If we needed any more proof that government-run industries are destined for disaster, just look at Mexico.
To date, the country’s oil and gas sector has been under the control of the government and its proxy, Pemex.
Like most countries with government-controlled assets, any profits generated by the industry end up being diverted elsewhere. As a result, the country is experiencing the lowest level of oil production in 24 years.
In many parts of Mexico, electricity is more costly per kilowatt-hour than in the United States. And given its paltry exploration efforts, it currently relies on imports for natural gas.
That said, there’s still a huge opportunity brewing south of the border.
In fact, while it might seem unthinkable, the potential for a Mexican energy boom could be just as massive as the one in the United States.
Time to Live up to Its Full Potential
There’s no question that there’s a ton of opportunity in Mexico.
The country’s northern border is simply a line on the map, not in the ground – meaning that the resource-rich Eagle Ford Shale extends into Mexico.
The offshore oil in the Gulf of Mexico still offers huge potential to companies rich enough to develop deepwater real estate. BP (NYSE:BP), for instance, is still pouring hundreds of million of dollars into Gulf operations, despite the tens of billions it had to pay out because of the deepwater Macondo oil spill.
Indeed, with over 10 billion barrels in proven reserves, oil is a major component of Mexico’s future.
Yet in terms of production, the country currently rates 10th in the world.
But that could change very soon…
As I mentioned a few months ago, Mexico is taking steps to finally open up its oil and gas sector to private and foreign companies. And the added cash will serve to further develop the country’s energy assets.
Investing in Mexico requires guts and deep pockets, however. The country has issues with narcotics trafficking, violence, and corruption. It’s kind of like the Nigeria of the Southern Americas… That is, it’s rich in both resources and those who would line their pockets with the proceeds.
As a result, while a lot of smaller players would probably like to participate, the first round of assets will go to the bigger players.
When Mexico does open its doors, we should see a huge impact on future earnings for three major players in particular: Exxon Mobil Corporation (NYSE:XOM), BP and Chevron Corporation (NYSE:CVX).
These companies have experience drilling and exploring in emerging markets. They have the financial resources to fund major campaigns. And they’re hungry for more assets, especially in the Americas – where, despite issues that I mentioned above, the environment is still more stable than in other regions where they operate.
Mexico’s oil production is declining after hitting a peak in 2004. The gas production is less than 10% of what the United States produces. And the country barely even makes the top 40 in proven reserves.
That all spells potential – and maybe the next biggest energy investment boom in the Americas.
And “the chase” continues,
BY Karim Rahemtulla