Yesterday, during his opening remarks at IHS #CERAWeek, Mexico President Enrique Pena Nieto spoke of efforts to continue to implement Mexico’s energy reform legislation despite lower oil prices. With great opportunity there can be great risk, and the dramatic overhaul of Mexico’s energy sector over the past year is shaping up to be one of the biggest opportunities for global oil and gas companies in years. It’s also an enormous opportunity for Mexico’s economy and people, if it is communicated and enacted effectively.
For the first time since March 18, 1938, when President Lázaro Cárdenas expropriated all foreign oil and gas holdings in Mexico, foreign companies can now look for and produce oil and gas in Mexico. The world has changed a lot in 76 years, but the main lesson from that expropriation is as relevant as ever. A good reputation, healthy relationships and positive public opinion in Mexico are essential to success.
In fact, even as the marketplace reforms witnessed in 2015 were applauded by international pundits in the media, they were opposed by many Mexicans, and it was Mexico’s laborers who were the driving force behind expropriation in 1938. The court of public opinion is powerful and ignoring its direct impact can have lasting reverberations.
To seize this opportunity, foreign investors must understand Mexico today as well as its historical context (click to tweet). They must be able to tell a credible “benefits” story, align actions with words, and deal effectively with the inevitable challenges that will arise from social, environmental and political opposition, a nascent and still-emerging regulatory framework and a judicial system that has no precedents for the decisions it will be required to make.
Foreign companies will be held to the standards of various anti-corruption regulations that govern them, and they will be constantly exposed to the radical transparency that exists in today’s world of pervasive social media.
Then there is the matter of security. Security risks are serious, but manageable. The effectiveness and manner of their management will also shape the reputation of foreign investors.
These are all operational variables that can be addressed, but more importantly they are reputational variables, and ultimately it is reputation that gives an organization license to operate.
Still, with those caveats, there is an excellent story of social and economic benefits that can emerge from Mexico’s energy reforms, and there are precedents to guide foreign investors in just about every area of endeavor and concern. Whether it’s unlocking shale gas and oil, deep-water drilling, siting new electricity plants, changing ownership structures, and even changing pricing structures – as will happen with gasoline for consumers – there are effective communication strategies to smooth the way.
That’s because today’s Mexican opportunity is born of economic necessity for foreign investment. Government and business leaders understood that the country lacked the resources for productive deep-water drilling, and for on-shore horizontal drilling and well-completion procedures that are found within many global companies. They have witnessed the “energy renaissance” in the U.S. and Canada since 2008, built largely on new access to substantial shale formations that Mexico also possesses.
Mexico’s leaders know its energy sector must change quickly, upstream, midstream and downstream. Mexico urgently needs to discover and produce more energy. Electricity production must improve and electricity costs must come down relative to other markets to strengthen Mexico’s manufacturing sector. Oil and gas transportation infrastructure also must improve.
Failure to implement these changes could negatively impact the Mexican economy in the long term. Mexican oil production has slumped by over one million barrels per day since 2004, driven by decline in the giant Cantarell field. Current oil pricing will continue to arrest production. The U.S. Energy Information Administration reports that Mexico could go from being one of the world’s largest oil exporters to becoming a net energy importer.
But with the reforms effectively implemented, the EIA estimates Mexico’s oil production could rise to 3.7 million barrels per day by 2040, and Goldman Sachs has reported Mexico could become the world’s fifth largest economy.
The opportunity is too great to ignore, and it is too great to pursue without a thoughtful, strategic communication plan for any company that hopes to enter Mexico’s energy market. Today, coming into a newly opened market requires a deft touch based on a solid reputation and a keen understanding of the political, business and social landscape. It requires on-the-ground support from powerful stakeholders.
78 years ago, the nationalization of the Mexican oil industry was perceived as a patriotic action. Today, the country has the opportunity to write its own chapter in history, helping to change the face of the country by creating wealth through enabling competition and private investment in the energy sector