Mexico Opens Up Energy Sector

Courtesy of The Financial Times, a report on Mexico’s decision to open up its energy sector:

President Enrique Peña Nieto has unveiled plans to change Mexico’s constitution and open up the country’s energy sector to foreign investors for the first time in 75 years, a move that could unleash billions of dollars of investment from oil majors struggling to find new resources elsewhere.

His proposal to loosen the grip on Mexican energy of Pemex, the state oil monopoly, and invite in companies such as ExxonMobil and Royal Dutch Shell, is potentially the country’s biggest overhaul since the passage of the North American Free Trade Agreement in 1994.

“Mexico faces a historic opportunity,” Mr Peña Nieto said in a televised address from Los Pinos presidential palace in Mexico on Monday. “This profound reform can lift the standards of living for all Mexicans”.

Mr Peña Nieto said he will seek to change article 27 of the constitution, which forbids private sector contracts, and article 28, which limits Mexican energy to state-run institutions. The bill, which now goes to congress, will offer profit-sharing contracts rather than production-sharing contracts, he said.

“It’s a pretty solid proposal,” said Duncan Wood, director of the Wilson Centre’s Mexico Institute in Washington DC. “But it will be interesting to see how oil companies take to profit-sharing rather than production-sharing contracts as that may limit their ability to book reserves.” Generally, under US Securities and Exchange Regulation, a company must have a right to produced reserves in order to book them.

Mexico sits on reserves estimated at 115bn barrels of oil equivalent, comparable to Kuwait’s. Just over half its reserves are non-conventionals, including shale gas, and Pemex estimates that with the right investment and technology about 27bn barrels of deep sea crude could be added to the nation’s proven reserves.

All stages of Mexico’s energy chain – from production and refining to distribution – have remained the legal property of the Mexican people since 1938, when President Lázaro Cárdenas expropriated fields from US and British companies and changed the nation’s constitution.

Although the expropriation is a point of nationalist pride celebrated every March 18, the burden that Pemex faces of being the government’s cash cow – providing a third of government revenues – has led to years of under-investment. Pemex, with $100bn of revenues, is the world’s seventh-largest oil producer, but output has fallen by a quarter to under 2.6m barrels of oil a day over the past 10 years.

Mr Peña Nieto said the reform would reverse that decline, and “provide cheaper energy for all Mexicans”. He said the changes would allow Mexico to boost oil production to 3m bpd by 2018 and to 3.5m bpd by 2025. Gas production would also increase from 5.8bn cubic feet currently, to 8bn cubic feet by 2018 and 10.4bn cubic feet by 2025.

Mr Peña Nieto, seeking to deflate nationalist opposition and assuage national pride, quoted Cárdenas who 75 years ago said that his expropriation never forbade private-sector collaboration. “The spirit of this reform recovers the best of the past to conquer the future,” Mr Peña Nieto said.

The leftist Democratic Revolution party has said it will not support constitutional changes but Mr Peña Nieto’s ruling Institutional Revolutionary party and the conservative National Action party, which last month released its own more ambitious energy proposal, have enough votes between them to secure the two-thirds majority need in the Senate and in Congress to pass the reform.

Mr Peña Nieto said the plan would not see Pemex privatised via a stock market listing, and stressed that under the profit-sharing contracts he has proposed “all hydrocarbons will remain the property of the Mexican people”.

Timeline: Mexican oil

? By 1911, Mexico becomes the world’s fourth-largest producer, producing 8 million barrels per year compared to just 5,000 in 1990. Article 27 of the Constitution of 1917 makes oil and other subsoil wealth property of the nation.

? Pemex is formed in 1938 by President Lázaro Cárdenas following worker protests against foreign-owned oil companies, expropriating property from 17 companies.

? An addition is made to Article 27 in 1940 prohibiting the granting of concessions to private firms. However, secondary laws still welcome private contracting and profit sharing in oil exploration and production.

-In 1960, another constitutional provision makes ownership of all natural resources “vested in the Nation” and Mexico essentially closes off their energy sector and nationalises the electricity industry.

? Crude oil production peaks in 2004 at 3.83 million barrels per day.

? Attempts in 2008 by then-President Felipe Calderón to ease restrictive energy laws are watered down after massive protests, and fail to attract foreign companies. Pemex offers “integrated service contracts” with performance incentives but no risk sharing for the reactivation of mature oilfields.

? In 2012, Pemex discovers 500m barrels of crude oil in South Mexico – the biggest find of on land petroleum in the last decade

This entry was posted on Monday, August 12th, 2013 at 12:10 pm and is filed under Mexico, Petróleos Mexicanos (Pemex).  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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