The economic transformation brought on by President Enrique Peña Nieto’s energy reforms are expected to impact more than Mexico itself. Different countries, including the United States, welcomed the changes, especially as they allow foreign investment in energy sectors after more than seven decades of nationalization. However, while opening many doors to Mexico’s northern neighbor, California especially believes that it will benefit the most from Mexico’s unique opportunity due to its location and commercial ties.
In August, the Mexican President and California’s Governor Jerry Brown shared the stage to discuss different aspects, mainly business opportunities. Peña Nieto’s visit was expected after Brown traveled south on a trade mission in July, accompanied by many business representatives and lobbyists who eagerly paid to tag along. State energy officials are quite optimistic about these visits, especially after the president signed legislation to facilitate investment and development in both the electricity and oil and gas industries, and considering the high energy potential of the country. “These energy reforms significantly alter the structure of Mexico’s energy industry,” they said. “California’s innovative policies send a clear signal, provide incentives and generate market demand.”
California Energy Commission (CEC) Chairman Robert Weisenmiller and the California Governor’s senior adviser Michael Rossi believe that California has many companies which can help Mexico effectively carry out its reforms while reducing emissions and promoting the use of renewable energy sources. “By doing so, California and U.S. energy companies will create more jobs and tax revenue on both sides of the border and build an even stronger economic partnership,” Weisenmiller and Rossi said. Mexico has made a plan to reach 35% of electric generation with clean energy by 2024, and so opportunities abound for developers and technology companies.
Having strong ties with Mexico is also important for California due to trade. The Latin American country is the state’s largest export market. In addition, two-way trade between both reached more than $60.1 billion in 2013, a number which Weisenmiller and Rossi believe would grow now that both regions are closer than ever. “The energy reforms in Mexico allow for this collaboration to continue and result in greater economic growth and the achievement of climate and clean energy goals on both sides of the border.”
Energy and trade relations aside, the electronics industry at both ends is bound to expand in the future. While Californian companies build the components of cellphones, computers and other electronics, it is actually Mexican factories that assemble the final products. International trade advisor Jock O’Connell from Beacon Economics pointed out, “Largely because of the very high cost of doing business in California, we don’t make an awful lot of consumer goods. It tends to be stuff that goes into stuff, the components that go into more complex products.” This expansion is inevitable as Mexico’s workforce has grown more skilled. In addition, after recent Chinese government crackdowns on American companies, many are expecting California to limit its focus on trade with China to concentrate on its new Mexican ties.
Though California seems to be the most eager for ties with Mexico, the United States as a whole would benefit from its southern neighbor. Despite dealing with migration and drug issues, the U.S. cannot deny that Mexico is the world’s eighth largest producer of automobiles and fourth largest IT exporter. It is also growing into a world-class aerospace and electronics manufacturer, a feat possible due to the United States’ support and exports.
With so much to offer, California and other states are bound to update their views of Mexico. The Golden State has already taken a positive step during Brown’s trade mission by striking an educational exchange agreement, which is a first of its kind between the Mexican government and an individual U.S. state. However, this is just one step in a longer journey that would result in stronger ties between the neighbors now that Mexico has evolved into a willing and able economic partner.
Last visit of Eric Garcetti, LA Mayor brought a share of the new Mexico City airport (US$9 bn) to Parsons Corporation, one of the LA Firms that came with economic mission. So, the question is how far California and Mexico want to be integrated.
California Green Road Sign and Airplane Above with Dramatic Blue Sky and Clouds by Andy Dean Photography
Mexico’s lawmakers have approved new and historic measures which will be opening the energy sector to private investment. The Mexican oil sector had previously been a state monopoly for over 75 years. Mexican President Pena Nieto made liberalization of the energy sector, among others, a central part of his platform when he became President. At present, Mexico is the world’s 9th largest oil producer.
In the next 6 months, details of the tenders will be made available by Mexico’s energy minister. There will be between 30 and 40 zones where private companies will be able to bid in the first tender. As has been reported widely, Mexico has an enormous, untapped oil reserve. The first round of public tenders will likely take place in early 2015.
Royal Dutch Shell, ExxonMobil and other foreign oil companies are reportedly interested and actively monitoring the recent legislative activity surround the proposed tenders.
As the new law outlines, foreign and private domestic energy companies will be permitted to explore, produce and refine oil. In 1938 Petróleos Mexicanos (Pemex) was created to perform these duties and has since done so exclusively. The new regime is the first time ever the Mexican government has permitted foreign or private energy companies to participate in this work.
Zepeda told news reporters that no big surprises should be expected from the tender process. That Pemex’s requests for some biddings to be reserved for its exclusive tender – will not be. In particular, where there are areas that Pemex does not have a demonstrated expertise – the government will be seeking foreign experts. Deepwater and unconventional drilling and exploration are some examples.
