Mexico Courts Canada’s Energy Sector

Although the US currently absorbs nearly all of Canada’s energy exports, that doesn’t mean the country’s energy producers are solely dependent on its neighbor to the south for future growth–nor should they be.

After all, the prolific shale plays are helping the US become increasingly self-sufficient in satisfying domestic energy demand, which is crowding out Canadian crude. And Canada is still at least a few years away from having the necessary export infrastructure in place to move its energy products to fast-growing Asian markets.

Fortunately, the US isn’t the only major regional energy player with which Canada enjoys friendly relations. In fact, a recent move by the Mexican government could draw the two countries closer together.

Late last year, Mexico’s Congress enacted historic energy reforms that ended the monopoly of state-run Pemex (Petróleos Mexicanos) over the country’s energy sector. More recently, the secondary legislation that will create the legal and regulatory framework for this sweeping transformation is moving toward approval in August, which means Mexico is poised to allow foreign investment in its energy sector.

Although the US enjoys greater proximity to Mexico, Canadian energy producers could end up being the big winners here, in part because of the complicated and sometimes thorny relationship between the US and Mexico. Indeed, Mexico booted US energy companies from its soil back in 1938, just prior to nationalizing its energy sector, and by some accounts there is reluctance to re-establish those ties.

As Carlo Dade, director of the Centre for Trade and Investment Policy at the Calgary-based Canada West Foundation, put it to the Financial Post, “Obviously, the opening of the energy sector in Mexico cannot be seen as a reconquering by Americans.”

According to the FP, Leonardo Beltran Rodrigues, undersecretary of planning and energy transition at Mexico’s secretariat for energy and natural resources, told Canadian oil company representatives, Mexico can undertake this transformation “with many people, but we would rather do it with friends.”

This comment was apparently made early last month, when a high-level delegation from Mexico met with Canadian energy firms in Calgary to pitch them on taking advantage of these new energy sector reforms.

Although Mexico was the ninth-largest oil producer in the world, based on 2012 production numbers aggregated by the US Energy Information Administration, its production has been in decline, falling from a high of 3.4 million barrels per day 10 years ago to 2.5 million barrels per day in recent years.

By some estimates, Mexico could even become a net energy importer if it doesn’t find the capital and expertise to fully exploit some of its more hard-to-reach resources, such as shale formations and the deepwater deposits in the Gulf of Mexico.

Under the new regime, Canadian firms can participate in energy production through services, profit-sharing, production-sharing contracts and licenses. And private investors will be allowed to finance midstream and downstream projects.

According to a report earlier this year by the North-South Institute, a Canada-based nonprofit whose research focuses on international development, Canadian firms with expertise in horizontal drilling, multistage fracking, offshore drilling, as well as service and equipment companies are in the best position to profit from these reforms.

Though Canada has obviously benefitted from Mexico’s declining production, Canadian producers already have invested in shale formations just across the Mexican border, and these resources could have contiguous plays in Mexico itself. Additionally, stronger ties between the two countries could help provide leverage with negotiations over related areas with the US.

At the same time, this development could undercut US demand for Canadian heavy crude, since the US already absorbs about 85 percent of Mexico’s energy exports.

Beyond our parochial concerns as investors, the North-South Institute speculates about the possibility that Canada, Mexico and the US could forge an energy alliance that could turn North America into a net energy exporter, an outcome that would fundamentally reset the balance of power among energy-producing nations.