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CEO says Pemex to Pursue U.S. E&P, GOM-to-Pacific Pipeline

Mexico's federal government-dominated energy sector continues to be the focus of reform talk by the country's presidential administration, with disclosures by the new CEO at Petroleos Mexicanos (Pemex) that he will form a new company within the state-operated oil and natural gas giant specifically to go after shale and deep water Gulf of Mexico (GOM) supplies outside of Mexico.

The revelations by Emilio Lozoya, the Pemex head, in a Wall Street Journalreport come a week after new Mexican President Enrique Pena Nieto made global headlines suggesting he will seek constitutional changes to allow more private foreign investment in Mexico's energy sector.

Lozoya told the Journal he intends by the end of this year to create a new Pemex-related company to go after shale gas and oil exploration and production (E&P) in the United States, along with deep-water GOM E&P in U.S. waters. Presumably U.S. partners would be involved with the new Pemex company on these projects.

A long-time observer of the Mexican energy sector, Gianna Bern, an energy economics researcher, educator and consultant, told NGI last Friday that what the reforms outlined by Nieto will end up looking like is unclear.

"We're early in the game still," said Bern. "Progress is being made, though, and the fact that they [Mexico's political leaders] have gotten this far, with all things considered, is remarkable."

Bern thinks the key going forward is if the consensus for liberalizing the nation's energy sector can be maintained among Mexico's three major political parties -- the National Action Party, the Institutional Revolutionary Party and the Party of Democratic Revolution (PRD).

Pemex leaders have been reluctant to drive home efficiency programs within the company for fear labor unrest would be stirred in the oilfields by the most revolutionary of the political activists, including PRD. Nevertheless, Lozoya indicated that longer term he wants to reign in the inefficiencies as a means of saving billions of dollars that can be used to exploit various business development opportunities eyed by Pemex.

Examples cited by the CEO are a fertilizer plant and the completion of a GOM-to-Pacific Ocean natural gas pipeline that would allow Mexico to participate in liquefied natural gas exports to various gas-hungry Asian nations.

According to the Journal report, Lozoya is pointing toward a future Pemex that is "more competitive and transparent," which, judging from the experience of other Latin American nations with state-owned energy companies, should greatly increase energy production in Mexico, the world's fifth largest crude oil producer.

"There seems to be political consensus [in Mexico] that revitalization of the Mexican crude oil market is of increasing importance," said Bern. "It is important, not only for the nation's economy, but because Mexico's crude oil production has been on a steady decline over the past decade [3.4 million b/d to current 2.5 million b/d]."

Bern said that the proposals include establishing a means for private-sector companies to book reserves using Securities and Exchange Commission (SEC) proven reserve criteria.

"If they are able to do that, I think that gets them a long way, because [potential private-sector investment] companies want to be able to do that. I think they need to be able to cross that hurdle," said Bern, adding the caveat that it is not a sure thing the three major political parties will be able to cooperate and get this done.

"Pena Nieto appears to be the biggest advocate of this that the energy markets have seen in a Mexican president in recent administrations, so I think that is a step in the right direction." She added that the new administration wants to go further than just allowing more private investment in Mexican energy projects.

Bern thinks there will be a lot of interest from global companies if Mexico does open up shale and deep-water GOM development with the right for foreign companies to book reserves. "Being able to book reserves under the SEC criteria is the key hurdle," she said, adding that many other countries already have adopted this approach to encourage foreign investors.

 Noting that both shale and deep water plays are capital intensive, Bern said most of the global major oil and gas companies today want partners. "Any company today really wants to have partners to develop those types of opportunities that call for risk sharing and cost sharing," she said.

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