Mexico’s energy reform in relation to oil and gas: Key points

  1. Today, we have a Senate report that is very ambitious in its scope; and the underlying purpose of which is to give the government the flexibly to respond to evolving technologies and market conditions without having to enter into a another constitutional debate in the future.
  2. That said, what we have today is a Senate report, not a new oil regime that has been enacted into law. The legislation will come next year if everything goes according to plan.
  3. The attractiveness for prospective oil company investors will not be apparent until the terms and conditions of exploration blocks are announced and presented in a public lease auction. It would be attractive if, for example, the government were to propose a production-sharing agreement of 60/40 in favor of the government; on the other hand, were the ratio 90/10 it would not be attractive. It would be even more attractive if in deepwater and shale, the government were to propose a lease system comparable to that found in the U.S. Gulf of Mexico.
  4. The initial idea of “profit-sharing” seems to have died a natural death; but what continues to be worrisome from the perspective of investors is the proposal in the senate report that all oil receipts should be funneled to a Sovereign Oil Fund which will be responsible for administering the accounting of cost oil and profit oil.
  5. So we just can’t say, at this point, if the new oil regime will succeed in attracting the $20-plus billions of annual investments that Pemex says are needed.
  6. Pemex benefits from this reform in multiple ways, the principal one of which is that it is given focus in its exploration and production efforts. Today, Pemex is responsible for all hydrocarbon deposits regardless of their size, complexity and cost; once the energy reform package becomes law, Pemex in “Round Zero” will be able to pick and choose those fields and reservoirs where it has a competitive advantage, principally in naturally fractured, carbonate reservoirs in shallow water (under 200m). Not for nothing has Pemex been the largest offshore oil producer for the past 40 years. If nothing else changes in Pemex corporate governance beyond the removal of the board members of the Oil Union, there will be little improvement. In a personnel system in which it is the President of Mexico who nominally appoints each of the directors general of Pemex’s business units, the executive authority of the director general of Petróleos Mexicanos is correspondingly nominal. If the government wants business leadership, it needs to install a CEO with real, not just decorative, authority.

Written by

George Baker

Baker & Associates offers niche-market business and policy intelligence related to Mexico's oil and gas, power and chemical industries. Over 1,000 reports have been issued in the last 20 years. Subject matter expert and publisher George Baker, who directs the firm, has carried out consulting assignments starting in the late 1970s at the height of the Oil Boom in Mexico. He brings bilingual and bicultural skill-sets to understanding and responding to challenges of business and public policy, coupled with a deep familiarity with the history and idiosyncrasies of the Mexican operating environment.

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