Perez-Rivas: Opening up of Mexico’s energy sector provides significant opportunities

McALLEN, RGV – Mexico’s Energy Reform Bill is poised to create significant opportunities for economic growth and job creation for its oil and gas sector.

The reform eliminates Mexico’s exclusivity in upstream, midstream and downstream energy activities. It would also allow private investment by foreign as well as Mexican companies in exploration, production and transportation of oil and gas as well as oil refining, marketing and electric power generation.

Once the reform is implemented, the Mexican state, not Petroleos Mexicanos or PEMEX would be able to enter into contracts, including licenses. The reform would call for a set of new autonomous, independently- funded regulators for licensing, safety and environmental protection in the hydrocarbons sector.

A new, transparent national petroleum fund would also be established and managed by Mexico’s central bank in order to cap the government’s share of revenue, as well as to ensure that resources are shared with future generations, that research and development is encouraged, and that a rainy day reserve I available, according to a December 2013 report called “Mexico Rising: Energy Reform at Last?” from The Atlantic Council.

The catalysts behind the push to open Mexico’s energy sector to private and foreign investment is the country’s declining crude production and high electricity costs, said PEMEX Chief Executive Emilio Lozoya during a HIS CERA Week conference in early March in Houston.

The reform’s main impact would be to increase upstream investment as part of Mexico’s efforts to raise $1 trillion over the next 10 years, Loyoza said at the conference. The investment is needed to produce Mexico’s deep-water, shale and heavy oil resources. Mexico has the sixth largest technically recoverable reserve of shale gas and the eighth largest technically recoverable reserve of shale oil in the world, but its deep-water and shale reserves are underexplored, according to a January 2014 report from BBVA Compass. PEMEX currently lacks the technical capacity to exploit these resources.

The Mexican government estimates that energy reform could add 500,000 jobs by 2014 and 2.5 million jobs by 2025.

Under the reform, Mexico would retain ownership of hydrocarbons beneath the surface and PEMEX as Comision Federal de Electricidad (CFE) would not be privatized. However, the new legal framework would allow the ownership of hydrocarbons at the wellhead through profit-sharing, production sharing and license sharing contracts. BBVA Compass estimates that the reform could increase private direct investment inflows into Mexico by $20 billion to $30 billion per year, or 1.5 to 2.3 percent of Mexico’s gross domestic product.

According to the BBVA Compass report, the reforms would send about $1.2 trillion into the Texas-Northern Mexico region within the next 10 years. In the U.S., the reforms would create faster growth, helping to narrow the socio-economic disparities between Texas’ border cities and metro areas such as Houston, Dallas and Austin. If border towns effectively seize the opportunity the reform would bring, the U.S.-Mexico border could see a dramatic transformation in terms of economic development.

Claudia Perez-Rivas is the new energy correspondent for the Rio Grande Guardian. She will report regularly on oil and gas production in Mexico and in the Eagle Ford Shale.