Expectations are High as Mexico Accepts Foreign Oil Explorers

On barren ranch land just south of the Texas border, where road signs are pockmarked with bullet holes, a small group of foreign oil and gas companies is looking for the future.

Conditions are difficult — some companies have resorted to paying protection money to drug cartels that control the area _ and results from test wells have been limited. But as Mexico prepares to open its oil and gas fields to exploration by foreign companies for the first time in seven decades, expectations are high.

“I think all the stars are in alignment this time,” Ray L. Hunt, chief executive officer of Dallas-based Hunt Consolidated, said in an interview. “Mexico has a significant natural resource. And I think 10, 15, 20 years from now you’re going to see huge changes along the border.”

The obstacles are numerous, from oil at the deepest depths of the Gulf of Mexico to gas shale formations in cartel-controlled territory along the 1,200-mile border with Texas.

President Enrique Pena Nieto pushed through constitutional amendments last year ending the monopoly of the state-owned oil company Pemex. But the Mexican Congress still hasn’t agreed on a legal and regulatory framework for the reformed energy sector. Officials have set an August goal to finalize changes in the law to attract foreign investment without giving up too much of the oil wealth that many Mexicans consider their birthright.

Beyond the political debate, Mexico lacks the infrastructure to expand drilling, the geologic surveys to identify new fields and the security that many companies want before taking big risks.

Mexico estimates its deepwater and shale reserves at about 90 billion barrels of oil and natural gas. If that proves true, it would re-establish Mexico as one of the world’s leading hydrocarbon-controlling countries.

But Pemex has struggled to keep pace with the technological revolution the wider industry has undergone over the past decade. While new deepwater drilling and hydraulic fracturing technologies have opened up vast new deposits in the United States, Mexico’s crude oil production has fallen more than 20 percent since 2004, to 2.6 million barrels a day. That has put increasing pressure on the government, which relies on Pemex for a third of its tax income.

Pemex officials believe shale has the potential to provide Mexico with more oil and gas than the country has produced since it first struck oil in the early 20th century. “Mexico has the sixth-largest gas shale fields in the world. And you’re all welcome to come join the exploration opportunities,” Emilio Lozoya, Pemex’s chief executive, said at an energy conference in Houston in March.

Developing those resources would require up to $1.2 trillion in capital spending, according to an analysis earlier this year by Goldman Sachs. The world’s four largest publicly traded oil companies spent less than $180 billion worldwide last year.

The hope at the highest echelons of Mexican politics and business is that development of the energy reserves will not only boost government revenue, but expand the country’s industrial and manufacturing economy far beyond anything envisioned 20 years ago, when the North American Free Trade Agreement was enacted.

“Mexico’s declining oil production, the rigidities of the (political) system, have been known for a long time,” said Daniel Yergin, author of “The Prize: The Epic Quest for Oil, Money and Power.”

“As Mexico becomes a manufacturing platform of the global economy, they really need the energy supplies,” Yergin said. “It’s not something that happens overnight.”

Expanding drilling in the Gulf of Mexico poses relatively little challenge for major international companies. Irving-based Exxon Mobil and Chevron are already drilling deepwater wells in the U.S. Gulf, and moving operations south across the international line would be relatively easy if the terms were right.

Extracting oil and gas from Mexico’s shale deposits is another matter.

Along the border in northeastern Mexico lies the Burgos Basin, an extension of Texas’ energy-rich Eagle Ford Shale. But the Mexico side lacks adequate roads, pipelines, processing plants and housing for workers. And less-developed areas, noted Eduardo Medina Mora, Mexico’s ambassador to Washington, are more vulnerable to criminals.

U.S. intelligence reports show that incidents of criminal gangs illegally tapping pipelines along the border increased more than sixfold between 2006 and 2012, to more than 1,400 a year, according to a U.S security consultant who works with American energy companies.

In 2010, Pemex, the state-owned oil company, sued five American energy and chemical companies in U.S. federal court, claiming they had bought more than $300 million in stolen natural gas condensate with the assistance of Mexican customs officials.

Some areas in the Burgos Basin are hotly contested by the Gulf and Zetas drug cartels. As test wells are drilled and pipelines laid, some energy companies operating in the area are paying off the Zetas cartel just to operate, according to executives and security personnel who spoke on condition of anonymity.

“Security is a big concern, even bigger when the Mexican constitution prohibits you from carrying guns on Mexican soil,” said the U.S. security consultant, who spoke only on condition he not be further identified. “So what do you do? Hire a cartel to look after your interest.”

Nuevo Laredo, in the state of Tamaulipas just across the Rio Grande from the Texas city of Laredo, is one area in the grip of a cartel.

Despite the presence of federal troops, locals say drug cartels have ordered bars across the city to play at 1 a.m. over their loudspeakers “The Life of Miguel and Omar,” a corrido, or ballad, to imprisoned Zetas leader Miguel Angel Trevino Morales and his younger brother.

“If you can’t even have a beer without fear of getting killed, how can you even think of drilling for shale?” said a rancher in the area, who spoke on the condition of anonymity out of fear of reprisals. “Sometimes this feels like a cursed land.”