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Mexico energy reform

Oilfield Technology,

The Mexican Congress has just opened an Extraordinary Session to discuss energy reform and its secondary, or implementing legislation. The opposition is calling for a referendum on the energy reform itself. However, the Government insists that the reform is a constitutional issue that is explicitly excluded from the referenda. The Supreme Court must make a decision on the matter.

The publication of 21 laws that, if passed, will implement both the hydrocarbons and electrical energy sectors is under close scrutiny by Mexican legislators, and petroleum experts in the US.  Three essential purposes drive the reform: attract private investment and stimulate growth; convert Petroleos Mexicanos (PEMEX) and the Comision Federal de Electricidad (CFE) into efficient, productive and competitive enterprises; and transit from a fiscal regime that was dependent upon PEMEX for approximately 40% of government revenues to alternative sources of revenue to support desired improvements in health, education, and infrastructure.

Regulatory agency capacity

Brookings explains that the legislation on hydrocarbons outlines two different forms of contracts: ‘entitlement’ and ‘assigned’. Assigned contracts are those in which private parties may invest because PEMEX lacks technical capacity. Under both regimes, the role of CNH is vital: It is responsible for managing the bidding process, awarding the contracts and supervising the implementation. However, Brookings emphasises that its current staff level of 80 people is insufficient to undertake all the tasks assigned to it.

A large pool of the petroleum and civil engineers, and geologists, needed can be found within PEMEX. However, according to Brookings, the transfer from a national oil company to a state owned, productive company may not be sufficient to attract quality engineers.

The issue of land ownership

Brookings holds that the issue of land ownership and surface rights could become troublesome if CNH sought to auction off exploration and production rights in the Burgos shale gas field. While ownership of the subsoil remains the property of the Mexican people, no clear guidance exists as to ownership of the surface property. The Mexican government might impose ‘temporary eminent domain’ so as to permit extraction of gas through fracking. However, private owners of otherwise barren lands will appear rapidly to contest this. Many of the owners of these lands are indigenous communities that are expected to resist transfer of their ancestral lands.

Industry outlook

Diana Villiers Negroponte of the Brookings Institution has suggested that until the Mexican Supreme Court comes to a decision of the Energy Reform referendum, major investors may seek to wait and see. In the meantime, the Mexican government is demonstrating a determination to move ahead with energy reforms, despite knowing that a decade or more is needed to fulfill citizens’ expectations of lower energy prices and increased revenues to pay for the National Infrastructure Program.

Adapted from a report by Emma McAleavey.

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