Mexico to temper expectations as it implements energy reforms

Having adopted its first energy reforms since 1960, when it increased already major barriers to private sector participation, Mexico will try now to temper expectations as it reverses course and implements changes that include bigger roles for outside companies, an official of its government said.

“This set of reforms is not aimed at privatizing [national oil company Petroleos Mexicanos], which most people in Mexico oppose, but in reducing energy costs, which most people favor,” said Enrique Ochoa Reza, the Mexican energy ministry’s undersecretary of hydrocarbons during a Dec. 19 discussion at the Atlantic Council.

Congress passed constitutional amendments essential to reform earlier this month (OGJ Online, Dec. 13, 2013). A majority of Mexico’s states ratified changes in Articles 25, 27, and 28 of the national constitution authorizing the reforms, and President Enrique Pena Nieto said he will enact them soon. Pemex has 90 days after they are published to indicate where it wants to keep working, after which the energy minister will have 180 days to respond, Ochoa said.

Private-company participation in exploration and production, which has been confined to service contracts, will expand to profit and production sharing. “Refining and petrochemicals, which were closed, now will be open,” said Ochoa. “So will transportation, storage, and distribution.”

Systems in trouble

Change was possible because growing numbers of people recognized the country’s energy systems were in serious trouble, according to Ochoa. Crude oil production had dropped by 1 million b/d over 10 years, natural gas imports had climbed from 3% of consumption in 1997 to 30% in 2012, gasoline imports had risen from 25% to 44% of supply, and petrochemical imports had climbed from 41% to 66%.

With electricity costing 25% more than the US average and much higher gas prices, manufacturers have been leaving Mexico, Ochoa said, adding: “It’s as much an economic as an energy issue.”

How Mexico implements its energy reforms will be crucial, other speakers agreed. “In the course of a year, Mexico managed a formidable accomplishment,” said David L. Goldwyn, president of Goldwyn Global Strategies LLC and former international energy security coordinator at the US State Department. “If it succeeds, it could be a major producer again by 2025.”

In addition to allowing more private investment, he said, the reforms separate energy policy from industry supervision; establish a new set of autonomous and independently funded licensing, safety, and environmental regulators; develop an independent electricity system and an agency to ensure open access for gas transportation; and create a new and transparent national petroleum fund to be managed by the country’s central bank.

“It will ensure the government’s share of hydrocarbon revenue is capped, resources are shared with current and future generations, research and development is encouraged, and a rainy day reserve is available,” Goldwyn noted in a new report, Mexico Rising: Comprehensive Energy Reform at Last, which the Atlantic Council released on Dec. 19.

‘Paradigm shift’

“There’s been a paradigm shift since 2005, when the US mainly was concerned about finding new supplies,” said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Institute for Scholars. “Now, it’s on the verge of becoming a significant oil and gas exporter, while Canada is moving ahead with its own exports. Real North American energy market integration seems possible. Mexico’s reforms would be icing on the cake.”

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, said, “Pemex won’t go away. It won’t be privatized either. It may be recapitalized along the line of Petrobras and Ecopetrol, but it will need to move carefully and be re-engineered.”

He warned the company also “faces a possible brain drain as many of its engineers and geologists retire and others go to work for private companies that come into Mexico as a result of these reforms. Pemex also might need to seek joint ventures downstream since Mexico imports $20 billion/year of oil products and natural gas, Pinon said.

Ochoa said Mexican gasoline imports don’t benefit consumers because competition with Pemex hasn’t been allowed. “We see private branding possibly being allowed as part of the next legislation. We’re looking for a major change downstream, but it will take time,” he said.

Goldwyn said legislation, budgets, outsourcing, and leadership will be important benchmarks for Mexico in the next 6 months. He noted that after the Macondo deepwater well accident and crude oil spill in 2010, US President Barack Obama brought in Michael R. Bromwich to make necessary major offshore oil and gas regulatory changes. “Mexico may need to do something similar,” he said.

More support needed

Wood said regulation will be especially important. “There now is a very small, underfunded hydrocarbons agency that is being asked to bring the right people in,” he said. “It will need much more support.”

Many US universities have relationships with Mexico’s government and private companies and potentially could contribute, Pinon observed.

“Independence is a major issue,” Ochoa conceded. “Upstream and downstream regulators must have it. They will be allowed to keep up to 3 years of their budgets in a trust fund so they can keep operations consistent. The biggest change will be that regulation will move out of Pemex.”

Transparency also will be essential, the speakers agreed. “The industry welcomes it across the whole process,” said Pinon. “It already has to share a lot of data. Good governance where it operates also is important. I think Mexico has gone through a major cultural change which makes this possible.”

Ochoa said, “There’s a full commitment to transparency in this administration. We looked at how other governments do it. More important, the Mexican people want it.” Outside companies should be able to book their reserves from joint ventures, he continued.

Goldwyn added, “If they can’t, they won’t invest.”

He said Mexico will need to manage expectations. “There are indications benefits won’t accrue for 3-5 years, yet the government went ahead anyway because it felt it was necessary. These reforms, while impressive, won’t do the entire job, but there’s no turning back now.”

Contact Nick Snow at nicks@pennwell.com

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