New energy era for Mexico as reforms become law

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Mexico's President Enrique Peña Nieto has set a blistering pace for reform of the nation's oil, gas and electricity sectors – after signing radical new legislation into law this month. Numerous companies – both foreign and Mexican private companies – are now queuing up to exploit the opportunities presented by the ending of decades-old monopolies. Reportedly, around 80 companies are interested in bidding to develop Mexican oil and gas resources.

The secondary legislation signed into law by the president on 11th August is enabling legislation for the historic energy bill that was approved by Congress last December to amend Mexico’s constitution. Together all the various laws that make up the energy reform package will open up what is currently one of the world’s most restrictive legal frameworks for energy development and production. The big international oil and gas companies – such as ExxonMobil,  Shell and Chevron – have, not surprisingly, been monitoring developments closely.

Falling production: Mexico is estimated to have some of the largest resources of hydrocarbons in the world. However, Petróleos Mexicanos (Pemex), the national oil and gas company, has been struggling to reverse falling production. Oil production has fallen from a peak of 3.83 million barrels in 2004 to 2.88 million b/d in 2013, raising the spectre that the nation could become a net importer by around the end of the decade.

Production of natural gas has been much less affected, though it has been on a declining trend since peaking at 59.4 Bcm in 2009; in 2013 it amounted to 56.6 Bcm and proved reserves are a paltry 12.3 Bcf. Moreover, Mexico, which in 2013 consumed a substantial 82.7 Bcm of natural gas, is a significant importer: in 2013 it had to import 18.6 Bcm of pipeline gas from the United States and 7.8 Bcm of LNG.

Tough times: Pemex has found itself in a tough position. A third of federal revenues come from the company, making it a cornerstone of Mexico’s economy. Yet with production falling, the company has been starved of funds for the new investment needed to develop new resources. And, besides, the company lacks the skills and technology to develop its hard-to-reach resources. Something had to give – making the reforms being implemented by Peña Nieto vital for both Pemex and for Mexico as a whole.

Pemex Platforms in Mexico Before the new reforms, Mexico’s constitution stipulated that oil and gas were strategic resources, reserved exclusively to the state. (Source: Pemex)

Mexico’s oil and gas industry was nationalised in 1938 by the then president, Lazaro Cardenas. For a while it remained possible for, first, private Mexican-owned companies and then foreign companies to enter into production-sharing and profit-sharing contracts with Pemex, so long as Pemex had a majority share of the venture. That, however, ended in 1959 when the laws were again modified. Since then Mexico’s oil and gas industry has effectively been closed to foreign and private companies, unless they were willing to enter into service contracts, which few were.

The new laws end Pemex’s monopoly and introduce a contractual framework under which private companies can be awarded licences, production-sharing contracts, profit-sharing contracts, and service contracts for upstream projects. Companies will be allowed to pursue ventures on their own account or in association with Pemex. Crucially, foreign and private companies will be allowed to book reserves, even though oil and gas resources will remain under state ownership until they are produced.

The new laws also open the midstream and downstream oil and gas sectors to competition, along with the electricity industry. The state-owned electricity utility, Comisión Federal de Electricidad (CFE), retains its monopoly on transmission and distribution, but the electricity generation sector is opened to competition and a wholesale market is to be established.

Accelerated implementation: The determination with which Peña Nieto is pursuing energy reform was highlighted at the time of the signing of the legislation with the publication of a list of ten action points aimed at accelerating implementation, which brought forward the deadlines for key stages of the process.

For example, the so-called Round Zero, which involved the granting of exploration and production rights to Pemex, following requests submitted by the company in March, was supposed to take place in September. In fact it took place on 13th August, just two days after the signing of the secondary legislation. Pemex was awarded 100% of its producing areas, 83% of Mexico’s proven and probable (2P) reserves, and 21% of the nation’s prospective resources. In other words, almost all that it asked for. Energy Secretary Pedro Joaquín Coldwell said the Round Zero allocation amounted to an area of 90,000 square kilometres containing an estimated 20.6 billion barrels of oil equivalent.

Similarly, on the same day, the National Hydrocarbons Commission (CNH) announced that it was beginning implementation of Round One immediately. This is the bidding round that will be open to foreign companies, private companies and Pemex, all bidding on equal terms – with 156 blocks up for grabs. The bidding round is expected to be completed next year.

The energy reforms have inevitably attracted significant opposition within Mexico but they are supported by the two big political parties, Peña Nieto’s Institutional Revolutionary Party (PRI) and the right-leaning National Action Party (PAN).  Some of the loudest opposition has come from the leftist Revolutionary Democracy Party (PRD), which has threatened to organise a referendum seeking to overturn the reforms next year.

In a country beset by corruption, bureaucracy and political wrangling, it remains to be seen how many obstructions will be placed in the path of implementation. Whatever happens it will be years before the benefits of the reforms become apparent to the people of Mexico, whether in the form of stronger economic growth, or lower prices for electricity and gas. But at last the long-overdue process of reform has begun.

By Alex Forbes