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Price Plunge Adds New Wrinkle to Mexican Energy Reform

After years of political wrangling, Mexico is poised to open up its state-run energy monopoly to private investment, pumping excitement into Texas. But as crude oil prices fall, will investors walk through that door?

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After years of political wrangling, Mexico is poised to open up its state-run energy monopoly to private investment — pumping excitement into Texas, where officials have talked about oil-tinged partnerships that might lift border towns out of poverty.

But as global crude oil prices plunge, will investors walk through that door? 

Oil’s value has tumbled roughly 50 percent since June, triggering layoffs and big budget cuts across the industry. That only increases the pressure on Mexican officials, who are seeking to court investors for an emerging market while overhauling a 75-year-old energy policy.

“While many are eager to begin development in Mexico, and there are plenty of service providers in South Texas that are well-positioned, you will see that most companies will be in a holding pattern until the time is right,” said Omar Garcia, president of the South Texas Energy and Economic Roundtable, an industry group.

State officials have spent plenty of time contemplating what Mexico’s sweeping energy reforms mean for Texas, which could lend its southern neighbor a century’s worth of industry expertise. In August, with oil prices still relatively high, the Texas Senate formed a subcommittee to study the reform, which Mexican President Enrique Peña Nieto signed into law shortly after.

"No region stands to gain more from Mexico's energy reforms than the Rio Grande Valley,” state Sen. Juan "Chuy" Hinojosa, D-McAllen, said upon being named that body’s chairman. “With the Eagle Ford Shale to the north and the Burgos Basin, also known as the Eagle Ford Shale south of the border, the Rio Grande Valley is at the epicenter of this energy revolution happening in Texas and Mexico.”

Marcial Nava, chief economist for the global bank BBVA Compass, told lawmakers in September that Texas could reap 200,000 jobs and $3.5 billion in revenue as Texas oilfield service firms and other companies trickle across the border.

Border towns that “effectively seize the opportunity could see one of the most dramatic transformations" in the border's history, he said.

But the slumping oil market threatens those prospects, at least for now. The gloomy climate may not deter global behemoths from pouring cash into long-term projects like deepwater drilling, but lower oil prices could make operators less likely to invest in the shale along the border.

“There’s just not a ton of movement anywhere right now,” said Malachi Boyuls, a partner at St. Augustine Capital Partners, an energy investment and advisory firm, and a former candidate for railroad commissioner. “People are kind of just sitting with what they have, seeing where the oil bottom is.”

The market pressures come as would-be investors in Mexico wait for answers to a host of other questions: What will that country’s regulations look like? Will its roads and workforce accommodate new activity? Will government corruption and violence hinder business?

In recent years, for instance, cartels have expanded their drug- and human-smuggling operations. They are stealing Mexico’s oil by siphoning it directly from pipelines. From January through September of last year, the cartels drilled about 2,480 illegal taps, according to The Associated Press, costing the Mexican government an estimated $1.15 billion.

“From what I’ve heard from most investors in the industry, that’s the No. 1 concern,” said state Rep. Ryan Guillen, D-Rio Grande City, whose district extends from San Antonio south to the border with Mexico and east to the Gulf Coast. “There’s no question that they want to go in that market, they want to be players, but the question is will they ever because of the safety concerns.”

The instability may give investors more leverage in their negotiations with the Mexican government, allowing them to seek more contract guarantees and lower taxes and fees, experts say.

“At least with current day prices, the whole package has to be more attractive,” said Shannon K. O’Neil, a senior fellow for Latin America studies at the Council on Foreign Relations, a nonpartisan think tank.

Despite all the uncertainty, Guillen said he's excited about the experiment in private investment, which could improve the quality of life for all Mexicans and help stabilize the border.

“I really do believe that this gives Mexico the opportunity to really turn things around," he said.

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