In the future, Mexico’s Congress will decide on further tenders. They will retain the right to award or not reward certain areas for public tender in the future. Mario Gabriel Budebo, a former hydrocarbons undersecretary, told media reporting on the matter that any new law should clearly spell out what criteria would be useful for those future tenders. In particular, he cited the need for clarity in the areas of licenses, profit or production-sharing contracts
After the initial tenders are completed, Mexico’s Comisión Nacional de Hidrocarburos (CNH) will administer annual tenders aimed at exploiting the approximately 115bn barrels of oil (equivalent) that is estimated that Mexico contains and that Pemex is unable to develop.
Zepeda told reports that the tender is likely going to take place next summer. And that “Blocks could range from 150 sq km for shallow-water fields to up to 500 sq km in deep waters and as big as 1,500 sq km in virgin areas.”
Despite these sweeping changes to the energy sector, the Mexican economy is predicted to grow at 2.7 percent this year – a slower growth level than what many had hoped for. As a result, Mexico’s President, Enrique Pena Nieto – has seen his popularity dip. Despite this, he promises to continue to focus on reform – and it appears clear too, that despite any political developments in the future, it’s likely that Mexico’s’ economy has been permanently changed to one open to the world.
www.mexicanlawblog.com is a tool for developing business in Mexico. This is why, I added a section with relevant events about business in Mexico. If you want to list your event or include an interesting one, please contact me.
Platts 18th Annual Mexican Energy is taking place next November 20 & 21, 2014 at the Four Seasons Hotel in Mexico City. Hear from over 30 energy industry leaders what is in store for Mexican Energy following the historic reforms. Learn on what energy reform means for oil and gas investment, PEMEX’s new role as a productive state enterprise, the latest developments in deepwater and shale gas, natural gas, NGLs, biofuels, and more.
A new regulatory framework for electric power will improve financing in the power grid. New tenders for power projects are coming, and the private sector has a whole new role.
The elite of Mexico’s energy industries, including state energy agencies, regulators, private power producers, renewable energy developers, oil and gas developers, oil and gas infrastructure, energy service companies, energy traders, energy investors, consultants, and more.
The Mexican Eagle Ford
The Eagle Ford Shale is considered the largest economic development in the history of Texas, with a USD 60 billion impact estimated for 2012 alone and over 115,000 jobs created in 20 nearby county areas. It is also ranked as the largest oil and gas development due to the USD 30 billion spent in developing the play in 2013. With a record-breaking rate of 4,000 barrels per day of oil, the Eagle Ford play has put South Texas on the map. However, whereas the lights can be seen from the surface-level gas flares and rigs in the area, the Mexican part of the shale is engulfed in darkness.
The Mexican share of the Eagle Ford Shale has hundreds of mile forming the Burgos Basin, and bear the opportunity of thousands of wells to boost the economy. While the American side has over 5,400 wells, Mexico has only attempted 25. It is expected a change from the secondary legislation that is under final discussion at Congress now.
The Effects of the Mexican Energy Reforms
Initiated by President Enrique Pena Nieto, the energy reforms will open the Mexican oil industry and private foreign investment sector after over seven decades. As a result, foreign investors are having a serious interest in the country, and could bring along new technology, expertise, and risk assessment tools that state oil monopoly Pemex has failed to introduce in its operations. Though lawmakers are currently working on the details of the reforms, U.S. oil and gas companies as well as others from across the world are optimistic about being able to bid on projects by the end of 2014 and initiating projects even in some of the country’s most violent areas in 2015.
If all goes as planned, Mexico can easily become a large net importer of oil in a few years. Pemex predicts that the formation holds approximately 60 billion barrels of oil, which is more than the volume the country has produced since 1904. Natural gas especially is expected to be plentiful; a 2013 survey by the U.S. Energy Information Administration showcased that Mexican shale gas reserves were the world’s sixth.
Unfortunately, despite the country’s rich resources, its demand for electricity and pipeline infrastructure has forced it to depend on imported gas. At certain parts of the country, the prices of natural gas can reach four times as high as those in the United States. Therefore, in addition to countering this issue, the shale’s resources have the power to help the country’s economic and energy development and ensure its self-sufficiency when it comes to its fuel needs.
Finally, due to the lower cost of gas, Mexico can generate energy for less, empowering its manufacturing and assembly plants and helping them compete with China. According to Javier Trevino (PRI), the Mexican Congress’ head to the energy commission, “This is critical to the re-industrialization of North America. Mexico needs to develop these resources, or else we’ll be left behind.”
How the Reforms will Benefit Eagle Ford Shale Producers
The American producers will get numerous opportunities to start tapping into the Mexican side of resources. With Congress currently taking the necessary steps towards creating laws which complement the reforms, numerous organizations have started applying to the Federal Energy Regulatory Commission (FERC) to build border-crossing pipelines from the U.S. side of the Ford Shale to Mexico.
Columbia Pipeline LLC has already filed an application to construct a pipeline from Texas to help with generating power in Mexico. The company, which is a San Antonio based unit of Howard Midstream Energy Partners, has been collecting gas and continuously working on the infrastructure which Eagle Ford producers depend on.
