Mexico in full swing
A year of further energy liberalisation and continued upstream and midstream expansion lies ahead
Mexico's oil and gas industry will be completely open to private investment by end-2018. For the first time in almost eight decades, domestic and foreign companies will be allowed to do business throughout the value chain, from oil exploration to service stations. Free entry and exit, competition and transparency will be the new normal.
It has been a three-year process to get to this point. After constitutional reform and new secondary legislation that ended Pemex's monopoly over the oil industry, implementation of market reform advanced in gradual steps. It began with exploration and production: in the summer of 2015, offshore blocks in the Gulf of Mexico's shallow waters were auctioned. Two years and eight bid rounds later, we've awarded 76 blocks to 67 companies from all continents. They're estimated to invest $60bn, should their projects reach the commercial stage. The government's take from these auctions is on average 70%, including taxes and royalties.
During the summer of 2017, the first significant finds by international companies drew much attention: the Talos-Premier-Sierra consortium found close to 2bn barrels of oil equivalent, and Eni 1.5bn barrels of oil. A couple of months later, Pemex discovered more than 1.5bn barrels onshore. That's 5bn new barrels found in the space of just two years, and it's only the beginning.
Mexico's government has already announced two offshore rounds for 2018, for shallow-water and deep-water blocks. They include 64 blocks with a diversified portfolio of oil, dry gas and wet gas in the key oil basins of Mexico's Gulf Coast. More bid round announcements are planned for 2018 for both onshore and offshore blocks.
Midstream progress is also encouraging. In 2017, the Mexican natural gas market started operating for the first time. After receiving control and ownership of the Pemex pipeline system, Cenagas, the national system operator, organised the first bid rounds for private companies to reserve capacity in this infrastructure. Buyers and sellers matched their offers through an electronic trading board and came out with the first bilateral contracts between private companies. Pemex is still dominant, with 70% market share, but will cede additional capacity to private companies over the next five years. Its market share will fall to 30%.
5bn—Barrels of oil found in Mexico in past two years
More than 60 companies are already registered in this market, 24 of which have signed contracts as either buyers or sellers. More companies will join as projects to expand transportation capacity are finalised in the coming two years, adding over 66% of mileage and reaching areas that didn't have access to natural gas.
The most delicate step of the opening—and one that's also providing positive results—involves the liberalisation of the gasoline and diesel markets. It's delicate because this is the most visible segment of the reform, where consumers get to experience what the market is supposed to offer and feel it in their pockets. In December 2016, the government announced a one-year gradual schedule to free up fuel prices, accompanied by a similarly-timed schedule of auctions, or open seasons, to allow private companies access into Pemex's oil-products-logistics infrastructure.
Gasoline and diesel price liberalisation will be completed by the end of 2017, but the open seasons have proven more difficult to implement, owing to the tight integration between Pemex's refinery and trading arms with its logistics arm. More activity on this front will take place through 2018. Even so, in the few months since liberalisation started at the gas pump, 29 new retail brands, in addition to Pemex's, have joined the Mexican market. They account for 25% of the almost 12,000 service stations.
The supply side will see more significant change by mid-2018, when independent private storage terminals will start receiving imported products. New tanks are being built through the Gulf, in Central Mexico, and the Pacific. Foreign and domestic companies are reserving capacity, setting up logistics and marketing plans to gain a share of a growing market.
The jet-fuel market is the only one pending liberalisation, but work is underway to ensure that in 2018 it's also opened to private participation. Companies will reserve capacity in tanks owned by ASA, a government-owned airport operator. Capacity will be open for tender, making Pemex one of many potential suppliers to airlines. Mexico's oil industry liberalisation is in full swing. Competition and transparency, the two pillars guiding the government's implementation strategy, have proven powerful tools in generating trust and attracting unprecedented levels of investment.
Aldo Flores-Quiroga is Mexico's Deputy Minister of Hydrocarbons
This article is part of Outlook 2018, our annual book looking at energy market trends for the year ahead. To purchase a copy, click here