Mexico Energy In Need Of Expanded Financing Options

Mexico Energy In Need Of Expanded Financing Options

Photo credit: Gas Prices at Their Lowest Levels Since January by KOMUnews

Petróleos Mexicanos (Pemex) has decided to cancel the $10 billion refinery it had planned to build in Tula. According to the Mexico City newspaper El Universal, the government’s oil and gas monopoly has not included the refinery in its 2014-2018 business plan despite announcing that it would in March 2008. The publication pointed out that the indefinite delay was due to insufficient funds. Pemex had already invested around $370 million but required more to continue.

Earlier this year, speakers at the BNamericas Mexico Energy summit pointed out that the lack of investment was affecting the growth of the energy sector. According to CRE commissioner Francisco Barnés de Castro, “[Investment in refining] has fallen behind year after year, decade after decade, and we now have a phenomenal accumulated gap in investment.” As a result, the Mexican national refining system hasn’t been updated to produce up to its full potential.

Critics blame Pemex for the lack of investment as its entire budget goes it to its subsidiary PEP. Of Pemex’s $23.9 billion budget, only 9.28% has been invested in the Pemex Refiacion, causing the facilities and equipment to stay outdated. As a result, only two out of Mexico’s six refineries can process heavy and ultra-heavy crude while the rest are striving unsuccessfully to match NOM-086 standard for sulfur levels in gasoline and diesel. This has driven Pemex to import gasoline and diesel despite Mexico being the ninth-largest oil producer. Officials even predicted that Mexico would become an energy importer by 2020.

This has driven the Mexican government to negotiate more ambitious reforms with the opposition party. Mexico had opened up its energy sector to foreign investors in August, the first move of its kind since 75 years. Officials from both the Institutional Revolutionary Party (PRI) and the National Action Party (PAN) are starting to agree that the state should determine the terms of the contracts offered. This is a change from the parties’ previous plans, which revolved around profit-sharing agreements and disappointed many investors in August. An anonymous official stated, “At the end of the day, Mexico will allow ‘contracts’ in the constitution which will give enough flexibility for a whole range of projects.”

With support from PAN, the ruling PRI has the votes it needs to change the constitution and expand the energy sector’s financing options. President Enrique Peña Nieto is especially interested in attracting investments from oil majors like ExxonMobil, BP and Shell. However, the fate of this decision is yet to be determined. The voting session is expected before December 15th, which is when the Christmas recess starts. As for the terms and conditions of the reform, a secondary legislation is expected to pass in early February next year.  The first contracts will be ready early in 2014.

The reform will have a bigger effect that surpasses oil. Once it goes through, investment opportunities in oil sector could open new investments in other sectors bringing many factories along.

Mexican #Energy Reform: Pemex and Taxes

Mexican #Energy Reform: Pemex and Taxes

Photo credit: Pemex by Matthew Rutledge

Two things are certain on this Mexican Energy Reform: Pemex and Taxes. President Peña proposed changes in the taxation rules for Pemex trying to set a more flexible and standard tax system applicable for any type of hydrocarbon, allowing re-investment and reducing the red tape. As this is a very complex topic, I tried to describe the proposal as simple as possible, skipping some tricky details:

1. Pemex would have budget autonomy for managing and borrowing, repealing the current authority of Ministry of Finance for that purpose;
2. There will be a homogeneous tax system for all hydrocarbons. In brief, Pemex has a complex and combined tax system. As a general rule, it has a 71.5% tax over net income from production of oil crude and associated gas, as well as a 10.683% for gross income on production for oil crude and 0.683% for associated gas. In addition there is a special tax regime for Chinotepec and deep waters oil that has a 30-36% tax on net income and 15.683% on gross income. For marginal fields (inventory proposed by Pemex and approved by Ministry of Finance) combines the general and special regimes. Also, associated gas has a levy or 50 cents per each thousands of square feet produced. The proposal would allow to pay ISR as any other private company (up to 30% on net profits), plus a flat rate royalty on sales and a percentage on each oil contract. Government would apply all incomes from Pemex into investment projects through a public trust;
3. Pemex can only deduct some acknowledge costs with caps. The proposal would allow deducting total and real costs;
4. Currently, Pemex has a monopoly on oil production. With the proposal, Pemex would migrate to assigned oil wells that exploit to profit-shared agreements. These agreements would be set as service level agreements (SLA). Mexican State will receive a monthly flat rate, a percentage over gross value of produced hydrocarbons and a percentage over operating profit. Likewise, the SLA would establish the percentage of operation profit for Pemex; and
5. Pemex will be regulated by Ministry of Finance and Ministry of Energy.

From 2006 to 2012, Pemex had an average net profit of 4.24 Billion USD, but in 2012 was 8.8 Billion USD. So, any change that could increase the profit is substantial and matters.

Under this tax reform to Pemex, there is a preview on the SLA for private companies. Will Peña deliver?

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