Oil Price May Slow Development of Mexico’s Burgos Basin

Mexico is getting ready to welcome the U.S. shale revolution into its borders after 75 years of state monopoly. The timing couldn’t be worse.

As a flood of supplies from Texas to North Dakota sends oil into a nosedive, U.S. producers are reducing investment budgets for 2015. The cuts dim the chances they’ll take their fracking and horizontal drilling capabilities down south anytime soon.

After changing the constitution last year to allow foreign oil investment into its territory, Mexico is having to adjust, too. Regulators are considering reworking and potentially delaying leases for the country’s portion of the giant shale formation that encompasses the Eagle Ford in Texas.

“They’re going to have all of the issues of depressed price that the people in the Eagle Ford are having now,” said Michael P. Darden, global chair for oil and gas transactions at law firm Latham & Watkins LLP in Houston.

Energy ministers from the U.S., Canada and Mexico are set to meet Dec. 15 in Washington to discuss the implications of Mexico’s energy reform for the rest of the continent.

Mexican offshore assets have drawn interest from oil majors from Exxon Mobil Corp. (XOM) to Royal Dutch Shell Plc (RDSA) as the end of the monopoly triggers a race to gain a foothold in the country. The question is how quickly producers will be willing to move into the higher-risk, more costly prospects.

With Mexican shale possibly having to wait, cheaper offerings in shallow waters might have to do for now.

“In response to the falling prices, the government is bidding out the most attractive, better margin projects first,” said James K. Alford, a partner focusing on Mexico energy reform for the law firm Locke Lord LLP in Washington.

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