Mexico's Energy Reform Going Strong

So far Mexico’s energy reform has brought major new oil discoveries, gleaming new petrol stations and billions of dollars of committed international investment. We look at what’s next…

Mexico’s energy reform was revolutionary. In the years leading up to the 2013 reform, millions of protesters had taken to the streets to decry any attempt to undermine state oil producer Pemex’s almost 80-year control of the oil and gas industry. But in one fell swoop this government managed to alter the constitution and change Mexico forever.

With the legal framework in place, the next challenge was to make it a reality. The people faced with liberalising the Mexican hydrocarbon sector from 2014 had one huge advantage – the country is blessed with ridiculous amounts of oil and gas. Geologists believe that Mexico could be sitting on more than 100 billion barrels of oil equivalent (boe) yet Pemex has only explored 20% of the country. The areas of interest can be split into three main categories. First, there’s the Gulf of Mexico. The US-owned part of the Gulf is one of the world’s major oil provinces, with more than 4,000 wells drilled. Pemex reckons there could be up to 50 billion boe in Mexico’s area of the Gulf, but just a handful of deepwater wells have been drilled. Second, there are Mexico’s vast shale oil and gas reserves. According to the US Energy Information Administration, Mexico has the world’s fourth-biggest shale oil reserves, measuring at least 60 billion boe.

José Antonio González Anaya, CEO of Mexico’s behemoth oil company Pemex, is clear about the country’s oil riches. “Mexico is home to massive amounts of hydrocarbon resources. Our unconventional oil and gas is practically untouched, while the deepwater Gulf of Mexico is the world’s last great unexplored basin.”


What gives González Anaya’s comments extra weight is that less than a month after he spoke to LatAm INVESTOR a consortium of private-sector oil companies made a huge shallow water oil discovery 60 km from the coast of the southeastern state of Tabasco. The group, made up of US-based Talos Energy, London-listed Premier Oil and Mexico’s Sierra Energy, believe the deposit could hold up to 2 billion barrels of oil, making it the world’s 5th-largest discovery in the last five years. The fact that it was a wild cat drill, in an area that had never been explored before, emphasises that Mexico’s potential hydrocarbon resource is probably even larger than the official estimates. “This is a historic discovery for both Talos and Mexico”, says Tim Duncan, CEO of Talos Energy. “It was a true exploration effort: there were no wells ever drilled on or near the block, and it will go in the books as the first offshore exploration well drilled by the private sector in Mexico’s history.” That discovery came on the back of a find by Italian producer ENI, albeit in a more established oil zone, that could hold up to 1.2billion barrels.

"The world’s 5th largest discovery in the last five years…"

Mexico’s unique potential isn’t just below the ground.  The reform has liberalised everything from petrol stations to storage facilities so firms investing in the midstream and upstream have a world of opportunities. “We have half the number of petrol stations per capita as the OECD average”, explains González Anaya, “so there is a huge room for increase. The growth in petrol stations will provide more jobs but also more choice for the consumers. Meanwhile the investment in midstream infrastructure, such as pipelines and storage plants, will help to boost energy security. Mexico is the 6th-largest petrol market in the world and one of the few large markets that is growing. We’re also right next to the US and have easy access to other markets via Pacific and Atlantic Oceans.” Indeed the upstream developments are likely to prove the most visible face of the reform to the Mexican people. BP’s recently opened pilot petrol stations in Mexico have proved a great success and the firm plans to open 1,500 more.

Above ground risk

But, as any oilman will tell you, below the ground resources always have to be squared off with the above ground risk. And that has been the big challenge for those charged with implementing Mexico’s reform. The country faced the unfortunate coincidence that oil prices tanked just as it opened up its oil and gas fields to international investors. A sustained drop of more than 50% in the oil price has forced companies to cut budgets, reducing their appetite and ability to participate in exciting new oil plays like Mexico. Meanwhile the strong political opposition to the reform meant that the reform couldn’t be seen to be giving the oil away on the cheap. Another big concern was corruption. Mexico’s historic problem with graft meant that the most Mexicans expected the energy reform to become a vehicle for local elites and international oil companies to embezzle the country’s hydrocarbon wealth. All of these issues made it vital that a transparent, fair auction process and regulatory framework was established.

The National Hydrocarbon Commission (CNH by its Spanish initials) was charged with running the auctions and regulating the sector. Initially it appeared the CNH wasn’t up to the task. Its first auction was branded a failure after awarding just two of the 14 fields on offer. Subsequent auctions were more successful, with deepwater fields, farmouts, onshore blocks and more shallow water plays all awarded to a mixture of local and international companies.

"You can go online and see that I am not a rich man…"

But if there is an agreement that the CNH needs to finetune some of its processes, there is also respect for its biggest achievement – it is not corrupt. That might sound like a low bar to set a regulator but given Mexico’s poor record on corruption, added to the fact that the oil and gas sector tends to be a magnet for graft in emerging economies, it is a considerable success.

“We recognise that accountability is in high demand in Mexican society”, says CNH President Commissioner, Juan Carlos Zepeda. “We were conscious from the beginning that we had to build a good reputation. The reform came with strong inbuilt transparency rules but at the CNH we have added even more anti-corruption procedures.” You would expect a regulator to say that but you don’t have to take Zepeda’s word for it. “We release all of our earnings into the public domain. You can go online and see that I am not a rich man. I live from my salary so there is no room for corruption.”

Local giant

Pemex also plays a key role in assuring the reform’s long-term success. The company must undergo a transformation from monopoly player to a productive state-owned company that can compete with the world’s best in its home turf. All of th international oil companies interviewed for this report hope that Pemex can make the transition smoothly as its dominant position in oil and gas infrastructure, its vast commercial network and its deep hydrocarbon resources meant that most entrants will partner with the firm in some form. Pemex is also an important political symbol. Its status for many Mexicans is something akin to the NHS in Britain and politically it would play badly for the reform if Pemex struggled while international entrants thrived. González Anaya is upbeat on the transformation.

“It is happening - not as fast as I would like but it is happening. In the first 78 years of its existence Pemex never had a risk-based partnership. We used to own the ball and set the rules of the game, so to speak. Now we have to negotiate the rules and play fairly with new partners so it’s a big learning curve. We have already had some progress. In December we completed an $11billion deepwater farmout in the Trion field with BHP Billiton. This September we should see a shallow water and an onshore farmout.” Moreover, González Anaya believes that there is a cultural shift within the company as more of its staff sees the advantages of partnerships with international firms. “Many of our petroleum engineers are becoming supporters of the farmouts because they realise that it’s the only way that Pemex will be able to get some of these projects to work.”

So far the reform is a success. Of course it has taken time, had setbacks and not gone perfectly. But from the billions of barrels of oil discovered, to the growing international interest in the auction rounds, it is clear that the hydrocarbon element of Mexico’s energy reform is picking up pace.