The proposed arrangement moves the Mexican government's interest from a production-sharing model to a profit-sharing model. The government will maintain its ownership of the oil reserves, but will share profits with the companies that locate and produce the oil. Previously, outside companies were allowed to prospect, but were only paid a flat fee for their services. The Wall Street Journal notes that this arrangement is similar in structure to the way oil companies operate in Iraq, but less friendly than countries like Brazil or Norway.
Why is Mexico doing this? A combination of reasons, with the main one being falling production. In 2004, the country was pumping out 3.4 million barrels of crude oil a day. By 2012, that number had dropped to 2.5 million. This drop is particularly unsettling given that Mexico's estimated reserves are at 115 billion barrels, roughly equivalent to the reserves of OPEC powerhouse Kuwait. By comparison, Kuwait's daily oil production is approximately 3.6 million barrels.
The falling production brings us to the second reason: an outdated infrastructure. Pemex has largely been tapping easy oil, those reserves located in shallow areas that can be drilled quite easily. These are running out. The rest of the oil is located in more difficult-to-drill areas like shale rock and deep water. By opening the oil market to international companies, the Mexican government is hoping to outsource the exploration and equipment expenses in exchange for a share of the profits.
Given the relative lack of development in pipeline infrastructure into the U.S., this move is predicted to laregely strengthen the country's internal fuel reserves and further increase the benefits of conducting business/moving industry to Mexico, more so than decrease the cost of oil internationally. While the plan has not been enacted -- and thus predictions are the only thing out there -- this could greatly impact the manufacture of petroleum-based goods within the country and more easily facilitate shipments into the U.S., which come from Mexico largely via diesel-fueled trucks and trains.
If your company has been researching a transfer of production into Mexico or Latin America, be sure to contact Source One to glean our expertise on Nearshoring and Latin America.