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U.S., Mexico Sign Agreement for Joint Oil Exploration

U.S. Secretary of State Hillary Clinton and Mexican Foreign Minister Patricia Espinosa signed an agreement today for development of oil and gas reservoirs that straddle the two nations’ boundaries in the Gulf of Mexico.

The agreement is the first of its kind signed by the U.S., establishing a legal framework and creating incentives for U.S. energy companies to develop oil and gas resources jointly with Petroleos Mexicanos, the Mexican state oil company known as Pemex. When it comes into force, the agreement will end the current moratorium on oil exploration and production in the Western Gap portion of the Gulf of Mexico.

“With this, we are setting aside the old fear that honestly exists among many Mexicans that Mexico’s oil could be extracted from the other side,” said Mexican President Felipe Calderon. “Any joint reservoir will be jointly exploited,” and we will all gain the benefits.

U.S. Secretary of the Interior Kenneth Salazar called the agreement an historic step that “opens to door to previously off-limits areas in the Gulf of Mexico,” an area larger than the state of Delaware.

’Under a Moratorium’

Salazar told reporters on a conference call that the area has “essentially been under a moratorium” because of the uncertainty about who owned the resources and how potential revenue would be shared.

“These reservoirs could hold considerable reserves that would benefit the United States and Mexico alike,” Clinton said at the signing ceremony in Los Cabos, Mexico, on the sidelines of an informal meeting of Group of 20 foreign ministers. “But they don’t necessarily stop neatly at our maritime boundary. This could lead to disputes if a company discovers a reservoir that straddles the boundary -- disputes, for example, over who should do the extraction and how much they should extract.”

The agreement will help to resolve issues such as whether oil extracted from the Mexican side of the Gulf but sent directly to crude terminals in the U.S. is considered Pemex output and imported crude, and whether Mexico will charge royalties on it.

Both Sides Now

If no joint exploration deals are made between U.S. companies and Pemex, the agreement allows each side to exploit its share of hydrocarbons while protecting the other nation’s interests, according to the U.S. State Department.

The agreement also allows for joint inspection teams to ensure compliance with safety laws and environmental rules. The U.S. would also help Mexico, which is interested in drilling in deeper waters, develop the capability to respond to spills, Salazar said.

A shortage of investment in technology, exploration and production, and a ban on private-sector involvement has hindered Mexico’s petroleum production in recent years. Mexican law banned private companies from exploring, producing and refining crude oil until legislation championed by Calderon passed in 2008, allowing performance-based service contracts.

Calderon’s government has said deep-water offshore exploration and production in regions such as the transboundary area may be Mexico’s best chance to reverse declining output from the country’s largest reserves.

Second-Largest Source

Mexico was the second-largest source of U.S. oil imports in 2010, exporting 1.3 million barrels a day to its northern neighbor, according to the U.S. Energy Information Administration.

The oil sector generated 14 percent of Mexico’s export earnings in 2010, according to Mexico’s central bank, while oil earnings account for 32 percent of Mexican government revenue, according to the EIA.

At the G20 meeting yesterday, Clinton called on developed and emerging economies to eliminate unfair advantages in the global financial and trade systems, such as those enjoyed by state-owned enterprises and sovereign wealth funds.

Underscoring the “need to update the rules of the road” so businesses and economies compete on a level playing field, Clinton warned that free economies face an mounting challenge from “‘state capitalism,’’ which she defined as ‘‘the rise of sovereign wealth and the growing presence and influence of state-owned and state-controlled enterprises that operate globally.’’

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