stated that energy deregulation is necessary to provide Pemex the capital needed for deepwater oil exploration and technology upgrades.

Indeed, crude oil production at Pemex, the world?s fourth-largest oil producer, has been falling for the last eight years despite abundant reserves.

And economic growth has caused energy demand to outpace the country?s ability to generate supply.

?The reform that happened a few years ago under [current Mexican president Felipe] Calderon opened up space for service companies, but a more fundamental reform is necessary to bring in the major [energy companies] for exploration, production, and potentially distribution,? says O?Neil.??

Thus far, only oilfield-services companies are getting a piece of the pie. (More: Crime Explodes ? but an Economy Booms)

In May, engineering firm McDermott International [MDR? Loading...? ? ? () ? ] in Houston was awarded a Pemex contract to construct an offshore drilling platform for oil exploration and production.

And Houston, TX-based Schlumberger [SLB? Loading...? ? ? () ? ] won a contract in June to develop oil fields in Northern Mexico with U.K.-based Petrofac. [PFC-GB? Loading...? ? ? () ? ]

Chevron [CVX? Loading...? ? ? () ? ] in San Ramon, Calif., Baker Hughes [BHI? Loading...? ? ? () ? ]of Houston, TX and Halliburton [HAL? Loading...? ? ? () ? ]of Houston, are also reportedly making bids for rights to develop offshore oilfields in the Gulf of Mexico.

The opportunity for growth, as deregulation takes shape, is not lost on New York investment firm Morgan Stanley Private Equity, which announced in January it was working with former Pemex CEO Jesus Reyes Heroles to identify drilling and oil services companies that are ripe for investment.

It plans to invest between $35 million and $110 million in each of Mexico?s most promising energy companies.

Source: http://www.cnbc.com/id/49024104

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