Mexico Energy Reform: Steady Growth is Likely


Most industry observers consider Mexico’s ongoing energy reform to be beneficial for everyone – the country itself, its national oil company, Pemex, and outside investors and international energy firms who are eager to participate in developing Mexico’s energy resources.

They are excited for good reason – Pemex says the country’s reserves are in the range of 50 billion barrels of oil equivalent, with another 60 billion or so in unconventional resources, such as shale and deepwater.[1] And there are plenty of opportunities in midstream and oilfield services, too.

But the question some are asking is, “Is reform sustainable?”

In other words, is there a possibility that political pressure or changes in government might lead to the roll-back of these advances that appear to offer so much promise? It’s a legitimate question, given the long history of nationalization in Mexico.

The answer is simple – it appears that Mexico’s new approach is here to stay.   President Enrique Peña Nieto sees energy reform as the foundation for transforming Mexico’s future – a key element in developing a knowledge-based economy with stronger financial and social underpinnings. The Government is looking for direct investment of approximately US$350 billion a year from outside the country and a rise in GDP of approximately 1% per year in the early stages of reform, roughly equivalent to increased economic output of approximately US $12 billion.

There is a lot riding on the success of reform, and the Government has taken a thoughtful approach to implementation. Of Mexico’s three major political parties, President Pena Nieto’s Institutional Revolutionary Party (PRI) and the conservative National Action Party (PAN) are both in favor of reform, and there is general agreement on the methods under way.

Some are concerned that midterm congressional elections in 2015 – and a presidential election in 2018 – might tip the scales in a different direction. And there is anecdotal evidence that some firms intend to wait on the sidelines until after the 2018 election.

But new constitutional rules, enacted alongside reform, require strong majorities to change the law, and it will be structurally difficult to do so. The left-wing Party of the Democratic Revolution (PRD) achieved just 25% of the vote in the last election, and there is little to suggest they can win the numbers necessary to overturn or even slow the reform movement, especially if results of the initial pre-bidding phase are successful.

Round Zero bidding is expected to take place in September 2014. In addition, the reform legislation provides revenue from investment to fund the regulatory bodies that have been set up to oversee both the oil and gas and power markets, giving them economic independence from the Government. That should strengthen their regulatory position and enable them to operate without fear of losing funding.

Reform proponents have a number of other factors in their favor:

 

  • • First, there is every indication that the initial reform elements will be successful in achieving the Government’s goals, which should bolster its popularity among voters. For example, experts believe that Round Zero will enable Mexico to boost production from its existing fields, which have suffered from a lack of investment in recent years.
  • • Second, increased investment and new production flows will help Pemex increase its profitability and reduce its extensive pension fund liabilities, which will benefit the company’s employees. That will resonate with Mexican voters and foster a new sense of pride in Pemex’s reemergence.
  • • Finally – and perhaps most importantly – it is clear that the overall pace of change in Mexico will be relatively slow, in part due to a lack of storage and pipeline infrastructure. It will take many years for Mexico to see significant improvement in its midstream capabilities, given the current fragmentation of the market and overall lack of sophistication. That will, by necessity, slow the growth of upstream development, giving investors – and Pemex itself – time to adjust to the new environment and regulators the ability to tweak rules as necessary to ensure success.

 

For US-based energy companies – and the executives who manage them – Mexico represents a unique opportunity for growth in a familiar location where they have already been operating in, such as the Gulf of Mexico. Despite concerns to the contrary, it is likely to remain a popular market for investment for a long time to come.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.

 

[1] “All Eyes On Mexico: Energy Reform Creating Opportunities Across Oil And Gas Supply Chain,” Forbes website, forbes.com/sites/mergermarket/2014/04/17/all-eyes-on-mexico-energy-reform-creating-opportunities-across-oil-and-gas-supply-chain/, accessed 05/06/2014.