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Mexico energy liberalisation pushes on

Despite the downturn, Mexico is pressing ahead with plans to open its energy sector

Mexico’s energy reformers turned out in force at IHS CERAWeek in Houston this year, led by president Enrique Peña Nieto. They brought a clear message: the oil downturn isn’t going to knock the country’s oil opening off course.

“No matter what happens with the international context, the reforms will go ahead,” Peña Nieto said. “Now is not the time to stop.”

The reform process has come under heavy pressure at home, where opponents have seized on the low oil price to cast doubt over whether the reforms can succeed in transforming the moribund energy sector. At the same time, potential international investors have started to wonder whether the government will be able to sustain the pace of reforms as austerity grips international investors and state oil company Pemex sinks further into financial trouble.

Peña Nieto tried to demolish those doubts. The hotly anticipated deep-water licensing round would be held in early December this year, he insisted, and Mexico’s downstream liberalisation was being accelerated, with all companies able to start importing crude and fuel products starting in April.

December’s deep-water round will include 10 blocks in total, say government officials – four in the well-known Perdido Fold Belt that spans the US-Mexico maritime border and six larger blocks in the less explored Salina basin further south in the Gulf of Mexico. The Mexican government says that all of the blocks have billion barrel-plus potential, and the risked potential between all 10 areas is around 2.9bn barrels.

The December date is somewhat later than expected. But the extra time may allow for some recovery in the oil price and for oil executives to start taking bets on deep-water projects again.  

While the upstream opening has garnered most media and investor attention, the reforms are also clearing the way for international and private Mexican companies to enter the downstream

Peña Nieto’s effort won praise. “The energy reform in Mexico is tremendous,” said Ali Moshiri, the head of Chevron’s Latin America business. He called the Mexican section of the Gulf of Mexico a “huge opportunity” and said the country was offering good fiscal terms.

Mexico’s reformers even appear to have won over some sceptics. Occidental Petroleum’s boss Steve Chazen dismissed the reform process in January 2015, saying he’d rather focus on the US than “fool around with some ridiculous contract”. But he’s more positive now. “There will be a lot of opportunity in Mexico,” Chazen said. His main beef was that it would take time for Pemex’s legacy to wear off – so the state firm should take a minority role in new projects to learn from international companies.

While the upstream opening has garnered most media and investor attention, the reforms are also clearing the way for international and private Mexican companies to enter the downstream.

From April, private investors for the first time will be able to import fuel into the country and sell it at their own branded petrol stations, a potentially enticing opportunity given Mexico’s growing demand.

But two factors will probably slow this process. First, subsidised fuel prices won’t be fully liberalised until 2018, and given the political difficulty of ending subsidies companies may want to see liberalisation become reality before jumping into the market. Second, it remains unclear how foreign companies will access Mexico’s pipeline infrastructure, which is still owned exclusively by Pemex. The company says it is willing to offer capacity on its network. But how this will work and whether outside companies gain equal access to the infrastructure remain unknown.

A messy state

Another worry is Pemex’s perilous financial health. The company lost around $30bn in 2015 on low oil prices. Investment has been hit and unpaid bills are mounting, threatening to push many of its suppliers into bankruptcy.

The government is trying not to waste this crisis, using Pemex’s plight to accelerate reform at the company. Peña Nieto appointed Jose Gonzalez, who comes from Mexico’s social security institute, as its new chief executive. Tapping someone with a financial rather than industry background suggests bringing order to the firm’s balance sheet is the priority.

The government says it will inject billions of dollars of much-needed capital into the company, but only after Pemex cuts costs, gets more efficient starts establishing partnerships with international investors. While the government’s bid rounds have raced ahead, Pemex has lagged in making deals with foreign firms, seen as a key component of bringing outside expertise and cash into the country.

“We will monitor cuts and efficiency measures to make sure Pemex is following through on reforms before extending cash to Pemex,” says Miguel Messmacher, a senior official and the finance ministry. “Otherwise the needed reforms may not happen.” 

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