Operators await details as Mexico implements energy reforms

International oil and gas companies keenly await more details as Mexico’s Congress drafts and debates secondary laws to implement its recently passed energy reforms. Opinions vary on whether Mexico can meet the deadlines it scheduled for secondary laws and the creation of various regulatory groups.

On Dec. 21, 2013, Mexico’s sweeping energy reform became law, representing the most significant overhaul of Mexico’s oil, gas, and electric industries since 1938. Many ambiguities have yet to be resolved, various energy attorneys and consultants told Oil & Gas Journal.

Secondary legislation will stipulate contract logistics and tax reforms as Mexico ends the state-owned monopolies of oil company Petroleos Mexicanos (Pemex) and electric company Comision Federal de Electricidad (CFE).

Companies outside Pemex are to be allowed to participate in exploration and production activities, breaking the decades-old Pemex monopoly. The reforms also will allow direct private investment in Mexico’s midstream and downstream.

An independent director at Pemex believes energy reforms can be completed in 2 years (OGJ Online, Jan. 17, 2014).

Energy attorneys in Houston already have been briefing oil companies about what is likely to happen in Mexico in coming weeks and months. The energy reforms involve broader tax reforms to reduce the tax burden on Pemex, speakers told a Jan. 21 briefing in Houston hosted by the law firm Mayer Brown.

“A lot of hard work on secondary legislation has already been done,” said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center in Washington, DC. “More than 20 laws need to be changed” to cover all the reforms, Wood told participants at the Mayer Brown briefing.

Contract terms uncertain

Mexico’s Congress likely will draft and negotiate secondary legislation within a 120-day deadline, Wood said, adding that the timing of actual bid rounds remains less clear but likely will be sometime in 2015.

Among other decisions, Mexico has to devise the structure of oil and gas contracts at terms that will be competitive and attractive to international investors, Wood said, adding, “Mexico will get it right in terms of deadlines, but what will the content be?”

In a Jan. 6 research note, upstream analyst Adrian Lara of GlobalData said the reform law does not specify which type of contract will be applicable to different types of exploration and production activities.

“This additional information will allow for a more rigorous test in assessing the effectiveness of the 2013 reform,” Lara said. “While it is still not decided when this fine print will be drafted and voted on, the second half of 2014 could be viewed as the best-case scenario.”

Lara believes “there is a long way to go before the approved reform materializes in new production or has a significant effect on the wider Mexican economy.”

Wood noted that international oil companies want to see best practices implemented and legal certainty before they are willing to make massive investments in developing Mexico’s shale resources or its deepwater resources.

“Mexico does not have a strong record on transparency and anticorruption,” Wood said, adding that he believes Mexico will need to hire people to run the bid rounds, and it also needs to establish royalty rates, which he has heard could vary field by field.

“Regulation is going to take a lot more time than the government is willing to admit,” Wood said.

Numerous ministries involved

Numerous ministries will be working together on energy reform and regulation, said speakers during a Baker Botts LLP Mexico briefing Jan. 15 in Houston.

Carlos Sole, Baker Botts partner and co-chair of the law firm’s Latin America practice, discussed how the reform will allow companies outside Pemex to book reserves for the value of the contracts for accounting purposes.

In addition, outside companies are to be allowed to enter into contracts and to get paid in actual production of oil and gas.

“This is important because you can take that production and you can trade it, you can sell it and you control its ultimate destination and the ultimate price vs. having the production and worrying about the price Pemex is going to pay you,” Sole said.

Three distinct Mexican agencies must coordinate efforts for the reform implement, he said.

“The Ministry of Financial will be responsible for economic terms while the National Hydrocarbon Agency will be responsible for the actual bidding processes,” Sole said. “The Ministry of Energy is the entity that will provide the technical support.”

The reform calls for a “Round Zero” in which Pemex will be allowed to choose initial fields in which it desires to maintain existing interests or develop in the future.

The constitutional amendments also call for creation of a new regulatory agency, the National Center of Natural Gas Control, to supervise operation of the national pipeline network currently operated by Pemex.

In addition, the reform calls for the creation of a wholesale power generation market with the National Energy Control Center acting as the system operator independently of the CFE and for creation of a new regulatory agency, the National Agency for Industrial Safety and Environmental Protection, which will be independent of the Ministry of Environment and Natural Resources.

The Mexican Congress has 12 months to develop energy-related environmental regulations and to establish the National Center of Natural Gas Control and the National Energy Control Center. Regarding downstream, the Ministry of Energy will issue permits for processing and refining.

The reform calls for a public trust, the Mexican Petroleum Fund for Stabilization and Development, to be administered by Mexico’s central bank, subject to transparency rules to be developed in secondary legislation. The fund is to administer, invest, and distribute oil revenues effective in 2015.

Contract Paula Dittrick at paulad@ogjonline.com.

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