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Mexico’s energy reforms to open oil industry race ahead

President Enrique Peña Nieto signed the reform legislation on 11 August and has since outlined an ambitious path for the industry

Mexico's president Enrique Peña Nieto is wasting no time putting his historic energy reforms into action. Just days after signing the landmark reform legislation on 11 August, his government outlined an ambitious path for opening the oil industry that could see state-run Pemex sign its first contracts with international oil companies later this year and the first oil and gasfields auctioned in early 2015.  

The first step for the government after enshrining the controversial reforms into law reforms was to define state-owned Pemex’s new-look portfolio. Through a process called Round 0, Pemex put forward a wish list of fields it wanted to retain, which it was largely granted by regulators. 

Pemex will operate most of the country’s proved and probable reserves, totalling about 20.6 billion barrels of oil equivalent (boe). Of those, 12.45bn boe are classified as proven. Most of those reserves are in conventional onshore fields, but also include the deep-water Holok and Han areas where it has carried out exploration drilling. That sizable reserves cache will ensure Pemex remains a formidable company.

High reserves

Outside Opec’s national oil companies, it will be the world’s fifth-largest reserves holder, just behind regional rival Petrobras but ahead of supermajors Total, BP and Chevron. Pemex, however, will hold a far smaller share of the country’s more prospective projects, such as frontier deep-water, unconventional and heavy oil projects where foreign expertise and cash is expected to make the most difference. Pemex had estimated that with more investment and better technology, around 112bn boe more in reserves could be found in Mexico, mostly in riskier and more costly deep-water and shale fields. Pemex was only awarded blocks holding around 20%, or 22.13bn boe of these prospective resources, with the state keeping areas with around 90bn boe to be auctioned in the coming years.  

The results were announced more than a month ahead of schedule, a sign that the government and Pemex itself are keen to capitalise on industry excitement and accelerate the opening of the industry. The supermajors, a number of independents and China’s national oil companies have all expressed their interest in new fields being opened in Mexico. Pemex chief executive Emilio Lozoya told Bloomberg that Pemex had held talks with “dozens, if not hundreds of companies” potentially interested in investing alongside the company.

Round 0’s results will help fill in the details of those discussions, and allow companies to move forward with concrete joint venture talks. Of particular interest to the supermajors will be a stretch of deep-water Gulf of Mexico blocks near the US-Mexico maritime border retained by Pemex. The area is seen as the safest bet for finding deep-water success in Mexico because it lies in waters near the Perdido discovery just across the border. The Energy Ministry says it expects Pemex to start signing farm-out deals before the end of the year.  

On the heels of the Round 0 results, the government announced details of the first licensing round, Round 1, which it says will take place between May and September 2015. The round will offer 109 new exploration areas and 60 areas already in production to bidders. A wide range of acreage will be up for grabs, including deep-water Gulf of Mexico acreage near the US-Mexico maritime border, shallow-water blocks that hold extra-heavy oil deposits, acreage in the technically complex Chicontepec field and shale deposits in the north of the country. 

Considering how rare it is for such a range of potentially rich oil- and gasfields to be put up for bidding, Round 1 will likely be one of the most hotly contested bid rounds the industry has seen in years. The energy ministry expects it to pull $50.5bn of new investment into Mexico’s oil patch over just the first four years of exploration and development.

Key to making the reforms work will be righting the ship at Pemex. Although the company is giving up its monopoly, it will remain at the heart of the industry. If the company continues to struggle there is little chance of turning around the sector as a whole. The company has been a cash cow for the government for decades, which has sapped its ability to invest in its oilfields and keep up with the industry’s rapid technological development. Ensuring the state oil champion has the financial muscle to lead a revival of the oil industry is crucial for Pemex and for its potential partners, which will want to be assured that the state company will be able to meet its share of exploration and development costs.

Firmer footing 

For that reason, an important aspect of the reforms has been to put Pemex on a firmer financial footing. The reforms are designed to free up billions of dollars a year for the company by cutting its heavy tax burden and allowing it to operate less as a government department and more like an independent and competitive oil company. One analysis has said that the company’s new fiscal regime reduce its tax bill be more than $3bn a year over the next five years, freeing up much needed cash. 

A controversial measure that will see the government take over Pemex’s pension liabilities, assuming Pemex can persuade the oil workers’ union to make certain concessions, such as increasing the retirement age, will also save the company billions of dollars.

The changes can’t come soon enough for Pemex. The company’s oil output has continued its decline this year, falling from 2.505 million barrels a day (b/d) in January this year to 2.436m b/d in June. The production decline contributed to a staggering $6.77bn loss for the company in the first half of this year. 

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