Sweeping reforms initiated by the Institutional Revolutionary Party (PRI) in Mexico are expected to include revamping the energy sector and possibly its state-owned energy company, Pemex, which has been beleaguered by a lack of investment and new technology as well as declines in oil reserves and production.

Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, speculated that the government could present its energy reform initiative between August and October. Whether these reforms include amending the country’s constitution to allow Pemex to form cross-border relationships with the private sector to successfully tap its resources remains to be seen.

Speaking during Mayer Brown’s Global Energy Conference in Houston on May 15, Wood called energy changes “the mother of all reforms,” saying they could be the most difficult for President Enrique Peña Nieto and the PRI party. Since regaining leadership of the country in 2012, the PRI party has created a pact working with other parties and already has successfully undertaken labor, education, and telecommunications reforms.

However, “As demand for government spending increases, the government is finding itself squeezed,” Wood said. Nearly all of Pemex’s earnings are funneled into the government’s coffers, and the company oftentimes loses to social and other causes when money is allocated to various agencies. “The great fear is that there will be a further major decline in oil production … if the necessary changes are not made.”

Pemex crude production has fallen steadily from 3,076 b/d in 2007 to 2,550 b/d in 2011, according to Wood. Also, Mexico is a net importer of natural gas, bringing in approximately 2 Bcf/d while grappling with gas shortages in the last 12 to 18 months.

The US Energy Information Administration said Mexico’s natural gas imports jumped 21% from 2011 to 2012, reaching a record 2.1 Bcf/d. Of that amount, about 1.7 Bcf/d came from the US in 2012, up 24% from 2011.

“That’s a crazy situation for a country which has the world’s fourth largest reserves of shale gas,” Wood said, adding the company does not have the technical knowledge needed for shale and deep water.

A lack of investment and new technologies, especially when it comes to developing its massive shale reserves, are Pemex’s biggest problems, Wood said. He noted that Pemex also has dramatically cut back on gas production, because the infrastructure is not there to support it.

“There is a clear need for investment,” he continued, noting western Mexico lacks pipeline infrastructure needed for access to natural gas. But Pemex cannot reverse its current state by itself. Its operational freedom should include not only the ability to make investment decisions but also the ability to enter joint ventures.

Opportunity lies in the deepwater Gulf of Mexico, which has witnessed an exploration resurrection following the Deepwater Horizon accident amid new regulations. Recent finds have included Chevron’s Walker Ridge Block 98 Well No. 1 encountering more than 122 m (400 ft) of net pay and Anadarko’s Shenandoah-2 well discovering 305 m (1,000 ft) net of oil pay in March. The Walker Ridge well was drilled to a depth of 9,713 m (31,866 ft), while the Shenandoah well reached a depth of 9,572 m (31,405 ft).

Pemex also hit deepwater hydrocarbon pay in August 2012 when it confirmed the presence of light crude oil deposits in the Perdido Fold Belt province. The discovery increased certainty toward the recovery of prospective resources in the Perdido area project, which have been estimated at up to 10 Bboe and could allow Mexico to increase oil production platform in the medium and long term, a news release said following the discovery. However, money and expertise will be needed to realize the discovery’s full potential.

Further success could be found in the Eagle Ford, which spans from Texas into Mexico. A report released in March by the University of Texas at San Antonio’s Center for Community and Business Research showed shale development in the Eagle Ford generated more than US $61 billion in revenue for South Texas in 2012.

“That’s where US firms will have a clear advantage,” Wood said when speaking on potential partnerships between Pemex and others if reforms are initiated.

George Baker, managing principal for energy consultant Baker & Associates, pointed out that Pemex cannot pay in kind, as a percentage of profits, or as a percentage of production. “That taken together eliminates, erases, the notion of a private mineral interest. That’s where [the company has] stood for 50-something years.”

Moreover, the doctrine of firsthand sales – only the state may sell energy products – along with the elimination of private oil mineral interest have caused immense value destruction in Mexico’s energy sector, Baker said.

His suggested changes to Mexico’s legal framework included eliminating the doctrines of firsthand sales and basic petrochemical, commercial clauses in Constitutional Article 27, and commercial restrictions of Article 6 of the petroleum law as well as strengthening Constitutional Article 134 by adding a clause regarding petroleum among other recommendations.

To change the constitution, a two-thirds majority is needed in both houses of Congress; however, the PRI has slightly less than 50%, Wood said, so cooperation from other parties is essential.

“The government has explicitly said it’s about joint ventures. It’s about making sure we can get to the oil in the deepwater Gulf of Mexico. It’s making sure that Pemex works as a company, not as a decentralized agency of the state, which is what it is today,” Wood said. “It’s making the oil sector a modern oil sector, and that’s what they are going to go for.”

Contact the author, Velda Addison, at vaddison@hartenergy.com.