If one were to look at major oil and gas players as one big happy family, then Petróleos Mexicanos (Pemex) would be the cousin with the sweet pad on the beach in Mexico that everybody wanted to live with but nobody could because his house rules prohibited it. But now – with the passage of energy reforms in December 2013 – the old rules are no more, leaving Pemex and the rest of the family to wait while the new house rules are hammered out by the Mexican Congress. But what will the new – and long-waited for – changes mean for Pemex now that it will no longer be the only player in Mexico’s hydrocarbon-rich fields?

No easy road to change

“Mexico is probably – until the reforms are implemented – one of the most closed countries for the oil and gas industry,” Jose Valera told attendees during a recent Mayer Brown conference. “Every single barrel of oil produced in Mexico is under a state monopoly. The private sector participates only as a vendor of goods and services or as a contractor.”

Valera – a partner in Mayer Brown’s Houston office and co-director of the firm’s oil and gas law practice – added that for Mexico, the significance of the reform being enacted into law is hard to overstate and that the “political consensus we see in Mexico today behind these reforms bodes well. Time will tell in practice how this is going to work, but all indicators are good.”

For former Pemex CEO Jesus Reyes Heroles, the reform is “great, great news.” Speaking at the Mayer Brown event, Heroles said that the “energy reform for those of us not only waiting but working for a reform like this to happen – in my case for the past 20 years – is great news because the government and political parties – the main political actors – did not go the easy road of a false reform. They went to the real issue, which was the constitutional reform. It is a game changer.”

Changed game, more money

The Mexican government needs to quickly grow the economy, and this created the need for higher investment, according to Heroles.

“You need to open the energy sector to attract more investment to the sector itself and to make the economy more productive, more efficient to attract more national and foreign investment into other sectors also,” he said.

The new laws end Pemex’s monopoly and encourage the state-owned company to enter into partnerships with companies to facilitate the development of the state’s resources.

“The elimination of exclusivity is really the major thing,” he said. “It will open up additional resources to come into the energy sector of Mexico. The second major change – in my view – allows Pemex to partner with anybody it considers adequate to pursue its strategic plans.

“And this was critical because it is an oddity in the world context that you have a national oil company that is not allowed to partner with other companies to pursue resources in the best way possible,” he said.

These new partnerships could, according to one Pemex executive, pump an additional US $35 billion in outside investment into the country’s oil and gas plays. As reported in the Houston Chronicle, Froylan Gracia Galicia, executive chief of staff for Pemex, told attendees at a conference on Mexican energy reform held in Houston recently that the company has estimated that it expects its capital budget to expand from $25 billion to $60 billion as a result of the joint ventures it anticipates forming with international partners in the coming years.

Pemex’s first exploration agreements with international companies are expected as early as year-end, as reported in Bloomberg. In the interview with Pemex CEO Emilio Lozoya, it is noted that the company will initially focus on mature and deepwater fields to establish these new ventures. Russia’s Lukoil was one of the first to ink a deal when it signed a cooperation agreement with Pemex for exploration and production in Mexico in January.

Meeting needs, new contract schemes

For current Pemex CFO Mario Beauregard, the new laws will help the company meet its needs through the significantly expanded budgets while also bringing many other positives to the country.

“Pemex is not exempt to current global industry challenges like rising financial and technological resources that are required to carry out exploration, exploitation, transportation, processing, and distribution activities,” Beauregard said in the company’s recent year-end results call.

“In spite of the vast resources that Mexico still counts on, the complexity of these resources has changed. Moreover, growing domestic demand for energy and fuels and the economic activity that cheaper energy has fostered in the United States increased the need to modernize the Mexican energy sector.”

In addition to the increase in private investment, he noted that the reform will “foster job creation, increase production of hydrocarbons, and boost Pemex’s transformation into a more efficient, profitable, and competitive company on par with the major oil and gas companies in the world.

“The energy reform offers new investment opportunities in the national oil and gas industry along the entire value chain,” he said. “These opportunities will be shared between the Mexican state and the operators in industry – including Pemex – through different types of contracts, which will be designed based on international best practices followed by countries with developed oil and gas industries.”

Gone are the days where the only contract option was for the supply of services and goods. In addition to the familiar service contracts, investors also will have four new types of contract schemes available, including profit sharing, production sharing, licenses, or a combination of the four.

“We would like to highlight that Pemex will be required to participate on each and every one of these contracts,” Beauregard said. “Additionally, all of the operators – including Pemex – will be able to release their annual reports on their financial reports with the expected benefits from these contracts in line with international best practices, thereby complying with the most advanced registry and audit standards broadly implemented worldwide.”

Many challenges lie ahead for the company and for the development of the country’s natural resources. Overcoming challenges is a standard part of building not just comfy beach houses but new modern-era economies.

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