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Reform in Mexico gives regulators more power

Mexico’s newly empowered energy regulators will be critical to the success of the opening. They have their work cut out

The days when Pemex was so large and powerful it could pay little heed to its regulators are over. At the heart of Mexico’s energy reforms has been an effort to restructure the way its dysfunctional industry is governed, empowering independent regulators and confining Pemex’s role to running its own business. 

The result has seen the emergence of a governing triad comprising a newly empowered independent oil regulator in the National Hydrocarbons Commission (CNH) as well as the Energy (Sener) and Finance (Hacienda) ministries.

Each of the players has a crucial role to play in the roll out of Mexico’s energy reforms. Sener will be in charge of upstream policy, determining which areas to auction off, with technical support from CNH, and choosing the contract model that will be awarded in each auction area. Hacienda is in charge of setting the fiscal terms in Mexico’s oil patch. 

But it is CNH that will play the most hands-on role and will ultimately be the industry’s most prominent regulator. During the initial stages of the oil opening, CNH is helping Sener decide which areas will be auctioned off, while also running the bid rounds. It will also sign off on new contracts. Once companies start operating in the country, it will be in charge of approving exploration and development plans, grant drilling permits and manage oil contracts.

It will be a difficult task for the understaffed and underfunded regulators. They will need to work quickly and in concert to ensure the reform is successful and the bid rounds are attractive enough to draw in new investors. The right acreage needs to be chosen, the right contracts need to be offered the right fiscal terms and the round needs to be handled smoothly, with quality data provided transparently and in a timely way. The stakes are high. A disappointing first phase of bidding could damage the broader reform effort by souring international interest abroad and undercutting political support for the reforms at home. 

The initial steps have been encouraging. Round Zero, which gave Pemex first choice for acreage, was generally seen as being well run. The risk was that the regulators would revert to their old pliant ways and give Pemex everything it wanted without considering the broader affect on the industry. Or they would be overly harsh and weaken the state oil company as it manages a difficult transition of its own. But a fine balance was struck. Pemex was allowed to keep its best mature fields, and granted some of the deep water and shale acreage it wanted. But some key areas Pemex asked to develop were held back for auctioning to foreign companies, Moreover, the results of the round were announced about a month ahead of schedule.

Defined limits

However, there have been questions raised. Many potential investors were taken aback by the relatively strict requirements for the first phase of Round 1, which will see companies bid on 14 shallow-water fields. Two bidders, for instance, that produce more than 1.6 million barrels of oil equivalent a day cannot team up to put forward joint bids, which effectively rules out consortia made up of more than one international major. Companies are also not allowed to join multiple consortia for the bidding, a common strategy in licensing rounds. Moreover, companies can only bid on a maximum of five of the auction’s 14 blocks. 

Lourdes Melgar, undersecretary of hydrocarbons at the energy ministry, defended the restrictions. “The restrictions were meant to foster competition in the shallow water, and to make sure just one player didn’t win all the blocks” she said, adding that policymakers were working with the industry to refine the terms. Melgar also said that the restrictions wouldn’t necessarily be in place for subsequent phases of bidding. “Those same restrictions will not be suitable for other kinds of geology,” she said.

Regulators are also scrambling to adapt to the new lower oil price. They have responded by sweetening some of the fiscal terms. The contract includes an adjustment mechanism that is meant to give private companies a fair return but ensure that revenues from much higher oil prices mostly flow to the government. The government raised the internal rate of return at which this mechanism kicks in from 15% to 20%. It is clearly an improvement but some in the industry are, unsurprisingly, pushing for better terms. As well as sweetening the investment terms, the energy ministry has said that it might also delay the tendering of high-cost shale fields if prices don’t rise.

Still, Pedro Joaquín Coldwell, the energy minister, is encouraged. “Despite the fall in oil prices the interest of national and international companies to access this round is very flattering and gives us a sense of optimism,” he said recently. Coldwell said that 49 companies had registered their interest in the round and 39 of those had paid the 5.2m peso ($330,000) fee to access the round’s data room.

Coldwell expects the tenders awarded in the first phase of bidding to pull in new investment of $16.76bn over the next five years.

“In just over a year, the energy reform has radically changed the previous situation of energy production from almost exclusively state-owned, to a new paradigm involving national and foreign private companies working with the state in an effort to develop the country’s resources,” he said. 

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