As 2013 drew to a close, 75-year old restrictions on foreign investment in Mexico’s state-controlled energy sector were ousted, as President Enrique Peña Nieto’s Congress approved controversial legislation allowing foreign companies to explore and extract oil and gas with state-run firm Petróleos Mexicanos (Pemex). The energy reform capped off a series of reforms in taxes, labour, education and telecommunications during the 47-year old leader’s first year as President.
“This is a watershed moment for Mexico,” said Lisa M. Schineller, an Analyst at the rating agency Standard & Poor’s Corp., which upgraded Mexico’s credit rating by one notch to BBB-plus shortly after the bill passed.
Since the nationalisation of oil and gas in 1938, Mexicans had condemned any whisper of a change in policy with yells of “the oil is ours.” It has traditionally been a non-negotiable issue. Until last year.
The Chamber of Deputies voted 354 to 134 to give general approval to the energy bill, although opponents loudly protested the ‘damaging actions’ to Mexico’s national interest. One MP, Antonio Garcia Conejo, from the left-wing PRD party, announced “This is how you’re stripping the nation!” whilst removing his clothes to show his protest.
However, the economics of Pemex’s monopoly haven’t worked. Mexico is blessed with attractive resources, with an estimated 160 billion boe, which includes potentially 55 billion boe mostly in deepwaters and around 60 billion boe in shale. For all that, Pemex has seen crude oil production output decline by approximately 1 million bpd in the last eight years, and since the company supports a third of the national budget, the effect of the downturn has been felt far and wide. Many hydrocarbon deposits have remained untouched, particularly in shale beds and deepwater wells, because Pemex lacks the technology and financial capacity to profitably extract from these sites.
Emphasising the state-controlled giant’s position, Emilio Lozoya, Pemex’s Chief Executive, welcomed Congress’ decision, noting it was a historic move that should have happened decades ago.
“Normally, monopolies don’t want competition. We believe competition is the best thing that can happen to Pemex,” said Lozoya, who took the helm of the world’s fifth-biggest producer of crude oil in 2012.
“As of the first or second quarter [of 2014], we’ll be ready to listen to investment proposals,” he said, adding that the first barrel of oil to come from a partnership with a private firm could be out of the ground as soon as late 2014 or early 2015.
US support for the reform comes in the shape of an agreement to allow offshore oil drilling along the maritime border in the Gulf of Mexico which was recently enacted by senators. The US-Mexico Transboundary Hydrocarbons Agreement had been included in the bipartisan budget deal approved by the US Congress.
The agreement, which lifts a moratorium that has banned drilling in the region, sets a framework, including cost and revenue sharing rules and safety regulations, for US companies to work with Pemex on developing oil and gas fields that cross the border. What is more important, the agreement demonstrates “the US government believes that [Mexico’s energy reform] is a significant step forwards,” Consultant Luis Miguel Labardini at Mexico City energy consultants Marcos y Asociados said. “It is very significant.”
With the fineprint of the policy still to be decided, it is clear that foreign energy companies will wait to see what terms will be developed. Transparency, clear rules, and effective regulations will be critical to success, and to attract the sought-after investment. Mexico still has a way to go; corruption and cartel violence still paint the picture of an unstable investment climate, but Peña Nieto’s political efficiency promises to help refashion the republic further.
To summarise, in the words of Mr Lozoya: “It’s very exciting. But the challenge now is execution. We delivered on the legislative side, now we need to execute.”
We can only hope the wave of progress continues to flow well into the new year.