What is the Immediate Impact of Mexico’s Energy Policy Overhaul?

What is the Immediate Impact of Mexico’s Energy Policy Overhaul?

Photo credit: Drilling at Dusk by Shane Anderson

By the end of 2013, Mexico’s Congress approved a bill to change Mexico’s energy policy and end a state oil monopoly that lasted 75 years. Despite protests from opposition lawmakers, the bill secured the necessary votes and will be implemented before the end of 2014.

With many laws and regulations expected to improve the efficiency of the energy sector, major changes are predicted in Petroleos Mexicanos (PEMEX).  Allowing private contracts and partnerships between the state oil producer and other companies, the bill will also set parameters for PEMEX’s ability to compete and create partnerships. That way, PEMEX would have more autonomy, a competitive tax regime, and a board that promotes the best international practices.

Chief Executive of Pemex Emilio Lozoya commented, “[The energy reforms bill] will only strengthen Pemex because it would allow us to have much more flexibility in the way we exercise our portfolio and in the way we can partner with various players and various parts of our supply chain.” Despite the government investing $20 billion a year on the oil industry, PEMEX had failed to operate up to its potential, reducing the output from 3.4 million barrels a day to 2.5 million.

Two challenges stand in the face of restructuring PEMEX: the unions and the government. Both have their interests at stake and could resist the change and end up slowing down or fully blocking the reforms. However, if PEMEX decides to comply and adapt, it may reach the same success as its Brazilian counterpart Petrobras. After several reforms from the mid 1990s to the 2000s, the national oil company of Brazil has made a name for itself worldwide and now owns modern R&D labs that boast both efficiency and high technology.

PEMEX aside, the gasoline industry will react to Mexico’s latest energy reforms. Currently, gasoline is heavily subsidized in the country, which is why it is sold for far less than its cost of production. Once the reforms are implemented, these high subsidies will be eliminated. Gustavo Madera, president of Mexico’s National Action Party, deems them useless because they don’t serve their true purpose. “The rationale behind these subsidies has always been that they are helping the poor, but the truth is that they are supporting those who already have money — the middle class and upper class. Because of these kinds of subsidies, there isn’t the money to help the poor.”

Another industry that will feel the impact of the upcoming changes is the electricity market. Like the oil industry, it will be opened to the private sector for the first time. This is why Mexican officials are planning to separate the transmission of electricity from generation. Though the separation process will be difficult and time consuming, especially with the high number of private investors in these fields, Mexico is determined to carry out this process.

The economy of Mexico will also be affected by the reforms, but in a positive way. With the country attracting as much as $1.2 trillion in investments and its manufacturing and industrial sectors thriving, 2013 witnessed a 0.8% growth in the fourth quarter and an overall estimated growth of 1.3% for the whole year. Though it was lower than the 2012 prediction of 3.8%, the estimate indicates the country’s growth potential. With more jobs opening up, poverty rates will decrease while living standards will improve.

US-Mexico Hydrocarbons Transboundary Agreement: A Major Opportunity for US Energy Sector in Mexico

US-Mexico Hydrocarbons Transboundary Agreement: A Major Opportunity for US Energy Sector in Mexico

Photo credit: Refinery Days by Anthony Lavado

In December 2013, the U.S. Congress passed the Transboundary Hydrocarbon Agreement with Mexico. The agreement was signed a year earlier by former Secretary of State Hillary Clinton and Foreign Minister Patricia Espinosa to lay down the details of a U.S.-Mexican cooperation to mine and utilise oil and gas resources in over 1.5 million acres in the Gulf of Mexico.

Several entities applauded the Congress’ decision, including the White House and the American Petroleum Institute (API). National Security Council representative Caitlin Hayden released a statement saying, “This agreement will establish an environmentally safe and responsible framework to explore, develop and share revenue from hydrocarbon resources that lie in waters beyond each country’s exclusive, economic zones.”

As for the API, the director of upstream and industry operations Erik Milito said, “The energy production made possible by this agreement will put Americans to work and raise more revenue for the government. American companies will now have the certainty they need to invest confidently along our maritime border with Mexico.”

Approving the Transboundary Hydrocarbon Agreement couldn’t have come at a better time. Mexico’s historic energy reform has opened the country’s energy sector to private and foreign investor for the first time in over seven decades. The reform also detailed different types of possible contracts, created the Mexican Petroleum Fund to manage the country’s oil revenues, and removed PEMEX’s union members in an effort to reduce their power.

