Mexico emerging as new rival to Canada’s oil sands – by Yadullah Hussain (National Post – December 17, 2013)

The National Post is Canada’s second largest national paper.

The Canadian oil sands sector is set to revive its rivalry with resurgent Mexican heavy crude production in the next few years as the southern country pushes through reforms and starts attracting billions of dollars in foreign investment in its energy sector.

“There is a potential for headwinds for Canadian heavy oil in the Gulf Coast, if Mexico gets its groove back, and is able to stabilize and then increase exports of Mayan crude,” said Judith Dwarkin, director, energy research at ITG Investments.

Mexico’s state-owned Petróleos Mexicanos (PEMEX) already exports its benchmark heavy oil crude to Gulf Coast refineries but its influence has waned as domestic production declined over the past few years. During this time, Canadian heavy oil has increased its market share on the Gulf Coast.

President Enrique Pena Nieto, who swept to power last December partly on a pledge to dismantle PEMEX’s 75-year monopoly, has cut through decades of resistance towards foreign participation in the country’s energy sector. Mexico’s Congress passed a bill on Dec. 12 that ended PEMEX’s grip on petroleum resources and opens the sector to foreign investment. The bill must be ratified by state assemblies before becoming law, but analysts widely expect the process to be smooth.

“This serves to connect the last missing piece of the North American energy landscape,” wrote Michael Cohen, an analyst at Barclays Bank Plc, in a report to clients. “Adding Mexico’s oil and gas resources to world markets, given the U.S.’s tight oil and gas and Canadian oil sands, could have dramatic implications in the medium and long term.”

The new law offers production-sharing contracts and licenses for companies, and gives Pemex the freedom to pursue joint ventures with Canadian and other foreign companies. Mexican crude production may increase slightly from 2.5 million bpd, but reaching the government’s target of 3 million bpd by 2018 and 3.5 million bpd by 2025 is ambitious.

Mexico’s oil renaissance comes at a time when Canadian oil production is expected to reach 4.9 million barrels per day by 2020, according to industry estimates.

Adding to North America’ energy prowess is the United States’ raising production to 9.5 million barrels per day, according to the U.S. Energy Information Administration in its latest Annual Energy Outlook published Monday. The shale-driven surge would dramatically shrink U.S. imports to about 25% by 2016, from about 40% last year, before edging back up in the latter half of the decade.

The North American abundance has the potential to weaken the value proposition of Canadian energy, especially as finding and development costs in Mexico stand around $10.97 per barrel, according to Barclays, much lower than its peers.

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