In recent years, the United States has seen a huge oil and natural gas boom fueled by hydraulic fracturing (“fracking”) and horizontal drilling. Now, American energy companies may have the opportunity to put their expertise into practice in a new energy market: Mexico.
Mexico recently passed a series of energy reforms that ended the 75-year-long monopoly over oil by the state-owned company Pemex. As a result, oil drilling will now be open to private and foreign investment. The Mexican congress is currently debating the secondary legislation that will implement the reforms.
The U.S. Energy Information Administration ranked Mexico’s shale gas and shale oil reserves as the sixth and eighth-largestin the world, respectively. Yet Pemex’s lack of technical expertise to drill the abundant shale energy reserves has caused oil and gas production to decline dramatically over the past decade. Mexico produced only 2.9 million barrels of oil liquids per day in 2013, a 22 percent declinefrom its height in 2004.
The U.S. is in the perfect position to invest because of the North American Free Trade Agreement and its experience with fracking and horizontal drilling. Additionally, Mexico’s recent rejection of bans on fracking makes the country more attractive to U.S. energy companies that are facing domestic discontent with fracking.
Mexican and American households would benefit in the form of lower energy prices and more jobs. In Mexico alone, estimates hold that these reforms could create2.5 million jobsby 2025. Moreover, an increase in economic opportunities in Mexico would reduce incentives to unlawfully migrate to the U.S.
Nevertheless, these reforms have faced significant challenges from Mexico’s left-wing Party of the Democratic Revolution, which could potentially organize a referendum in early 2015 to invalidate the approved reforms.
In addition, weaknesses in the rule of law could derail the success of these reforms. According to the Index of Economic Freedom, published by The Heritage Foundation and The Wall Street Journal, property rights and freedom from corruption remain serious problems. In fact, private energy companies are avoiding profit-sharing and production-sharing contracts, as it would obligate them to form joint ventures with the historically corrupt Pemex. The legislation should also address the apparent unchecked regulatory power given to the Ministry of Finance and the powers of regulatory bodies.
While Mexico’s energy reforms have the potential to attract significant investment from private and foreign companies, particularly U.S. energy companies, significant challenges remain. The details of the legislation, as well as Mexico’s ability to combat corruption, will determine if this potential is fulfilled or not.
Andrea Rodriguez is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, pleaseclick here.