In addition to boosting the economies of both countries and opening a large number of jobs in the Gulf of Mexico, the agreement will benefit Mexico by providing it with better resources and skilled labor to profit from unused and undiscovered oil and natural gas reserves. While PEMEX had kept Mexico’s name in the list of international oil suppliers, its production rate remained low due to reasons like lack of technology.

As for the U.S., the country’s maritime industry will thrive as shipyards will be commissioned to build vessels to service exploration rigs. Max Paxton, president of the Shipbuilders Council of America, believes that the agreement will increase the number of offshore platforms (estimated at 4,000) by 25%, making it necessary to create “substantially bigger and more complex offshore supply vessels.”

The Sierra Club, however, doesn’t share the same enthusiasm. The environmental organisation believes that the agreement will affect the ecosystem in the Gulf of Mexico region. “As it permits more drilling — via the Transboundary Hydrocarbon Agreement between the U.S. and Mexico — that threatens our coasts and our oceans and feeds our reliance on dirty fossil fuels,” said Athan Manuel, director of the Lands Protection Program at the Sierra Club. “The only silver lining to that provision is that the energy industry’s attempt to gut critical disclosure requirements has been stopped in its tracks”

While the new oil agreement adds less than a percentage point to the U.S. reserves, it is more symbolic in nature since it strengthens bilateral relations and shows how two North American neighbours can handle what was deemed a politically sensitive topic.

NAFTA Partners Set to Play a Prominent Role in Mexico’s New Energy Regime

NAFTA Partners Set to Play a Prominent Role in Mexico’s New Energy Regime

Photo credit: Oil Rig Promet by Jay Phagan

December 2013 marked the opening of Mexico’s state-monopolised energy industry after 75 years. The reforms that led to the change will allow international investors to become part of this lucrative sector and ultimately boost Mexico’s economy. NAFTA, the North American Free Trade Agreement, partners will also be able to enjoy the benefits of an integrated energy market in North America, which include more job opportunities and economic equality.

Canada, which first feared that its investors would shift their investment flow to Mexico, is now surer that its energy exports will still be in demand. This is due to an open trade and investment strategy that was established between Canada and the US in the 1980s and still works today. With its fears mitigated, the country is ready to play a major role in Mexico’s revolutionised energy sector.

Canada will be providing its capable energy companies, pipelines and ancillary services, three things President Enrique Pena Nieto believes his country needs. The Mexican energy sector has become a challenge on the economy due to ageing oil refineries, lack of deep water drilling equipment and expertise, and unstable oil production. Canada’s energy companies would have the opportunity to set up their operations in Mexico to try solving these issues.

The U.S., which experienced its biggest oil boom this year, will also be one of the major contributors to the industry. State-owned oil company PEMEX is eyeing U.S. independents that produce 54% of domestic oil, 85% domestic gas, and drill 95% of domestic oil and gas wells. By entering into joint ventures with these companies, PEMEX will be able to develop half-exploited fields or develop them before drafting a new contract with private companies. That aside, PEMEX will learn the techniques and technologies it lacks and needs to drill Mexican oil wells.

With these contributions, the three countries forming NAFTA will become a powerful energy front and their relations are bound to grow stronger. For starters, Canada will not consider Mexico to be its top competitor. In addition, issues like the immigration of Mexicans to the U.S. will be reduced. In fact, the U.S. is optimistic that the debate over the immigration reform will end. Governor Rick Perry commented, “I think immigration reform is going to be very passé. It’s going to be part of the past. And one of the reasons is that when Mexico liberalises the energy policy down there and the Mexicans who are here illegally go home. And as a matter of fact there might be a lot of folks who maybe are U.S. citizens going to Mexico looking for jobs in the energy industry.”

The new energy regime is bound to bode well for Mexico and its people. Current Administration is trying to set up programs to consolidate the middle class, decrease the poverty, and improve the education system. If these reforms succeed, will ultimately benefit the U.S. and Canada, as they will gain an economically stable NAFTA partner.

Foreign Companies to Play a Role in Mexico’s Energy Future

Foreign Companies to Play a Role in Mexico’s Energy Future

Photo credit: Rig repairs by Andrew Deacon

The Mexican energy reform drafted by President Enrique Peña Nieto was approved by the Congress in Dec 12 and most of the 31 states. As a result, the once PEMEX-controlled sector opened up to private and foreign partners after 75 years. Starting next year, new contracts will be issued to companies to allow them to enter Mexico and carry out their work without becoming PEMEX contractors. As well, PEMEX may partner or contract with companies, too.

