Mexico’s Petróleos Mexicanos (Pemex) will continue to be a large player in the country’s energy industry following landmark changes to the nation’s energy law. However, the doors will now be open for other public and private investors through service contracts, profit-sharing contracts, production sharing contracts and licenses.
The most impressive aspect of Mexico’s energy reforms was the speed with which they occurred. Indeed, in late 2013 there was still widespread skepticism that President Enrique Peña Nieto’s government would be able to follow through with its goal of opening up its oil and gas industry to foreign investors. But that is exactly what happened.
“We have put money into the oil fields, but have come up short with production. This decline has been offset by price increases, but remains a huge concern,” Enrique Ochoa Reza, undersecretary of hydrocarbons, Mexican Ministry of Energy, said at a recent program hosted by the Atlantic Council in Washington, D.C.
“Gas production is not much better. In the past 15 years, we have gone from a situation where domestic production matched demand, to a situation where we are now importing a third of our gas supplies, largely from the U.S., to meet demand despite having a large reserve base,” he said. The country is also importing approximately 50% of its gasoline, despite a strong refining capacity, and 65% of its petrochemicals. “These numbers don’t seem to tell the story of a strong hydrocarbons-producing country. So we needed reform.
“Pemex will maintain exploration entitlement in those areas where it has made some commercial discoveries or exploration investments, and we will allow them a period between three and five years to do so,” Reza said. The company will also retain entitlements in fields in which it is currently producing oil and gas.
The National Hydrocarbons Commission will provide technical assistance to the Ministry of Energy to determine which blocks will be open for investment. Mexico will own the natural resources under the subsoil but will allow ownership of volumes extracted from the subsoil to be owned by the private sector. The Ministry of Finance will design the fiscal terms of these contracts, and the National Hydrocarbons Commission will select and oversee implementation of the winning bids.
The funds from these bids will be overseen by the Mexican Petroleum Fund, a committee overseen by the Minister of Finance that will also include the Minister of Energy and the Central Bank governor along with four independent members nominated by the president.
This fund will pay the contractors with income above 4.7% of total GDP. Payments will go into a savings fund operated by the Central Bank to support the bank as well as the country’s universal pension fund, scholarships, connective enhancement projects and regional industry development. “The idea of this fund is that the money that comes through the Mexican oil and gas reform goes mostly to long-term projects,” Reza said.
The bidding itself is designed to improve transparency. This extends to public bidding rounds and contracts, including transparency clauses, along with full disclosure of all payments associated with these contracts. This directive will also extend to the operation of the Mexican Petroleum Fund, with payments being public and external audits to supervise cost recovery and accounting. The Mexican Congress will also have the authority to establish special anticorruption legislation.
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