In H2 2013, we published an article on Mexican President Enrique Peña Nieto’s proposed energy reforms. Eight months after constitutional amendments were introduced to actualize these reforms, the President has taken a historic step and signed the energy reform bills passed by the Congress into law. While analysts seem happy with the new package of laws, the key question pertaining is that, has the government done enough to satisfy the key stakeholders, the oil companies, PEMEX, and the Mexican public.
Mexican President Nieto has set a blistering pace for reform of the nation’s oil, gas and electricity sectors, with final Congressional approvals being in place in less than a year of the initial proposal. The secondary legislation signed into law by the President on 11th August 2014 has opened up the oil and gas sector to private investment for the first time in 75 years. The Mexican government estimates that the new framework will result in an investment of US$50 billion by 2018 in oil exploration, production and refining activities.
The determination with which the President has pursued energy reform is highlighted by the move to pre-pone the ‘Round Zero’ process by a month, which entailed the granting of exploration and production rights to PEMEX. PEMEX has been awarded rights to 83% of the country’s proven and probable oil reserves and 21% of the nation’s prospective resources. The next round of bidding, Round One, will involve private companies, foreign companies, and PEMEX bidding on equal terms for the remaining 79% of prospective reserves. This tender process will be overseen by the National Hydrocarbon Commission (CNH), and is expected to take place between May and September of 2015.
The reforms are considered ‘fairly pro-market’ as private players will be allowed to pursue joint ventures on their own accord or with PEMEX. More importantly, addressing earlier concerns regarding share in resources, foreign and private companies will be allowed to book reserves, even though oil and gas resources will remain under state ownership until they are produced. This has resulted in keen interest from leading global energy companies, few of whom have given official statements stating their intent to bid. The new law also opens up the electricity generation market, while the state retains monopoly in transmission and distribution. The government looks to set up an electricity wholesale market under the reforms.
In addition to introducing private investment into every segment of Mexico’s hydrocarbon sector, the regulation encompasses the strengthening and autonomy of regulatory bodies, CNH and Energy Regulatory Commission (CRE) as well as setting up of new independent bodies for supervising environmental protection as well as controlling and operating the natural gas and electricity network. This it to ensure smooth and transparent implementation of the reforms.
From the point of view of the energy companies, the reforms could have not come at a better time, with several of their current operation zones (of the likes of Iraq, Libya, Nigeria, and Russia), facing violence and above-the-ground problems. In comparison, the situation in the Mexican territory seems much less risky. However, there exists a slight amount of political risk for international companies.
President Nieto has bagged several wins in his first two years, including banking, education, telecommunication, and energy reforms. Unlike the case of the three former reforms, the public has not supported their President in his latest endeavor. According to a poll published in Mexican newspaper, Reforma, 40% of Mexicans believed that the changes under the energy reforms would be bad for the country. Should President Pena Nieto’s PRI party lose elections in 2018, an incoming government may be likely to roll back such reforms that displeased the Mexicans. Nonetheless this risk, most energy companies are likely to welcome the reforms with open arms.
Overall, Mexico’s energy reforms are expected to be transformational for both the country as well as the global energy industry. While they are running well within the timelines in terms of policy formation, time will determine the success, or lack thereof, of the reforms, especially with regards to implementation.