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  1. Analysis
May 21, 2015

Down to Mexico: analysing the energy financing agreement between the UK and Mexico

The recent unveiling of a financing agreement between the UK and Mexican governments to heighten collaboration in their energy production efforts could carry considerable benefits for both countries’ offshore oil and gas sectors. But is there a catch? Ross Davies reports.

By Heidi Vella

mexico flag

Mexican President Enrique Peña Nieto’s state visit to the UK at the beginning of March was anything but low-key.

The redtops were out in force to capture a banquet at Buckingham Palace, with eyes drawn to Peña Nieto’s glamorous wife – and former soap star – Angelica Rivera, as the red carpets were unfurled.

A lunch appointment at 10 Downing Street with Prime Minister David Cameron followed. While trade negotiations between the leaders proceeded, hundreds of human rights protesters gathered outside to rail against the Mexican government’s war against drugs initiative, which has resulted in an acute increase in torture cases in the country.

Yet, it was the final leg of Peña Nieto’s three-day trip that was arguably the most noteworthy, in which the President met with senior dignitaries from the UK’s oil and gas industry in Aberdeen. Also in attendance at the event, held in the city’s famous Town House was UK energy minister Matthew Hancock and Scottish Secretary Alistair Carmichael.

Hours later, Hancock revealed a financing agreement had been penned between the UK and Mexico, aimed at enhancing collaboration in the area of energy between the two nations.

No surprises: Why the trade deal between the UK and Mexico makes commercial sense

The memoranda of understanding (MoU), signed by both UK Export Finance and Pemex, Mexico’s state oil company, include the provision of a line of credit of up to $1 billion with the view to strengthening exploration opportunities for UK businesses with offshore exploration interests in the region. Despite its newsworthiness, the announcement comes as little surprise to oil and gas industry insiders.

"I’m not shocked one bit," says Dr Kenneth Aidelojie, senior lecturer in oil and gas studies at GSM London. "The Mexican government – and the people – has been looking into developing the country’s offshore oil and gas credentials for some time now, although it remains a relatively young and unexplored industry.



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"In the UK – specifically its operators in the North Sea – there is the potential for a great partnership due to this country’s vast experience and exposure to offshore drilling, which can be brought to the table. It’s a win-win situation for Mexico."

As Aidelojie alludes to, for Mexico – currently in the process of opening up its energy sector to foreign investment for the first time in 75 years – the prospect of an influx of innovative technology and safety expertise, via the North Sea, is a welcome one.

And UK energy players with offshore interests, such as BP and Shell – both represented at the Aberdeen meet-up – will also be hoping to reap the benefits of the accord. With dwindling hydrocarbon reserves in the North Sea, they are being forced to set up their rigs elsewhere. With its vast blocks of oil and gas fields – still relatively untapped – the rationale behind heading into the Gulf of Mexico is obvious.

"There are a million and one reasons why both parties would go into such a contract," says Aidelojie. "From a UK standpoint, we all know that the North Sea oil production has been in decline for a long time now. Taking that into account, a new potential source of energy, in which deals can be struck up, is very attractive for the UK."

Unsurprisingly, UK companies aren’t alone in their interest in the ongoing reforms currently taking place in the Mexican energy market. Recent rumours of mounted capital investment activity and pre-signed tie-ups between Pemex and foreign players looking to get a foothold in the Gulf of Mexico abound.

The Peña Nieto administration appears to be confident, too. On the back of announcing plans to auction off the first of 14 hydrocarbon blocks in the Gulf of Mexico’s shallow waters – with a first tender round penciled in for July – the government predicted that it expects to receive payments of $1 billion per block and a future production of in excess of 80,000 barrels a day from each of the respective areas.

This was also corroborated by Hancock, who claimed after the Aberdeen conference that Mexico "expects $50 billion of investment by 2018 in the wake of its energy reforms – boosting the economy and creating jobs, while rejuvenating production."

Partnering with Pemex: Is the UK energy sector chancing its arm?

But what about the risks of the trade deal, particularly for UK energy firms? Partnering with Pemex – a company dogged by perennial accusations of institutional corruption, not to mention a recent fire onboard one of its offshore platforms, which led to the deaths of four workers – might represent absolute anathema for some.

"Partnering with Pemex – a company dogged by perennial accusations of institutional corruption – might represent absolute anathema for some."

"There will always be risks when dealing with markets with transparency and accountability issues," says Aidelojie. "But I doubt it’s anything that the likes of BP, Shell and the UK government aren’t aware of. Allegations of corruption history and human rights allegations are factors that will have definitely been taken into consideration so as to mitigate against any fears over security and credibility."

Aidelojie, akin to the UK government, is of the belief that if such issues are ironed out, using sound risk analysis, there could be potentially lucrative gains. "The possibility of enhancing our oil profile in the Gulf of Mexico would then surely surpass the disadvantages."

The timing of the memorandum is also pertinent. With the present geopolitical impasse over Ukraine between Russia and much of the rest of Europe displaying no signs of thawing, the UK and its continental counterparts are in desperate need to diversify their fuel sourcing strategies.

Collaboration with Mexico might yet provide an answer to that particular quandary. But, as mentioned above, a deal can only be struck if there are advantages on show to the Mexican energy sector as well. The second MoU signed in the Granite City between Aberdeen University and Pemex to help foster training and human capital development is therefore a significant pledge.

But, lest we forget, nothing is set in stone yet. As a spokesperson for UK Export Finance recently said, the finance memorandum "was not a firm commitment at this stage, or an investment."

Will Cameron be cowed by environmentalists?

It will also be interesting to observe how the recently re-elected Conservative government pursues the deal in coming months. With accusations from Greenpeace of engagement in yet another "dirty" energy project – which would appear to fly in the face of previously laid-out plans to reduce carbon emissions – should we expect any kind of climb-down from David Cameron?

It seems unlikely. With Mexico’s offshore oil and gas fields now unfettered from the Pemex monopoly – coupled with the promise of an influx of innovation, experience and expertise – and the North Sea’s hydrocarbon reserves becoming more depleted by the day, the UK is likely to go where the business is.

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