Amid Talk of Privatization, Mexico's State Owned Oil Company Will Start Oil Exploration in the USA

Mexico's state-run oil monopoly, Pemex, confirmed this week their plans to set up a new company to explore for oil and natural gas in the USA and in US territorial waters. Pemex's newly appointed CEO, Emilio Lozoya, said that the unconventional move would help the Mexican oil giant obtain further access to Mexico's domestic supply by introducing it new techniques for offshore drilling and hydraulic fracturing.

The proposal, outlined by Chief Executive Emilio Lozoya in an interview, would push Pemex into complicated drilling techniques where it has no experience. It is a bold move abroad for the inward-looking company, which is the world's fifth-largest crude producer but has never faced competition nor ventured far beyond its borders.

"Pemex will be starting a new company that will work on the shale-gas and shale-oil fields in the U.S. and in the deep-water side of the U.S.," said Mr. Lozoya, a 38-year-old former investment banker tapped last year by Mexican President Enrique Peña Nieto to run the oil giant. "The geology is similar and we can benefit from numerous areas of collaboration with international oil companies."

Potential candidates for Pemex's US energy exploration venture would include Texas' Eagle Ford Shale or New Mexico's Permian Basin- both of which are fairly close to the Mexican border and share a similar topography to northern Mexico.

The announcement comes less than two weeks after Mexican president Enrique Peña Nieto postponed a sweeping bill that would overhaul Pemex and allow foreign investment in the state-run monolith, although Nieto made it a point of stopping short of privatization. The 27th article of Mexico's 1917 Constitution states that all natural resources are deemed property of the state. While Nieto or Mexico's congress are unlikely to revise that part of Mexico's constitution, Pemex could offer foreign companies profit-sharing on various projects as an incentive for foreign investment. However, privatization of Pemex could be viewed as a third rail of Mexican politics.

Pemex was formed in 1938 when then-President Lazaro Cardenas expropriated the assets of all foreign oil and privately-held Mexican companies operating in Mexico. Since expropriation, Mexico has become the sixth largest oil producer in the world. Pemex also has a pension and healthcare system that is independent from the rest of Mexico.

However, in recent years Pemex has been plagued by a number of problems including declining output, theft and sabotage by organized crime, obsolete facilities, deadly accidents, little to no safeguards against pollution and overly generous salaries and benefits to redundant bureaucrats. The entity has traditionally invested in a bloated and heavily entrenched workforce instead of constructing new refineries or modernizing facilities. As recently as 2011, gasoline imports to Mexico were at an all-time high as Pemex sought to expand existing refineries instead of building new ones. Despite high revenues thanks to increased oil costs in recent years, Mexico's federal government traditionally collects between 60% and 70% in taxes and revenues from the oil giant.

Although any degree of privatization of Pemex seems unlikely for now, other state-run oil companies in Latin America have managed to partially privatize while the government remains the majority shareholder. In the mid 1990s, Brazil opened up their oil and natural gas deposits to foreign competition, meaning that the former oil monopoly PetroBras [NYSE- PBR; PBRA] would have to submit competitive bids to the government for subsequent leases while allowing PetroBras to form joint ventures with foreign companies. In 2007, Colombia's EcoPetrol [NYSE- EC] was also partially privatized and shares of the company began selling on the stock exchanges in both Bogota and New York.

Nor would Pemex be the first state-run assets in Mexico that were privatized. In the late 1990s, Mexico opened up their national rail network to privatization- Carols Slim's Grupo Mexico [BMV- GMEXICOB] began operation of FerroMex while Kansas City Southern [NYSE- KSU] entered into a joint venture with Grupo Tranportacion Maratimo Mexicano SAB [BVM- TMMA] to form Transportacion Ferroviaria Mexicana until the KCS bought out TMM's share in 2005. By 1998, Mexico's government had started to privatize their airport system, with publicly traded groups like Grupo Aeroportuario del Centro Norte, S.A.B. de C.V [NYSE- OMAB], Grupo Aeroportuario del Pacifico S.A.B. de CV [NYSE- PAC] and Grupo Aeroportuario del Sureste, SAB de CV [NYSE- ACR] being awarded concessions to operate the airports throughout the country including those in Monterrey, Cancun and Guadalajara.