Peña Nieto believes that foreign companies’ knowledge and technology are what Mexico needs to exploit its huge reserves. “We, Mexicans, have decided to set aside myths and taboos, to take a big step forward,” said the President to assure investors that Mexico is indeed changing its policies and attitudes towards foreign investors. Funds are also an important factor in the success of Mexico’s energy sector as PEMEX estimates that Mexican fields require $60 billion a year in investment, which is double what Pemex spends today.

By allowing private contracts for profit and production sharing with well-known companies such as Exxon Mobil, the government expects the country’s oil output to increase by one million barrels per day. Currently, the country produces 2.5 million barrels per day, which is about one million less than the numbers recorded in 2003. With the reforms implemented and part of the constitution, the new energy sector changes are bound to increase Mexico’s GDP by 1% until 2018 and by 2% by 2025. This means a stable economy for Mexico, which translates into a growing middle class and lower poverty rates.

Though the reforms give PEMEX the first round of entitlements, the state-oil producer will have three to five years to develop the resource on its own or by entering into a joint venture with private companies. US oil service companies and independents may be interested in partnering with PEMEX, but the latter is definitely aiming for this joint venture.

The reason behind this is that PEMEX has burdened the economy by not making the most of oil and gas resources due to insufficient labor and lack of technology. By entering into a joint venture with one of the independents, it will be able to learn the know-how it lacks and use sophisticated technology to develop half-exploited fields.

In addition to international oil companies, oil service companies will contribute to Mexico’s energy. This is because the contracts opening up and the licenses provided are better suited for their work. Foreign service companies may also join forces with Mexican companies to develop Mexican energy resources, further boosting the productivity of the oil and gas sectors.

However, Mexico is yet to decide how its hydrocarbon fields will be valued, what the bidding process entails, the nature of the contracts, and other important details. Given the speed and dedication exhibited in drafting and approving the reform bills, Mexico’s regulators are bound to resolve these issues before President Peña Nieto leaves office in 2018. Yet the reforms will be so advanced by then that the new government will deem them economically costly to turn back.

Opening of Mexico energy market a benefit to NAFTA partners

Opening of Mexico energy market a benefit to NAFTA partners

Photo credit: thistle alpha – belford dolphin 1978 by snapper

On December 12, 2013, Mexico’s lower house of Congress finally passed energy reforms, opening the country’s state-monopolized industry after 75 years. The 353-134 vote will allow private companies as well as international investors to spend billions of dollars on this sector and boost Mexico’s economy.

While the bill’s proponents cheered “Mexico, Mexico”, its opponents chanted “traitors, traitors”. The latter went as far as lock the chamber and block it with chairs and tables to disturb the voting. This is because they fear that multi-nationals, especially from the U.S., will have a sort of domination over Mexico’s oil as they did in the 1930s.  Protestors held signs and Mexican flags outside the building shouting, “The homeland is not for sale! The homeland is to be defended!”

On the other hand, supporters like Exxon Mobil’s vice president of corporate strategic planning William Colton believe that the decision is “very good for the people of Mexico and the people everywhere in the world that uses energy.” The bill’s proponents expect the energy sector to add 1% to the country’s annual growth rate. However, the biggest effect will be felt by the U.S., Canada, and Mexico in the North American Free Trade Agreement.

Thomas Donohue, president of the U.S. Chamber of Commerce is very optimistic about the reforms. “We are going to be able to develop services and competencies in dealing with energy that are transferrable from one country to another. They all have some differences in commodities and have their own regulatory systems, but all of it will be in the context of a lot oil, a lot of gas, a lot of coal and a fundamental ability to attract manufacturing, to improve supply chain and to drive the creation of jobs and economic growth.”

Former Mexican energy secretary Luis Tellez also applauded what he believes to be “the most important structural change in the Mexican economy in the last 50 years.” Like others supporting the bill, he hopes that the reforms will create an integrated energy market in the North American region. This will ultimately create new job opportunities and counter the current economic inequality.

However, there are hurdles ahead of this reform. For starters, it is still unclear how the government will be writing and enforcing contracts with investors. The Mexican government needs to show that its reforms will improve citizens’ lives in order to put everyone’s minds at ease. That aside, Mexico’s left wing parties plan to promote a 2015 referendum that overthrows the laws.

President Enrique Pena Nieto already enforced the Reform last December 20. This is because he believes that the ageing refineries, inability to use the deep water drilling technology, and fluctuating oil production are a burden on the economy which can only be countered by opening the state-run industry.

The energy sector reforms are the sixth major change that Pena Nieto enacted within one year of taking office. Other sectors that experienced much needed improvement include education, telecommunications, taxes, and the political system. If Reforms can read the NAFTA market, all three partners could benefit from the agreement, as energy flux could be back and forth.

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