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Market cautious but upbeat after Mexico energy reform

Keywords: Tags  Mexico legislature, energy reform, Tenaris, Petróleos Mexicanos SA de CV, Pemex, oil country tubular goods, OCTG, Citibank Enrique Peña Nieto

NEW YORK — The energy reform passed by Mexico’s legislature in mid-December has brought cautious optimism to the energy tubulars market.

Some sources say the move should eventually spur demand despite many issues that need to be resolved in an oil and gas industry that has been under state control since 1938.

"This is a transformational reform ... that will allow the country to produce more energy at lower costs," Mexican president Enrique Peña Nieto reportedly said at the signing ceremony for the new law, which allows foreign companies to invest directly into Mexico’s energy economy, although extraction still needs to occur in partnership with national operator Petróleos Mexicanos SA de CV (Pemex).

While the move was viewed positively by most sources, the lack of an open market previously and challenges with the political system could slow its impact.

"There are a lot of prospects, but it’s a ways away. There’s a lot of political infrastructure still to be built," Kurt Minnich, manager of Pipe Logix LLC, Tulsa, Okla., said.

"It’s going to be cautious in our view," Paul Vivian, principal of St. Louis-based Preston Publishing Co., said. "As you see the (domestic) oil and gas companies moving in, not until that happens will the pipe opportunities come along in the sense that they can drag their suppliers with them."

Sources also noted that the Mexican market, while significant, lags far behind the United States’ demand potential.

For example, Mexico’s rig count stood at 100 for November while there were 1,782 rigs running in the United States as of Dec. 13, data from Baker Hughes Inc., Houston, show.

While the changes might take a while to trickle down for purely domestic players, it is particularly good news for Tenaris SA, Luxembourg.

"Tenaris supplies almost 100 percent of the (oil country tubular goods) demand in Mexico through its just-in-time contract with Pemex, which also provides additional visibility and understanding of drilling plans," analysts for New York-based Citibank wrote in a research note.

On the reform, Citibank analysts wrote that "we expect the reform will be concluded in 2014, with first contracts signed already by late 2014 or early 2015."

Citibank and Tenaris didn’t return calls seeking comment.

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