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Mexico - a serious opening

The reforms underway in Mexico’s energy sector are profound – and 2017 will accelerate them

In 2017, Mexico's energy reform will enter a new phase with the liberalisation of its midstream and downstream sectors. Competition and private investment will become the new normal for the country's oil-products and natural gas markets. The same applies for storage, transportation, and distribution infrastructure, where further private participation will improve the efficiency and expand the capacity of existing networks to market gasoline, diesel, jet fuel, and liquid petroleum gas.

Managed pricing and subsidies, for years a centrepiece of energy and fiscal policy, will be phased out through a carefully orchestrated process of gradual opening. Regions where wholesale and retail markets of oil products are more competitive and have appropriate infrastructure will be liberalised first, followed by areas where extra time is required to bring about similar conditions. Open seasons have been announced for access to existing transportation and storage infrastructure, with more expected to foster the development of pipelines that will serve more regions. A new policy for private storage to increase coverage from five to 10 days of consumption will be in place. Meanwhile, Pemex's refineries should see increasing retooling activity as the company seeks to upgrade three of the six it owns in order to return to a healthier level of refinery output.

As the liberalisation of these market segments moves ahead, the ongoing and fundamental task of opening the upstream sector will remain a key priority. The first semester of 2017 alone will see more activity and investment committed than the previous two years combined. The experience gained from the first three exploration and production auctions will be put to use in the coming rounds for new blocks, both onshore and offshore. Pemex will partner with other companies to begin developing the vast portfolio of reserves it controls, which amount to 83% of the country's total. The farm-out for the Trion field awarded in December 2016 is part of this strategy. Shallow-water and onshore projects will follow.

This multi-level strategy for opening Mexico's oil and gas sector is delivering results that will build a diversified public-private oil and gas market ecosystem. Thirty-seven new companies from seven countries are now working in E&P. More companies will join in as additional bidding rounds take place. Seismic exploration in the past two years has surpassed both expectations and the aggregate level of land and surface analysed over five decades. Private companies are developing most of the country's new pipeline capacity and are gearing up for the liberalisation of liquid-fuels markets, where opportunities to invest are plenty.

The strategy has an international component. Mexico will continue to strengthen the country's links and relationships with key oil and gas trading partners. Increasing amounts of natural gas from the US will be entering the Mexican market through pipelines in 2017. Oil products from more production centres around the world will contribute to supply the domestic market. Crude oil swaps to optimise refinery operations have become a commercial possibility. Unimpeded flows of equipment, machinery, technology, and financial resources and other services will be supported by existing free trade, investment protection, and double-taxation agreements. And as a large producer and consumer, Mexico will continue to promote stable, transparent, and sustainable energy markets and expand its cooperation initiatives. Technical work is already underway towards Mexico's accession to the International Energy Agency.

The breadth and scope of Mexico's energy opening has been rightly described as a revolution, not just another reform. No country in the modern era has attempted as much as Mexico in such a short timeframe to transform its energy sector. Every single segment of the oil and gas industry has been touched and will be working differently in the coming years. Owing to the size of Mexico's resources and its energy market, and to its policy of deeper economic engagement with the world, it is very likely that what happens in Mexico's energy sector will be noticed beyond its borders.

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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