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New wave for Mexican oil

The reforms have been successful so far, but must be consolidated in 2017

Three years after the December 2013 approval of a historical constitutional reform in the energy sector, Mexico stands on the brink of success. Rapid congressional debate and approval of implementing laws in August 2014, the establishment of regulatory authorities and responsibilities, and the conclusion of three bidding rounds (with a fourth scheduled for the deepwater in December 2016) together mark an extraordinary achievement. It is extraordinary by comparison with other countries that have liberalised their oil and gas sectors, and simply stunning given Mexico's normal pace of change.

We should tip our hats to the government. It's worth noting just how much dialogue has taken place between Mexico's energy industry (Sener), and the investor community. This is, after all, what Energy Secretary Pedro Joaquín Coldwell called for when he announced the first round of oil auctions. Although to begin with the conversation was rather one-sided, since the summer of 2015 and the failure of Round 1.1 (a shallow-water exploration tender), the dialogue has developed in a truly productive way, with essential learning on both sides and a highly valuable process of socialisation.

The willingness of certain individuals in the government to listen has been key. But investors have also organised themselves effectively in the form of the Mexican Hydrocarbons Association, now an intermediary in public-private discussions. The dialogue has produced impressive advances in contract terms and regulations. It's also helped to build investor confidence.

But not all is rosy in the garden of Mexico's new oil industry. Three major doubts still compromise the success of the new model. The most glaring are the problems facing Pemex, the national oil company. Despite a change in leadership that has brought one of Mexico's most respected public servants, José Antonio González Anaya, to the helm, Pemex's production has continued to fall. In 2004 it was 3.4m barrels a day. Now it is just 2.1m b/d, according to official numbers that some analysts believe are inflated. Pemex's leadership also faces persistent resistance to its efforts to reorganise the company, resulting in a desperately slow process of change, and a failure to meet deadlines on the issuance of farm-outs and migration of service contracts. Corruption appears to be endemic within the company and the lack of effective corporate governance systems means that change will take years.

The second major area of concern lies with the change in government personnel that we can expect as the administration of President Enrique Peña Nieto enters its final 18 months (the next presidential election will be in July 2018). Hydrocarbons under-secretary Lourdes Melgar's exit meant that the government lost most of its thoughtful and industry-friendly decision-makers. Her replacement, Aldo Flores-Quiroga, is a sophisticated and expert voice on oil issues, but will need time to build a similarly productive relationship with investors. And 2017 is likely to bring more changes - if secretary Coldwell leaves the government, licensing rounds 2, 3 and 4 will be marked by increased uncertainty. It may turn out that the first four years of the current administration were the golden age in Mexican energy-policy making.

The last concern is the electoral outlook. The three leading candidates for the 2018 race are more or less tied in the opinion polls. Andrés Manuel López Obrador (Amlo), a man who has consistently rejected the logic and the value of the 2013 constitutional reform, has done an impressive job of establishing himself and his Morena party as a credible alternative. That's a threat to the new investment model. The chances of an Amlo presidency reversing the reform are minimal as it is highly unlikely that his party and its allies would be able to muster two-thirds majorities in Mexico's Congress as well as control of the state-level legislatures.

Still, an incoming left-wing government could do several things to spook investors: change the fiscal regime, provide a less receptive ear to the industry, compromise the autonomy of the regulatory agencies and, most importantly, refuse to issue new bidding rounds.

Mexico's new hydrocarbons model has been a success and, if progress continues, future generations will reflect on what has happened over the past three years and see it as an extraordinary accomplishment. But that legacy depends on continued progress and the success of the new system's supporters to communicate that to the Mexican public. They must keep pushing ahead in 2017.

This article is part of Outlook 2017, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here

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