Every industry has its list of developments or changes that are always “close” to being undertaken, but somehow never seem to come to fruition. In the energy industry, these include the development of Alaska's North Slope, the conversion of America's service trucks from gasoline to electric or natural gas, and, of course, the Mexican government ending the state-owned oil monopoly.

The North Slope is still some time away from development, and the conversion of light- and heavy-duty trucks to compressed natural gas (CNG) or liquefied natural gas (LNG) is in its infancy, but 2013 was the year that Mexico ended Pemex's stranglehold on the domestic oil industry.

Pemex will continue to be a large player in the country's energy industry, but the doors will now be open for other public and private investors through service contracts, profit-sharing contracts, production-sharing contracts and licenses in the E&P, refining, petrochemical and midstream sectors.

The most impressive aspect of Mexico's energy reforms was the speed with which they occurred. Indeed, as late as last fall there was still widespread skepticism that President Enrique Pena Nieto's government would not be able to follow through with its goal of opening up its oil and gas industry to foreign investors. Yet by mid-December, that is exactly what happened.

Although Mexico has one of the largest reserves of crude oil, the country has experienced a decline in production for the past eight years, and it is hoped that the large foreign E&P companies can help turn around this decline.

“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, DC

“Gas production is not much better. In the last 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 continued. Additionally, 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 have 90 days, after President Nieto has signed the reform legislation into law, to present to the Ministry of Energy areas in which it wishes to continue working. The Ministry of Energy and the Hydrocarbons National Commission will then have 180 days to review these plans and decide in which areas Pemex

will continue working and which areas will be open for new investors.

“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 they are currently producing oil and gas.

The Hydrocarbons National Commission will provide technical assistance to the Ministry of Energy to determine what 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 the 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 going 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 with the bidding rounds being public 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 with external audits to supervise cost recovery and accounting. The Mexican Congress will also have the authority to establish special anti-corruption legislation.

Perhaps nothing truly exemplifies the country's goal of openness and transparency better than its directive to make Pemex's closely guarded geological data available to the public through its bidding process when areas the company has operated in are selected for auction. Not only will this provide more accurate information on the country's reserves, but it will also help increase interest and investments.

“We are also giving the Hydrocarbons Commission responsibility to contract the private sector and universities to perform seismic studies for blocks that only have two-dimensional studies. We need to increase the quality of the studies that we have due to technology advances, and Pemex is a little bit behind on that front,” he said. This data will also be made available to the public, Reza added.

—Frank Nieto

For more on Mexico's energy reform, see OilandGasInvestor.com and the Insights From Hart Energy Research column in this issue.

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