Mexico's Fox Throws Out Welcome Mat to Canadian Producers

Mexican President Vicente Fox, elected last year on a promise to improve the country's economic future, has begun actively courting "out-of-towners" in the hopes of encouraging capital investments in his country. With several productive global trade missions completed, Fox now is turning his attention further north, courting Canadian oil and gas producers in his plan to develop Mexico's untapped oil and gas reserves.

On one hand, it should be an easy task. Experts estimate that Mexico, already one of the leading oil producers in the world, holds vast natural gas reserves as well, both on- and offshore. And while there are many outside producers already working on projects with Mexico, many U.S. and Canadian producers have been wary of serious investments in production activities because Petroleos Mexicanos (Pemex), the state-run energy company, holds sway over the country's assets. Basically, producers can explore and produce in Mexico, but may not actually own the assets.

Though Pemex still would control any exploration and production within the country, Fox and some members of the legislature are working to make the country more friendly to investment. Already working on the electricity and natural gas side, where outside companies own and invest in the infrastructure, the Mexican government is now working on ways to make investment more attractive.

They are taking with them a strong public relations pitch. Last week, Mexican Energy Minister Ernesto Martens warned that despite the country's energy riches, Mexico would be importing almost one-quarter of all natural gas consumed there by 2006. His news, though, carried an additional warning: it could be more than 26% unless local production is lifted by quadrupling the current rate of capital investment.

Martens estimates that natural gas consumption will reach 12 Bcf/d by 2006, up from its current level of 4.6 Bcf/d. "This will mean that from importing 15%, which we're doing now, we'll move to importing 26%," he said.

What Fox and his politicians want to do is bring in outside investment to not just invest in infrastructure. While it seems to work well for the country's electricity sector, advocates of a free market on the production side face the powerful Pemex nationalists, who do not want any foreign control. Martens, who answers to Fox, disagrees. As an advocate for opening up the E&P sector to more private enterprise, Martens said it still would take a Herculean effort --- development over the next 10 years would require at least $140 billion in combined public-private investment to prevent importing more gas than the estimated 26%.

The plan will not be easy to carry out, but there are precedents to show critics that outside investment can and will work. Martens noted that the country's natural gas storage, transportation, distribution and import activities already are open to private sector participation, and they are making a profit for themselves and for Mexico.

Pemex is beginning to show it can compromise. In March, Canadian-based Precision Drilling Corp. and BJ Services were awarded a major field contract by Pemex (see NGI, March 19). The project entails drilling and completing 240 gas wells in the Burgos Basin, which covers more than 21,000 square miles and is located in the northeastern part of Mexico near Camargo. The basin is considered one of the most gas-rich in the country, and could hold between 21 Tcf and 75 Tcf.

In May, Mexican Energy Secretary Ernesto Martens said that in the short term, "the Energy Ministry seeks to eliminate bottlenecks in surface infrastructure and improve understanding of fields in the Burgos Basin in order to maintain a constant rhythm of production through 2009."

And now, Fox is more visibly going after E&P money. According to the Mexican Embassy in Ottawa, several Canadian heavyweights will participate in a June 23 meeting at Fox's ranch in San Cristobal, Guanajuato, including Alberta Energy Co., Canadian Hunter Exploration Ltd., Enbridge Inc., Export Development Corp., Nexen Inc., PanCanadian Petroleum Ltd., Paramount Resources Ltd., Petro-Canada, Precision Drilling Corp., Talisman Energy Inc., TransAlta Corp., SNC-Lavalin and Westcoast Energy Inc.

Though no companies have indicated whether they will attend, several are expected, along with Canadian ambassador Keith Christie and Mexico's ambassador to Canada, Ezequiel Padilla.

Fox's overture is coming at a good time. The Canadian Association of Petroleum Producers last week submitted a report to Ottawa officials calling for Canada to build an energy strategy "within a North American context." The producers, who have a lot of cash from recent record profits, have called on Canadian officials to lower their tax burden and streamline regulations to open up the free market arena for them across North America.

The association represents 150 companies that produce 95% of the country's natural gas and crude oil. It wants Ottawa to work with the provinces and territories, along with the U.S. and Mexican governments, "to eliminate and avoid policies that impede free market principles affecting the timing and scope of energy development."

Fox told a Canadian audience last week that he is throwing out the welcome mat. "Today, more than ever, Mexico is a good place to do business," he said. "It is a good place to do business because it has clear rules and transparent procedures, owing to the decisive fight against corruption. It is a good place to do business because it offers investors certainty and security because the Rule of Law has been strengthened."

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