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All Eyes on Implementation of Mexican Oil Reform

Mexico’s Congress is debating and drafting secondary laws to implement a sweeping energy reform bill passed last month that will open up the market to international oil and gas companies.

Congress is expected to issue a draft and negotiate secondary legislation within 120 days, but there remains some ambiguity as to when bidding rounds would actually be opened up to international oil companies, with most predicting sometime next year.

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.

Mexico’s sweeping energy reform became law in late December, ushering in a new phase that will end state-owned energy monopolies and open the playing field to international companies for the first time in decades.

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For the oil industry, it means that international companies will be allowed to participate in exploration and production activities, while direct private investment in Mexico’s midstream and downstream sectors will also be allowed.

The legislation will amend the Mexican Constitution and change the status of the state-owned oil company, Petroleos Mexicanos (Pemex) and the state-owned electric company, Comision Federal de Electricidad (CFE) from public utilities to state-owned businesses. As companies, these enterprises would have autonomy to issue contracts to meet their principal goal of providing Mexico with its long-term energy needs and turning a profit.

Under current law, Pemex is permitted to issue particular service contracts for a set payment with outside providers, an unappealing arrangement for service providers.

Mexican oil production is 25% down from its peak a decade ago, and the government is keen to prevent the country from becoming a net energy importer, which requires a sizable increase in capital investment.

Pemex itself has seen production drop from 3.45 mbpd of crude in 2004 to 2.59 mbpd in 2012.

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Among the companies that have expressed interest in partnering with Pemex to explore untapped deep-water reserves in the Gulf of Mexico are Shell, Exxon, Repsol and Petrobras.

According to Southern Pulse, the language of the bill they are considering now allows for “risk contracts” in which the “owner of the resources [Mexico] transfers the economic risk of exploiting those resources to a third party without lessening its ownership.” The third party, called a “contractor” or “operator” receives compensation tied to their success in exploiting said resource, though the state would retain the majority. Companies will not be permitted to count unproduced reserves on their ledgers, although they can list final contracts and projected profits.

In addition, the proposed reform would establish a sovereign wealth fund to manage and invest Pemex’s profits. As far as the impact on electrical distribution and transmission, the reforms leave CFE as a monopoly, though it opens the door to contracts for electric generation by outside parties, though “concessions” are explicitly prohibited.

By. Joao Peixe of Oilprice.com

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