What Mexico’s Energy Transformation Means for Canada

Last week, Mexico’s Congress approved an energy reform package that goes much further than political and economic analysts anticipated: for the first time since the 1930s, private companies will be allowed to participate beyond the services end of the Mexican oil and gas sector and enter into investment, production-sharing, and even licensing agreements. The constitutional changes required for implementation of these reforms still need to be approved by at least 17 of Mexico’s 32 states, but with 25 State Governors from two major parties already on board, this is likely to be a smooth process.

Mexican energy reform has been in the news and on the radar of energy analysts and investors since Enrique Peña Nieto won the presidency on an ambitious reform platform last year. Oil production in Mexico has been steadily declining since 2004 and while the country remains the world’s 10th largest oil producer, it has largely missed out on the shale gas revolution that is transforming the energy future of the U.S. and Canada. The energy sector provides around 35% of the Mexican government’s revenue, making energy reform an urgent necessity, but the entrenched political and historical issues surrounding the sector had analysts expecting modest, gradual change as opposed to the sweeping reforms passed on Friday – reforms that transform the climate for the operation of international oil companies in Mexico.

Mexican oil production is now expected to increase by a million barrels a day, from 2.5 million to 3.5 million, by 2025. Add to that the possibility of exploiting the shale gas reserves that it shares with the U.S., which would nearly double its gas production by the same date, and energy reform is clearly a game-changer for Mexico, and by extension for North America. The country’s newly announced willingness to tap into long-needed private sector expertise on deep-water oil production as well as more recent innovations in “fracking” (hydraulic fracturing) will undoubtedly spark significant international interest; analysts are already predicting that by opening up its energy sector, Mexico will attract as much as $20 billion in additional annual investment.

Meanwhile, rising outputs from the U.S. along with increased production from Iran and Iraq could put downward pressure on the price of crude oil, creating challenges for projects in Canada and the U.S. that depend on a relatively stable minimum price level. Analysts were already anticipating declining prices; development in Mexico could exacerbate that trend (something that would likely please opponents to Canadian oil sands development).  Meanwhile, increased investment and production in Mexico’s domestic energy industry will provide jobs and increase prosperity in a country already identified as the engine of growth for North America due to its manufacturing capacity, youthful population, and emerging middle class.

Of course, a liberalized oil and gas sector is not a panacea. But the reforms have the potential to generate jobs, which would help with problems connected to economic underdevelopment such as the drug trade, violence, and organized crime.

Canada should be paying attention to Mexico’s reforms. They will create opportunities for investment, partnerships, and advisory roles for foreign governments, companies, and experts, especially when it comes to expanding the country’s regulatory capacity – something that must accompany greater international investment.

The historic reform process now underway in Mexico prioritizes economic opportunity and development. This combination aligns clearly with Canada’s current foreign policy direction. If we are serious about putting our economic interests first, we will get in at the ground level and seize the short- and long-term opportunities associated with the transformation of Mexico’s energy sector.