Mayer Brown: Mexico’s Congress trying to enact energy reform amid falling production rates

It easily could take longer than many might expect before state-run Petroleos Mexicanos (Pemex) and other companies are able to unlock Mexico’s vast oil and gas resources, said Jordy Herrera, the nation’s immediate past secretary of energy, told a Mayer Brown energy conference in Houston on May 15.

Calling pending energy reform the “last big chance for Mexico to become a stronger economy,” Herrera said Mexico’s Congress is working to enact secondary legislation that would outline the logistics of implementing a sweeping constitutional amendment passed in December 2013.

Mexico’s Congress received proposed secondary legislation on Apr. 30. Pending energy reforms would allow companies other than Pemex to explore, develop, and produce oil and gas in Mexico. The reforms also will change the way the energy sector works inside the country, Herrera said.

“It’s a huge transformation,” he said, adding that it will take time for Mexico’s lawmakers and regulators to debate and implement the anticipated overhaul. The country has to figure out what types of contracts will be allowed, and contracts are expected to vary by area and by geology.

“Congress does not work that fast,” Herrera said, adding that Mexico’s oil production has declined for about a decade. The declining production is attributed to declines from mature fields such as Cantarell.

Herrera said current oil production is about 2.5 million b/d compared with a 2004 peak of about 3.5 million b/d and gas production is about 5.6 bcfd compared with peak numbers of 8 bcfd.

Meanwhile, Mexico has been importing increasingly larger volumes of gas and gasoline. The reforms have been lauded as a way for Mexico to reverse that trend. Some Mexican officials have said they want oil production to reach 3 million b/d by 2018 (OGJ Online, Oct. 20, 2011).

Jose Valera, a Mayer Brown partner in the global energy group, said Mexico was losing money with its energy monopoly structure because oil and gas production and reserves were on the decline while imports were rising.

Mayer Brown publicizes legal updates and its analysis on Mexico’s reforms through the law firm’s Mexico energy web site.

Preliminary figures from Pemex showed crude oil production during January through April fell to 2.49 million b/d compared with about 2.54 million b/d for the same period last year, the Wall Street Journal reported May 12.

“I think it is going to take longer than people are expecting,” for Pemex and other companies to develop and produce significant additional oil and gas volumes, Herrera said.

Round Zero allocations pending

In an initial process called Round Zero, Pemex requested that it be allowed to retain 85% of Mexico’s known oil and gas resources, Herrera said. Mexico’s government is scheduled to decide by Sept. 17 regarding what Pemex will be allowed to keep under Round Zero.

“My opinion is it is going to change a little,” Herrera said. “We think the final number should be around 75%.” That would open 25% of the nation’s known resources to competitive bidding by other companies outside Pemex.

Herrera said he also expects “a huge discussion” on whether Pemex will be allowed to farm out areas that it is authorized to keep under Round Zero.

“Pemex has never been in deep water and Pemex has never been in unconventionals,” Herrera said, adding that Pemex needs help with both finances and technology in these areas.

Contact Paula Dittrick at paulad@ogjonline.com.

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