Mexico’s president formally proposes oil sector reforms

Mexico President Enrique Pena Nieto formally proposed a plan on Aug. 12 to reform the country’s oil and gas sector as a way to stimulate foreign investment. The proposal would modestly amend the national constitution to permit such investments, but retain national ownership of the resources.

“We are facing a historical opportunity to change what has been preventing the country from moving forward,” Pena Nieto said as he submitted his plan to the national congress. State oil firm Petroleos Mexicanos (Pemex) will not be privatized or sold, he emphasized.

The company would be restructured into two divisions—dealing with exploration and production, and industrial reform. It would try to become more internationally competitive; work to become more financially transparent; and establish policies to attract foreign investments.

Experts in the US found no big surprises in Pena Nieto’s proposal, but were nevertheless encouraged by it. “I’m actually excited that the prospect of major energy reform in Mexico may now be on the table,” said Frank A. Verrastro, who holds the James R. Schlesinger Chair for Energy and Geopolitics at the Center for International and Strategic Studies in Washington.

While political hurdles lie ahead, Pena Nieto’s Institutional Revolutionary Party (PRI) and the more conservative National Action Party (PAN), which proposed its own oil sector reforms earlier, apparently have enough votes to make the necessary constitutional changes in the 35 state legislatures which must ratify any such move as well as the national congress when it reconvenes in September, observers agreed.

Provided leverage

PAN’s proposal actually gave Pena Nietro leverage against parties that are further left politically because it proposed broader arrangements than the profit-sharing contracts the president outlined, noted Francisco E. Gonzalez, who holds the Riordan Roett Chair in Latin American Studies at Johns Hopkins University’s School of Advanced International Studies in Washington.

“Although this stance will disappoint big oil companies which would have preferred risk or production sharing agreements, the potential constitutional changes to Articles 27 and 28 of the Mexican constitution open up the possibility that for the first time in more than 50 years, private investors, domestic as well as foreign, will be able to participate in Mexico’s hydrocarbon exploration and production,” he told OGJ on Aug. 13.

Major oil companies would prefer production sharing contracts with Pemex, according to Jorge R. Pinon, associate director of the Latin American and Caribbean Program at the University of Texas at Austin’s Center for International Energy and Environmental Policy.

“Baker Hughes, Schlumberger, and other service and supply companies already can sell Pemex the technology,” he said. “The only thing they don’t bring to the table is capital. So the question is whether Mexico will open the door to any degree for major oil companies, or simply let service and supply companies continue to contribute.”

Despite domestic crude oil reserves that have fallen to about 10 years’ supply at current consumption rates and a nearly 25% production decline in the past decade, Mexico is still among the world’s 20 biggest oil producers with resources equivalent to Kuwait and other oil rich nations, Gonzalez said.

“Because Mexico has suffered from long-term underinvestment in the energy sector, and some of both onshore as well as offshore reserves are easy pickings given the right technology, the authorities remain in the driver’s seat in terms of setting terms for investors to come in,” he observed. “A lot remains to be spelled out, and secondary legislation might in fact enhance conditions to allow production-sharing agreements given specific circumstances.”

Other challenges

Fiscal reform and reengineering Pemex to make it more globally competitive are the other major challenges, Pinon told OGJ. “Pemex needs to be taxed less and allowed to keep more of its profits and revenue to reinvest and acquire new personnel,” he explained. “That means the government has to find another source of taxes. The leftist party says Pemex reform means higher taxes on the people. That’s essentially correct, but it may be necessary.”

While privatizing Pemex along the lines of Brazil’s Petroleo Brasileiro SA (Petrobras) and Norway’s Statoil looks unlikely initially, the company will need to change its corporate culture to become globally competitive, Pinon continued. “Its culture is the issue. It’s a company that’s been a monopoly working only inside Mexico,” he said. “Petrobras and other national oil companies have been working with and learning from the majors in the Gulf of Mexico.”

Verrastro told OGJ, “The issue is how far and how fast the government can move.” Estimates of Mexico’s resource base have grown significantly with the advancements in deepwater development in the gulf and the ability to now successfully access unconventional oil and gas resources, including the Eagle Ford shale which does not stop at the US border, he said.

“Given the security and trade relationships between the two countries, Mexico’s development strategy will impact the US and vice versa,” Verrastro maintained. “Add Canada to the mix, and the North American picture continues to improve. That all said, infrastructure, investment, and climate/regulatory policies can both facilitate or retard the energy story.”

The prospect of the Mexican constitution’s national ownership of the nation’s hydrocarbons provision finally being reformed is still the most significant development, Gonzalez said. “That change is finally coming to a policy sphere where questioning state ownership has been taboo for more than half a century could in fact provide broader signals about the potential high returns that private investors could make by participating in Mexico's economy,” he maintained.

Contact Nick Snow at nicks@pennwell.com.

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