With possibilities that the prolific Eagle Ford shale play crosses the US-Mexico border and the existing potential for more deepwater finds, Mexico’s energy reform could be just what the country needs to turn around its energy sector.

But attracting companies will take more than amending the constitution to allow for private investment. The specific terms associated with such moves will determine whether foreign investors take their chances in a country that has seen production steadily decline.

Although three reform proposals have been submitted by the political parties in Mexico, details have not been revealed. The percentage of government take, local content requirements, and taxes and royalties are unknown.

“Mexicans, including policymakers, believe that the private sector internationally is so desperate to get into Mexican deep water that they’ll accept anything,” Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center for Scholars, said during Mayer Brown’s Mexico Energy Reforms seminar Sept. 13 in Houston. “But we all know that the private sector makes investment decisions based on the bottom line, and if it’s not a good deal they are not going to go in.”

The proposal by the ruling party – the Partido Revolucionario Institucional (PRI) – would clear the way for joint ventures and profit- and production-sharing agreements by removing constitutional restrictions.

Wood said he heard from some PEMEX officials that the national content requirement –or the percentage of labor and services that must be come from local sources – may be 45%. Mexico has learned, by looking at happenings across the world, the importance of setting national content requirements at the right level and realizes that these requirements can be a driver of economic development, he added.

“Particularly, they look at the Norwegian model and they say Norway has become an oil and gas nation even though its reserves are running out,” Wood said, “and it will continue to be an oil and gas nation because industry was built up around it. It is not just Statoil that is out there around the world; it’s Norwegian companies that are out there around the world, and this is a driver of economic development.”

PEMEX, which has virtually been quiet amid talk of energy reform, has a plan to create a development corporation that would go into areas across the country where the company has a significant presence and serve as an incubator for oil and gas companies to help spur the development of providers, Wood said. The move would create clusters across Mexico that could increase the overall competitiveness of the nation.

Some efforts were taken toward energy reform in 2008. The changes included allowing PEMEX to create incentive-based contracts with foreign oil companies, but the companies have no ownership rights over oil produced.

Manuel Cervantes, an attorney with MCM Abogados in Mexico City, said national content has been based on service, lease of equipment, and installation of permanent facilities. When the incentive-based contracts were created, it introduced a 40% requirement for local content, he said.

“The first three service contracts under the new framework, which provides incentives to contractors for increased production, were awarded in August 2011 for relatively small, mature fields in Tabasco state,” according to the US Energy Information Administration (EIA).

Wood pointed out that before 2008 no Mexican service companies existed. But now there are companies drilling and doing other completions work.

Currently, there as 12 incentive-based contracts in place, Wood said, noting they are long term and based on the fee per barrel. However, if reform is enacted, those contracts could migrate to the new scheme enabling the companies to produce more.

The EIA estimates Mexico has at least 10 Bbbl of proven oil reserves, mostly heavy crude and mostly offshore, and about 481 Bcm (17 Tcf) of proven natural gas reserves. If legislators approve one of the proposals that opens the energy sector to private investors and the necessary regulatory framework moves into place with the blessings of the Mexican people, the move would unlock the door to huge potential.

“I think the big IOCs [international oil companies] are going to be looking at deep water. That’s where you have the biggest potential upside,” Wood said. “That’s where the government is very anxious to move on, so I think they are going to make that attractive. But there are certain players that are going to be very, very interested in shale as well.”

Mexico could hold an estimated 16 Tcm (545 Tcf) of technically recoverable shale gas resources – the sixth largest amount in the world. The majority of Mexico’s shale gas resources is in its northeast and east-central regions, according to the EIA. The Burgos basin, which accounts for two-thirds of the country’s technically recoverable shale gas, includes parts of the Eagle Ford.

Dallas Parker, partner with Mayer Brown and moderator of the event, pointed out that about 671,000 b/d were produced in the Eagle Ford in June 2013, up 60% from June 2012.

“If you multiple that times the price of a barrel of oil, to me that’s big money,” Parker said. “That would reduce a huge percentage of what [Mexico has] lost in production.”

In 2004, about 3.4 MMb/d were produced in Mexico. That number is now down to 2.5 MMb/d, largely due to production declines in the Cantarell oil field, Wood said. “But it’s also because the company hasn’t been able to get into deepwater and unconventional reserves. The country and PEMEX have been held back by the legal situation and by the constitution.”

Mexico produces between 170 MMcm/d and 198 MMcm/d (6 Bcf/d and 7 Bcf/d) of natural gas, but it has to import 56.6 MMcm/d (2 Bcf/d) of gas via pipeline, said Jose Valera, a partner with Mayer Brown, adding Mexico has three LNG import terminals and is investing in pipeline networks to import additional gas from the US.

“Why is it that PEMEX never developed gas fields?” Valera asked. “The reason is that PEMEX was mandated to produce the easy, cheap-to-produce oil, export it, and generate the currency to feed the requirements of the treasury. So risking large amounts of capital in exploration … was not the fiscal priority of the country. … That explains why Mexico put itself into the position of being a gas importer when it is otherwise one of the largest crude oil producers and exporters in the world.”

But all that could change. “If Mexico just becomes self sufficient in natural gas and ceases to import the 2 Bcf of natural gas per day, that accounts for one LNG export project in the US,” he said. “Once Mexico ramps up its own natural gas production, you’re going to have a huge integrated natural gas market that is going to be very attractive.”

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