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Mexico Pushes for Energy Change

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So Mexico isn't entirely energy independent. Mexico produces enough crude oil to satisfy its domestic consumption, however Mexico imports a lot of refined goods from the United States, mostly from Texas. So Mexico at this point is approaching basically a turning point in its energy policy. The country is in the middle of the conversation in order to determine what's going to happen next to the energy industry.

What's likely right now is that we're going to see a decline in production, also exploration, in the near future primarily because Mexico has underinvested for so long in its energy infrastructure. So we've got near shore energy production -- these are the fields like the Cantarell field -- where production is declining at a rate that that looks to be pretty precipitous for the government going forward. And it really matters for the government because most of, or 30 to 40 percent of, the government's revenues in any given year come from that energy they produce. So a decline in energy output means a decline in government revenues, which means that there's a budget crisis just over the horizon for Mexico unless they increase production.

So what Mexico's contemplating right now is basically twofold: One -- how does the country approach getting foreign companies to come in, invest capital but also technology into the energy resources that Mexico is pretty sure that it has, particularly in the Gulf of Mexico offshore. And then number two -- whether or not to reform PEMEX the country's -- the national oil company to make it a little bit more efficient, a little bit more productive, able to better adapt to incoming technologies.

The first question -- whether or not they open up the oil sector to foreign investment -- is going to have to reside in a question about constitutionality. Right now the Mexican constitution states that subsoil minerals belong to the state and to the people alone. In order to get foreign investment into Mexico, Mexico is going to have to change that part of the constitution in order to allow foreign oil companies to own the oil that they drill. So that's going to have to happen before anything happens with foreign investment.

When it comes to whether or not they're going to make PEMEX more efficient, we're talking about whether or not they're going to be able to tackle years and years of accumulated corruption, bureaucratic inefficiencies and vested political interests that are going to make it pretty difficult to change how Pemex is run, how it's structured, etc. And the government has already promised definitely not to privatize Pemex but it's possible that there will have to be some sort of change to how PEMEX operates in order to make it a viable partner for foreign companies coming in and also to just generally increase its efficiency and competence in the short to medium term.

So at this point we think that the Mexican government is going to follow through on promises to begin presenting an energy package, late this year, maybe August, maybe once the September legislative session gets rolling. We expect that there will be significant momentum towards changes but there's going to be a lot of compromises. The sort of best practices for energy industry solution would entail a pretty broad opening up of the Mexican energy industry. It'll probably be something short of that, something that allows for foreign investment on a more liberal basis than we've seen so far where companies are having to rely on fee-based contacting to get access to Mexico's oil fields, because Mexico is going to have to incentivize companies to come in and invest pretty heavy technology at really high levels of capital to get to those offshore oil deposits that everyone is fairly sure are there.

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