This "Forbidden" Market Is About to Crack Open

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Marina and I are off again. Early tomorrow morning, I'm making my fourth trip to Mexico City in less than two years.

This time, I'll be making a major presentation at a Bloomberg advisory session on the recent opening of the Mexican energy markets.

After operating as a monopoly for 76 years, Mexico is now set to dismantle all the barriers to foreign investment in its oil fields.

That promises to open up a series of unprecedented money-making opportunities for a select group of companies - and their investors.

As the story in Ukraine and Crimea continues to unfold, these dramatic new changes remind us there are other profitable matters afoot in the energy sector.

And the topics I am going to discuss this week in Mexico City go well beyond what's immediately south of the border.

All of these developments offer significant upside for investors...

Mexico Opens Up for Business

At the top of the list remains the dramatic change now being introduced in Mexico involving PEMEX, the nationalized and state-run oil/gas producer.

It started when the current President, Enrique Peña Nieto, was sworn into office on Dec. 1, 2012. One of his major initiatives promised big reforms in the national oil company and the energy sector as a whole.

That required a revision of the national constitution and a slew of new laws. But in the end, these changes have been approved at least in outline.

Now, admittedly, the "devil is in the details," but the potential upside for energy investors is significant.

These reforms will open the doors to outside companies and investments, provide the basis for joint ventures and other initiatives, and introduce the Mexican energy market to international services and support - all for the first time since the sector was nationalized on March 18, 1938.

Given the country has substantial known reserves, there is already plenty of American interest. According to the latest U.S. Energy Information Administration (EIA) figures, Mexico is ranked sixth in shale gas and seventh in tight/shale oil in the world.

Today, there are no fewer than five major basins to develop, and the most promising - the Burgos Basin - is actually an extension of the highly productive Eagle Ford basin in South Texas, with well-defined geology and reserve estimates.

The fact that there are already U.S. operating companies, field services, support, and expertise just north of the border has hardly gone unnoticed.

Another priority involves the major need for new investment and technology to reverse the declining production curve in Mexico's once-dominant onshore and offshore oil fields.

PEMEX has made some progress in arresting what had been a precipitous collapse in production. But significant time and field pressure has already been lost. Reversing this trend - upon which the national economy is still dependent - requires money and equipment that is only available from the outside.

That's the reason why Bloomberg has convened this meeting. Companies that can provide both the capital and the know-how will offer investors some intriguing plays. And further down the road, individual investors will even have the prospect of investing in PEMEX itself.

The Details on My "Sidebar" Agenda in Mexico

Yet, major convocations, like the one assembling at the W in downtown Mexico City on Thursday, always provide opportunities for "sidebar" discussions on other matters.

That's where the other three matters of interest on my agenda will emerge.

The second matter speaks to some of the broader moves in the Caribbean basin. For years, the dominance of Venezuela and its national oil company PDVSA has fashioned the transfer of oil products via a consortium known as Petrocaribe.

However, rising unrest in Caracas and elsewhere in Venezuela calls into question PDVSA's ability to continue to provide the crude oil to basin refineries. What's more, Venezuela's ability to develop the Orinoco, still the world's largest heavy oil basin, is also now debatable.

All of this is likely to spike prices throughout the Caribbean and add pressure to what are already fragile economies even in the best of times.

As a result, there are now some alternative arrangements under consideration, some involving the relaxation of U.S. oil export limitations. At present, exporting U.S. crude is highly restricted. But the largess created by huge American reserves of unconventional oil is changing this.

Once again, that opens up opportunities for other players in North and South America and early investment possibilities as well.

The third matter on my agenda involves China. The rise of Chinese economic and hydrocarbon influence in the Western Hemisphere can no longer be denied.

In fact, I have devoted several issues of OEI to the implications arising from Chinese loans to countries and national companies in the region. Beijing has become more sophisticated in its approach.

A few years ago, the goal would have been to export as much production as possible back to mainland China. Now, the objective is to control flows of revenue generated from oil and gas sales as much as it is controlling the product itself.

That introduces some leverage into how projects are funded and who is likely to participate. As paradoxical as it sounds, the rising Chinese presence actually provides new project openings for American service and expertise.

The Most Interesting Meetings of Them All

Finally, meetings will take place at the margins of the conference to consider the expanding market for oil and gas contract swaps.

You see, South America is rapidly joining the ranks of major oil and gas producers. Brazil, of course, is already there, as is Venezuela (even with its current problems).

However, the rise of major natural gas production in Argentina (number two in the world after China in shale gas reserves), along with rising prospects in Colombia and Brazil (to go along with its oil), will change the energy landscape.

What we are going to witness is the rise of significant new production volume, followed by the establishment of local spot markets, the arbitrage of contracts, and a network of contract swaps that will travel the length and breadth of both continents.

These swaps will benefit from a more integrated trading environment, where money and product will seek the best balance. As a result, Mexico may become a major fulcrum of this hydrocarbon "seesaw."

That will mean flows of finance to exchange contracts, in addition to funding actual oil and gas projects. And that has a number of bankers attending what is otherwise an oil and gas meeting.

My meetings with these guys are likely to be the most interesting of all. I'll have more as this develops...

About the Author

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle

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