This article was first published by TheStreet on August 30, 2014
Thanks to landmark oil industry reforms, Mexico is gearing up to explore its undeveloped deepwater oil reserves, which could hold roughly twice as much oil as the nation's existing proven reserves.
This could open doors to new business opportunities for Chevron (CVX_) and Schlumberger (SLB_) which could become the earliest and the biggest beneficiaries of the oil reforms.
Since 1938, Mexico's oil and gas reserves have been off-limits to foreign companies. However, earlier this month Mexico's President Enrique Pena Nieto signed into law changes that end the 75-year-old monopoly of the government-owned energy behemoth Pemex on the country's enormous 13.5 billion barrels of oil reserves while opening up the nation's energy sector to foreign investors.
Schlumberger's shares, at around $110, have risen by 22% for the year to date, while Chevron stock, at around $129, is up by 3% for the same period.
Not only does the law end the Pemex monopoly but it allows the nation to tap into its deepwater as well as unconventional reserves -- Pemex does not have the skills to carry out the complex drilling and production operations. In an email to TheStreet, Robert MacKenzie, the director of research at Iberia Capital has said that Mexico's deepwater assets represent "perhaps the most prospective untapped resource on the globe."
The earliest beneficiaries of the Mexican reforms could be the oilfield services companies that will carry the ground work for other exploration and production companies -- and that's where Schlumberger comes in.
In an email to TheStreet, Joao Felix, Schlumberger's director of external communications, said the company sees Mexico's oil reforms as a "significant step in the evolution of the country's oil and gas industry." The company is optimistic about "various business opportunities" in Mexico, ranging from deepwater to shale oil and gas projects.
Schlumberger already has significant operations in Mexico. Moreover, the company has a solidtrack record of working on various deepwater projects around the world, including at the U.S. Gulf of Mexico. Schlumberger might find significant opportunities on the Mexican side of the Gulf of Mexico, which is largely undeveloped and could hold as much as 27 billion barrels of oil reserves.
Chevron, on the other hand, could be one of the biggest beneficiaries in the long run. The oil major is not only the second biggest player in the industry but also one of the biggest leaseholders and producers at the U.S. Gulf of Mexico.
Last year, Chevron produced 91,000 barrels of crude oil, 69 million cubic feet of natural gas and nearly 8,000 barrels of natural gas liquids on a daily basis from deepwater Gulf of Mexico. Moreover, the company will start up three major deepwater Gulf of Mexico projects through 2015 which could give a boost to its output from the region.
The Mexican oil reforms can allow Chevron to expand its foothold to the Mexican portion of the Gulf of Mexico. Chevron has already reported oil discoveries at the Lower Tertiary Trend in the deepwater U.S. Gulf of Mexico, a region which extends well into Mexican waters.
Chevron's representative declined to comment.
Overall, the impact of reforms on the country's oil production is going to be profound, as per projection by the U.S. Energy Information Administration. Last year, the agency gave a gloomy long-term forecast for the country's oil production, which was expected to drop from three million barrels a day in 2010 to around 2 million barrels a day by 2040. However, following the reforms, EIA believes that Mexico's production could increase to 3.7 million barrels a day by 2040.
Pemex has been awarded rights for 83% of the country's reserves, exactly what it requested, but it got just 21% of the future reserves, lower than what it asked. The company is expected to start seeking partners for these properties later this year. The first round of bidding, in which foreign companies will also participate, is expected to occur in the first half of 2015.
Besides Chevron and Schlumberger, other U.S. companies can profit from Mexico's new law.Exxon Mobil (XOM_) , a major player in Mexico's chemicals industry, could start diversifying into other areas. Similarly, EOG Resources (EOG_) , the biggest producer at Texas's Eagle Ford Shale, could expand its operations to the Mexican side of Eagle Ford.
Additionally, MacKenzie, the Iberia Capital analyst, said Halliburton (HAL_) will take advantage of the increasing expenditure on the development of Mexico's onshore and shale reserves.
At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
