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.
In an effort to turn a new page after failures due to “early leadership and subsequent neglect”, the U.K. has started focusing on strengthening long-term ties with emerging powers in Latin America, including Mexico.
British Deputy Prime Minister Nick Clegg met with President Enrique Peña Nieto to reinforce bilateral relations they had started building over their last two meetings in March 2011 and June 2013. According to the British government’s press release, “The legacy of this new era of UK-Mexico relations will bring the 2 societies even closer together with 2015 designated as the Year of the UK in Mexico and Year of Mexico in the UK.”
Clegg led the largest trade delegation to Mexico on his Feb 2014 visit. He applauded Peña Nieto’s reform, especially in the energy sector, which has recently been freed from PEMEX’s monopoly and opened to investors after more than seven decades. “I think it’s difficult to exaggerate the significance of this very brave reform by President [Enrique] Peña Nieto because he is opening up the potential for collaboration [especially] in an area where the British energy sector excels – deep water exploration.”
Clegg also pointed out that the U.K. had already established a successful fiscal regulatory system, which the Mexicans can follow to overcome the challenges faced during deep sea exploration. “It’s certainly not about us finger wagging and pretending we have all the answers, but I am here . . . in a spirit of partnership.”
Currently, the U.K. is the fifth largest investor in Mexico. The meetings between both countries have resulted in a 9% increase of exports from the UK to Mexico in 2013 alone. The Deputy Prime Minister plans to reach a bilateral trade target of 92.97 billion pesos (£4.2 billion/USD 7.02) by the end of 2015. To achieve that, Clegg announced that the U.K.’s market share in Mexico would be doubled to 1.5% by 2020.
According to Lord Livingston, the Minister of Trade and Investment, the relations between the U.K. and Mexico are bound to grow more positive as UK exports to the Latin American country have increased by 60% since 2009. However, he does believe that both countries have a long way to go. “Much more needs to be done to ensure UK companies can benefit from the huge opportunities these markets offer, particularly in the energy, infrastructure and education sectors. That is why we are taking one of the largest UK trade delegations so far to Mexico and Colombia.”
Despite Mexico’s drug violence; British companies are planning to forgo these threats to avail the opportunities that the new wave of Mexican reforms has to offer. “Most of the investors I’ve spoken to accept there are parts of the country where there is conflict, there is violence, there is insecurity,” Clegg said. “But I think … far from seeing threats, many, most, all of the members of the delegation I’ve brought only see opportunities in Mexico.”
British investors and others from across the world will have less to fear as President Peña Nieto is working on a drug-policy that lowers the income of cartels as well as the rate of corruption in Mexico.
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.
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.
Photo credit: Max Phillips (Jeremy Buckingham MLC) Photo: Shale gas pipes, Pennsylvania USA by Beyond Coal and Gas
Despite starting to explore the area in 2010-2011, Petróleos Mexicanos (Pemex) will not be able to tap into the Mexican Eagle Ford Shale for decades. In addition to focusing on less risky shallow-water project, Pemex cannot afford the higher costs associated with more wells, labor and skilled training.
Mexico is the sixth largest potential natural gas supplier. However, it has been catering to local demand by importing liquefied natural gas (LNG) from the Middle East and Africa for four times the rate set in North America. Considering the fact that the Eagle Ford shale in Mexico contains 343 trillion cubic feet of shale gas and the country overall has 680 trillion cubic feet, the situation has been deemed “frustrating”.
Without lower-priced domestic natural gas, electricity prices have gone higher. This in turn has affected the country’s manufacturing sector, which was expected to thrive due to the cheaper labor and lower export prices. Low fuel prices in the US set a hard competition for manufacturing facilities in Mexico. However, the potential of renewable sources in Mexico could balance a little bit the situation.
If Mexico agrees to fully open up to foreign expertise, it may discover unconventional drilling techniques like hydraulic fracturing. Also known as “fracking”, this technique has helped the US achieve a shale gas boom and reduced its natural gas imports. However, Mexico isn’t offering any incentives to private or foreign companies. Currently, private companies can be involved in Mexico’s energy sector via services contracts. Through these contracts, they will get paid for the services they render, but will not own any reserves. Such clauses aren’t tempting enough to influence investment in shale resources, which are currently dominated by smaller companies.
Pemex has only awarded three of six blocks in the July 2013 auction, disappointing many investors. However, failure to award three blocks wasn’t as peculiar as the way other firms won theirs. The Humapa block was awarded to Halliburton for $0.01 billion despite Pemex setting a maximum price of $6.50 billion. Similarly, Weatherford and Petrolite were awarded the Miquetla and Soledad for $0.98 billion and $0.49 billion respectively. Pemex had set the maximum price of Miquetla at $6.5 billion while Soledad’s was $6 billion. Experts predict that Pemex has taken this step to protect its interest as the contracts aren’t going to see their 30-year life when energy regulations change.
President Enrique Peña Nieto currently has the votes he needs to open up the energy sector after 75 years. Voting will be held before December 15 while a secondary legislation will pass by February 2014. However, according to Ariel Ramos, a partner with Haynes and Boone, US companies will be at a position to provide the needed expertise when Mexico’s shale gas plays are ready and developed.
If Mexico developed 2,500 wells annually, it will become self-sufficient by 2020. On the other hand, at 5,000 wells per year, its gas production would increase and Mexico may become a key exporter in North America and Central America. Mexico will release, by end of year, its Energy Plan, and by Q114, its Renewable Energy Plan. Will this change strategy on natural gas?