Saddled with the task of reversing falling oil production while drumming up needed support and technology to tap shale and deepwater plays, Mexico and stated-owned PEMEX have a myriad of challenges ahead.

But hope appears to be on the horizon as the country’s political parties target energy reform. Getting there, however, will be a daunting task.

As of Aug. 9, Mexico was still waiting to see what Partido Revolucionario Institucional (PRI), the country’s ruling party, has in mind. But Mexico’s opposition political party, Partido Acción Nacional (PAN), has issued its proposal to the Mexican Senate. The plan opens the country’s upstream sector, as well as others, to competition and private investment by amending articles 25, 27, and 28 of Mexico’s constitution.

The National Hydrocarbon Commission would be charged with approving concessions and contracts, while a newly created Mexico Oil Fund would work to maximize the country’s oil profits and possess fee-setting authority to attract investments. And, the president would have to decrease fiscal dependence on oil resources and lower PEMEX’s labor liabilities over a 10-year period. Mexico is heavily dependent on its oil sector to generate revenue. Data from the US Energy Information Administration (EIA) showed earnings from the industry made up 34% of the government’s total revenues in 2011.

The proposal was the topic of a legal update by Mayer Brown, which said the proposal has the “potential to revolutionize the Mexican energy sector” if passed.

“I think the PAN proposal goes about as far as one can go in opening the entire energy sector in Mexico to competition and to private investment,” Dallas Parker, a partner for Mayer Brown, told E&P. The concession structure would initially grant exclusive rights to PEMEX, but afterwards the state-owned oil company would have to compete with other companies on equal footing. “I think that the concession structure is the most open of the available structures and that is therefore likely to be an area of concern and an area of debate.”

Another area of concern involves the PEMEX union. Gabriel Salinas, an associate with Mayer Brown, added the union would not have representation on the PEMEX board under the PAN proposal.

Calling the plan “very bold and broad,” Parker pointed out the devil is always in the details. Detailed legislation and regulation will be required. “In order to bring in the investment that’s needed for Mexico to enjoy the value of its significant reserves, we’re going to have to have clarity on how oil and gas will be priced, what the government take is going to be, and what the private bidder take will be, clarification on allowable expenses.”

Clarity also will be needed on the taxing scheme, Parker added, noting tax reform is the next area up to be revamped as part of the PRI’s Pacto por Mexico.

Another critical piece will be allowing bidders to book reserves in their financial statements, which the PAN proposal includes, Parker said. That has been a stumbling block in the past. Additional hurdles include bringing in “the money, the people, the technology, and the infrastructure to carry out this bold plan.”

At year-end 2011, Mexico had 10.2 Bbbl of proven oil reserves – mostly heavy crude oil, offshore in the Campeche basin, and onshore in north Mexico, the EIA said citing the Oil & Gas Journal. The country had 489.9 Bcf (17.3 Tcf) of proven natural gas reserves, mostly located in the southern region. “However, the northern region will likely be the center of future reserves growth, as it contains almost 10 times as much probable and possible natural gas reserves as the southern region.”

Mexico also ranks among the top 10 countries with technically recoverable shale oil and gas reserves, according to a report issued recently by the EIA. Mexico is believed to have 13 Bbbl of technically recoverable shale oil resources and 15.2 Tcm (545 Tcf) of recoverable shale gas. Despite the resources, Mexico imports gas and is a large but declining net crude exporter, according to the EIA.

Proposed changes to Article 27 indicate PAN realizes the country’s shale potential. The section refers to “oil or ‘hydrocarbons that originate from any geological formation,’ thus opening the door to shale gas development -- the statement of intent establishes shale gas development as one of the main focus points of the proposed reform,” Mayer Brown said.

“This has been recognized by both the PAN and the PRI,” Salinas said. “The proposal could be tailored to influence or incentivize development of Mexico’s shale gas resources.”

But that, too, could bring more challenges – given low water supplies in North Mexico and any concerns hydraulic fracturing could spark among citizens.

“I think that the PRI and the PAN are both aware of the needs,” Parker said. “The recent failures of some of the bidding in Mexico have underscored the lack of attractiveness of the current contractual scheme in Mexico.”

In July three of six blocks auctioned at Chicontepec failed to get any bids despite the hydrocarbon reserves the blocks were believed to hold.

“That was another wakeup call that it is time for change. I think both of the parties recognize that,” Parker said. They realize “they [must] put forth sufficient enticements to the international investment and oil and gas community in order to bring necessary funds to turn Mexico’s vast hydrocarbon reserves into wealth… and that [must] include the ability to book reserves for those who are going to risk capital to enjoy the rewards of the upside of that risk.”

Earlier this week, Bloomberg reported July oil production for PEMEX dropped to its lowest monthly level in nearly 18 years – 2.482 MMb/d, pushing the company closer to its ninth year of declining output.

Contact the author, Velda Addison, at vaddison@hartenergy.com.