Expectations are running high as Mexico's own citizens and international oil and gas companies await secondary legislation in coming months that will enable sweeping energy reform and allow investors from outside Mexico to partner with Petroleos Mexicanos (Pemex).
Lourdes Melgar, Mexico's recently appointed undersecretary of hydrocarbons, sees part of her job as helping manage expectations.
During a recent presentation in Houston hosted by the University of Texas-Austin and the Atlantic Council, Melgar said Mexico policymakers "are very much aware," that contract terms and anticorruption safeguards will make or break the reform's effectiveness.
She acknowledges it will take years for Mexico and its outside partners to increase oil and gas reserves and boost production. Meanwhile, Mexico's citizens eagerly await cheaper electric rates.
Noting that Mexico currently imports natural gas for power generation, Melgar said her government has keenly watched escalating US gas production from shale gas developments, including the Eagle Ford formation. Most of that formation is in South Texas, but it extends across the border into Mexico.
Burgos basin potential
The Mexican side of the formation, the Burgos basin, still remains largely unexplored. Some have estimated Burgos basin could hold more than 300 tcf of technically recoverable shale gas. Mexico's other shale formations—the Sabinas, Tampico, and Veracruz basins—also are believed to hold gas reserves.
"Shale gas in the United States created a sense of urgency for us," Pemex Chief Executive Officer Emilio Lozoya told Daniel Yergin, vice-chairman of IHS, shortly after the December 2013 passage of constitutional amendments overturning Pemex's monopoly of Mexico's oil and gas.
The reform involves amending Articles 25, 27, and 28 of the Mexican Constitution and adding 21 transitional articles that will outline regulations to be implemented.
Lozoya and Melgar believe Mexico has shale gas, tight oil, and deepwater assets, but their country lacks the cash and technology to develop those resources on its own. Under the reform, Mexico still owns the "subsoil," but international operators will be able to take possession of oil and gas at the wellhead.
The Atlantic Council's Adrienne Arsht Latin America Center published a December 2013 report "Mexico Rising" saying the earliest opening for private investors will be partnerships with Pemex as it migrates its existing fields retained in Round Zero to joint ventures.
During Round Zero, Pemex will tell the Mexican government what part of its current acreage it wishes to keep. Then, the Secretaria de Energia will have 180 days to grant or deny those wishes. Pemex must demonstrate it has the fiscal and technical capabilities to develop the resources it keeps, and Pemex must use its acreage within 3 years or lose it, with the possibility of a 2-year extension.
Bid rounds coming
After secondary legislation passes, new regulations are set, and Round Zero concludes, Mexico will move to launch bid rounds.
"In the new regime, Pemex will be on equal tax and royalty footing with international energy companies entering Mexico," said David L. Goldwyn, of Goldwyn Global Strategies LLC and head author of the Atlantic Council report. He expects Pemex will retain shallow-water production and find partners for enhanced oil recovery and deepwater projects.
"To the extent that Pemex is allowed to sell interests in its acreage, Pemex will gain capital for reinvestment," the report said. Partnerships will enable Pemex to leverage capital over many projects.
The reform legislation calls for Pemex to become a value-creating state enterprise and to function more like a company. For instance, the Pemex board of directors will no longer be required to include labor union representatives. Industry awaits details to be provided in secondary legislation and regulations.