Brilliantly Timed Oil Reforms Push Mexico into Fiscal Meltdown

from Wolf Street:

When Enrique Peña Nieto’s government pushed a historic energy reform bill through the Mexican congress in 2013, it was hoped that it would serve not only to privatize but also modernize Mexico’s state-owned Pemex and allow it to compete with giants like Exxon. However, the one thing the government seemingly hadn’t counted on was the collapse in global oil prices.

At the time, Brent oil prices were sitting pretty at around $110 per barrel. It was assumed those prices were there to stay; instead, they have plummeted to $50 per barrel.

Despite the government’s constant denials, the pain is beginning to show. The first auction of off shore oil leases, in July, was an unmitigated disaster, with only two of 14 exploration blocks awarded, both going to the same Mexican-led trio of energy firms.

image/huffpost.com

Oil is no longer a seller’s market. The financial arithmetic facing a potential investor has been turned on its head by the recent collapse of oil prices. As a result, many projects that were a slam- dunk just a year ago have become distinctly dicey propositions. At the same time fierce, competition among oil producing nations continues to drive prices southward.

As Bloomberg reports, Brazil and Mexico are preparing to compete for investments from some of the same oil majors when they hold auctions only a week apart at a time that the price rout is prompting spending cuts:

“In times of low oil prices, all companies need low costs and promising returns,” John Forman, a consultant and former director at Brazil’s oil regulator, said in an interview in Rio de Janeiro. “Brazil and Mexico will compete for resources and low-cost projects will be key.”

In other words, thanks in large part to the dreadful timing of Peña Nieto’s energy reforms, Mexico is about to sell off arguably its most valuable natural resource at bargain basement prices. It’s reminiscent of the notorious “Brown Bottom,” so named after the former UK Chancellor of the Exchequer Gordon Brown’s ingenious decision to sell the lion’s share of the UK’s gold reserves between 1999 and 2002, when gold prices hit a 20-year low.

Read More