Mexico hydrocarbon undersecretary vows careful energy regulation, contract transparency

Mexico’s government realizes it’s crucial to establish competitive contract terms and effective, transparent regulations to attract international investors as Mexico implements its pending energy reforms, panelists told a Houston gathering on Feb. 7.

Lourdes Melgar, the new undersecretary of hydrocarbons for the Mexican Ministry of Energy, spoke to a seminar hosted by the University of Texas at Austin and the Atlantic Council in Houston on the day after she was named to her current post. Previously, she was undersecretary of electricity.

On Dec. 21, 2013, Mexico’s sweeping energy reform became law, representing a major overhaul of Mexico’s oil, gas, and electric industries.

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). Secondary legislation is being drafted and discussed now.

Reforms pending

Having worked on the Mexican government’s energy reform team, Melgar noted that energy reform has been discussed for years in her country. She has held various positions in Mexico’s Foreign Service, including design work on international oil market strategy.

“It’s important to Mexico’s people to make sure we have financial transparency in every contract and bidding round,” Melgar said. Secondary legislation will outline the basics for the types of oil and gas exploration and production contracts, which will be flexible, she said.

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.

Melgar said Mexico expects to keep service contracts and to add profit-sharing contracts, production-sharing contracts, licenses, as well as enable a combination of various types of contracts. She told OGJ that it’s too early to know any contract specifics, and that contracts will vary widely.

“All hydrocarbons in the subsoil belong to Mexico,” Melgar said, confirming that energy reforms will enable companies outside Pemex to report oil and gas reserves on their accounting statements. “We want secondary laws that support the model the government has developed.”

Deadlines established

Mexico’s Congress has a deadline to approve these secondary laws by the end of April, she said, and the schedule calls for oil and gas bidding rounds to start around June 2015. Contract terms will be drafted carefully “to really attract the type of companies that we need,” in Mexico, she said.

Another speaker on the Feb. 7 Houston panel said Mexico could become a major oil supplier by 2022 if implementation of its energy reforms prove successful.

David Goldwyn, president of Goldwyn Global Strategies LLC and a former US State Department coordinator for international energy affairs, called Mexico’s energy reform “good timing for the rest of the world.”

Long-term opportunities for outside oil and gas companies in Mexico will involve the development of deepwater and unconventional gas plays, he said. For the near term, enhanced oil recovery technology and seismic analysis will be needed, he added.

Peter Schechter, director of the Adrienne Arsht Latin American Center at the Atlantic Council, said Latin America abounds with energy news although he noted, “No energy story in Latin America is more important than the Mexico story.”

US lawmakers in Washington, DC, closely are watching Mexico’s unfolding energy reform, he noted.

“Mexico is going to strengthen a North American energy market,” which means less reliance on Middle Eastern crude oil supplies, Schechter said. He noted that security concerns remain for outside investors.

Melgar acknowledged the security concerns, saying that her government is working to resolve these issues and also working to reassure potential international investors. “Security is an issue in some specific parts of the country,” she said.

"We expect these reforms to result in an increase of 1% to GDP by 2018,” Melgar told reporters in a news conference after the panel discussion. She said she was reluctant to discuss specific amounts yet, adding that Mexico’s economy is not equivalent to the US economy, making comparisons difficult.

Melgar said renewable energy will also be a priority for Mexico in the future.

Mexico seeks to reduce carbon emissions by 20% by 2020 and by 30% by 2050. Mexico also set a goal to reduce its reliance on fossil fuels to 65% by 2024, down from about 85% currently. Melgar noted that Mexico last year established a regime for trading carbon credits.

Separately from the panel discussion, Fitch Ratings issued a statement calling Mexico's energy reform “a long-term positive” for Mexico and Pemex credit quality.

“Fitch does not expect Pemex’s ratings to change due to the energy reform, but the company will benefit from the ability to find partners to share exploration risks and budgetary independence,” said Lucas Aristizabal of Fitch.

Contact Paula Dittrick at paulad@ogjonline.com.

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