“Howard Energy’s gathering pipelines are connected, either directly or indirectly, to significant supplies of gas produced in Texas…The border crossing facilities will…meet the needs of the expanding electric generation and industrial markets in Mexico. As such, the border crossing facilities will expand the market for domestically produced gas…will further national economic policy by stimulating the flow of goods and services between the United States and Mexico, in the process improving our international balance of payments,” said the company’s official.
Also following in the same footsteps is Kinder Morgan Inc., which has proposed the Sierrita Pipeline and made plans to connect it with natural gas transmission channels towards northern Mexico. The pipeline will connect El Paso Natural Gas Co’s mainline at the interstate system in Arizona to a point near the international border at Sasabe. “Sierrita Pipeline will serve new demand for gas transportation by MGI Supply Ltd. delivering natural gas to the border crossing facilities and on to Mexico; Sierrita’s services will not replace any existing services by other pipelines,” FERC announced.
Issues Which Should Be Addressed First
There are a number of issues which Eagle Ford Shale producers will have to take into consideration before they can venture into the Mexican oil and gas market. The first of these is the less developed Mexican infrastructure. Pipelines, rail and roads need to be taken care of and improved to facilitate production and allow raw materials capital equipment to make its ways from South Texas.
Another problem which Ford Shale producers will need to take care of is the security factor. Due to the constant drug violence in Mexico, especially around the borders, oil and gas producers tend to hesitate about entering the Mexican energy sector. Luckily, President Enrique Pena Nieto has already been waging a drug war two months since he took office in 2013. “My government will continue mounting a real fight against the trafficking of marijuana and all other drugs.”
In addition, due to its proximity to Mexican shale oil and gas deposits, the United States will make the most of these resources. While many countries are interested in tapping into the reserves in Mexico, most of the expertise needed for this task will be from the United States. Therefore, the U.S. is bound to benefit more from the prospects for shale oil and gas exploration in Mexico since has a wide experience in fracking and exploring techniques. However, still some environment regulation is still in process to be decided.
The Bottom Line
Mexico’s oil reforms will open the country for international investors and oil and gas explorers, allowing them to take advantage of the rich reserves in different parts of the country, including the Eagle Ford Shale. Aside from the U.S. and Mexico, shale oil and gas exploration will take its toll on global markets. The shale’s businesses and producers will be able to tap into the shale boom, strengthening their position and establishing themselves beyond North America.
The Mexican Congress is expected to approve the secondary legislation related to the energy reforms before the end of summer. This legislation will detail the now approved Constitutional Reform on energy that opened the market to foreigners. While no exact date has been set, end of July seems reasonable. Once passed, these reforms will complete the opening of the tightly closed oil and electricity sectors. However, while they may be used to reverse the decline of domestic oil production, they are mainly beneficial for the development of domestic shale deposits.
The Ministry of Energy is keen on investing in developing Mexico’s shale resources, which it estimates will cost USD 100 billion (or USD 250 billion according to some resources) for the next ten years. Previously, the task was entrusted to national oil producer Pemex, but it only managed to invest USD 250 million in shale gas exploration. However, it will be a while before foreign companies can become involved as the reform process will take until the end of 2014 or the first quarter of next year to settle down. A phase of implementation is being discussed.
One of the shale formations Mexico has its eyes on is the “Mexican Eagle Ford” shale, the sixth largest in the world, now covered under the US-Mexico Transboundary Hydrocarbons Agreement (cross-border oil reserves). The shale is responsible for two thirds of the country’s shale gas resources, which is approximately 600 trillion cubic feet. In addition to Eagle Ford, Mexico has 13 billion barrels of recoverable oil resources, ranking it the 8th largest in the world.
While this is a huge opportunity, it does come with its fair share of challenges. Despite the reforms, the exploration process will not be easy as infrastructure needs ample work, especially in the northern part of Mexico. Another issue that shale extractors face is the large amount of water required to drill reserves. In Coahuila, where the largest untapped shale is located, the water supply is scarce, making the state the second driest. Even the water that does come to the state is mainly used to agriculture activities. However, an amend to Waters Law is in process to support Geothermal business. Will it help shale too?
Drug cartels are also a threat foreign investors are wary of, especially since they have always extorted and stolen from foreign investors. However, Mexican president Enrique Pena Nieto is continuously urging local governments and private enterprise to address security risks and fight the growth of cartels by improving education in local communities, especially those in the shale-rich communities of Coahuila and Tamaulipas.
To further discuss the shale resources Mexico has to offer foreign investors, a two day oil and gas event named the Mexico Shale Summit will be held in San Antonio, Texas in February 2015. During the event, Mexico will showcase the opportunities and challenges of its northern regions, giving valuable industry insight and establishing strategic relationships that help the country ensure the success of its future ventures while mitigating the risks frightening many foreign investors.
Shale in Mexico has created many expectations along with solar. Can Mexico convert this interest in direct foreign investment? What is your opinion?