Mexico energy reforms become law: Part two

In a recent report by the Brookings Institute, Diana Villiers Negroponte described how Mexican President Pena Nieto signed into law the 21 component parts of comprehensive energy reform.

Two categories of critical issues can be distinguished in the implementing laws. Tax and financial obligations are discussed in another article. The second category is governance and political responsibilities.

Governance and political responsibilities

Villiers Negroponte explained that, to implement the hydrocarbon reforms, three major institutions have to reach agreement: the Ministry of Finance, the Ministry of Energy and the newly created Comision Nacional de Hidrocarburo (CNH, or National Hydrocarbons Commission). Brookings holds that this could prove to be challenging.

PEMEX also has a critical role to play. It is important that legislatures meet most of PEMEX’s demands and ensure the long-term viability of the emerging state oil company.

The level of national content produced in Mexico and committed to each project had been of serious concern to foreign observers who considered that it was too high. The issue is now reserved satisfactorily by emphasising flexibility in determining ‘national content’. Until 2025, Mexican national content will equal 25% of the assets, a percentage that can vary between zero national content for complex deep-water projects to higher national content – in excess of 25% - for shallow offshore and onshore basins.

After 2025, the energy law prescribes that national content shall rise to 35% based on two presumptions: significant private investment from Mexican and foreign companies, and reduced dependence upon foreign sources for technology and management. One might assume that if private investment continues to be insufficient and dependence on foreign sources endures, commencement of the 25% national content can be postponed.

Development of shale deposits in the Burgos basin that abuts the US fields at Eagle Ford will require significant infrastructure and Mexican government support. The reason is that Mexico’s north eastern, sparse and dry area will be changed dramatically with the management of water, construction of roads, housing, medical and educational facilities, electrical generation and provision of public safety.

Environmental concerns may also limit the development of the Macuspana basin, which lies beneath sensitive wetlands. PEMEX is not likely to pursue exploitation of gas in this area and local citizens are expected to protest development.

Assurances and appropriate compensation for holders of communal and privately held lands may prove to be the most contentious issue. Landowners from the Burgos basin, as well as ‘campesino’ farmers from the centre and eastern parts of Mexico have demonstrated throughout the country seeking assurances that they will not be driven off their land and that compensation will be appropriate.

The road ahead

Villiers Negroponte suggested in the report that the next stage is for the Ministry of Energy to reveal the list of offshore and onshore fields that PEMEX wishes to develop itself or in joint ventures. This could be released as early as 18 August. The Energy Minister will decide which blocs PEMEX keeps and which blocs must be released; decisions with both technical and political consequences.

The report concludes: ‘This is a defining moment for Mexico as it enters the global age of technological advantage and commits to raising the monies from foreign investors to pursue the development of infrastructure, quality education and social progress for its citizens’.

Adapted from a report by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/15082014/mexico-energy-reforms-1139/