Energy & Mining
A Bright Future
Mexico’s newest energy reform legislation, enacted in August 2014, came on the heels of the first set of constitutional reforms set into motion by President Enrique Peña Nieto in December 2013 to mitigate declines in oil and gas production. Now that the sector has gone public, Pemex is a “productive state enterprise,” granting them more autonomy and a lower tax burden than previously, but has made it subject to competition with private investors. Pemex’s new ability to partner with international companies means that the country will now have valuable access to their experience and capital, necessary to fully access Mexico’s as yet untapped deep water and shale resources. These resources have gone unexplored largely due to the lack of enhanced technology and unconventional extraction methods required to explore deep water and shale reserves, though with Pemex going public, the prospect of initiating these demanding projects is more tangible than ever.
THE ROAD TO REFORM
However, the reforms haven’t been implemented without controversy—the country’s political left still vehemently opposes the President’s decision to cede control of natural resources without ensuring the exploration projects will adequately and sustainable benefit the population at large. The creation of Pemex itself in 1938 became a symbol Mexican nationalism, part of a post-revolutionary culture uniting Mexico against foreign influence. The company pursued oil contracts with the US companies until 1958 when a constitutional law was implemented to outlaw the practice, and in the decades since, Pemex has held a strict monopoly over the sector. However, since the country has all but exhausted its easy-to-exploit reserves, Pemex has struggled to foot the bill to explore new fields, has sustained considerable financial losses, suffered from low worker productivity, and has been operating at a loss since 1998. On top of everything, a 2013 explosion in Pemex’s Mexico City office claimed 37 lives, and the company has lost millions of dollars over the years to criminal groups siphoning oil from its pipelines. Despite the sense of national pride that Pemex used to evoke, it is difficult to imagine the sector surviving without opening up its energy market in light of the dire situation. To be sure, Mexico’s strictly government-controlled energy sector had all but become an anomaly on the international oil and gas scene, as most emerging economies have turned to pubic-private partnerships and profit-sharing agreements to more effectively exploit their reserves
Mexico’s constitutional reforms still maintain state ownership of subsoil hydrocarbon resources, while allowing companies to take control of resources only when extracted. All refining, transport, storage, natural gas processing, and petrochemical sectors will be open to private investment. Significantly, four types of exploration and production contracts were created, namely: service contracts in which companies are paid for activities undertaken on behalf of the state; profit-sharing agreements; production sharing contracts; and licenses in which the private company is entitled to ownership of oil or gas at the wellhead after it has paid taxes. Pemex’s monopoly on retail gasoline and diesel sales is also set to expire in 2016, and companies will pay royalties and taxes varying with the price of oil. A provision related to the equitable exploitation of national resources stipulates that companies are barred from expropriating land from communities for exploration and development, and are only temporarily occupying land while compensating its owners.
OIL IN NUMBERS
Mexico has the 18th largest oil reserves in the world at approximately 11.1 billion barrels, and is the world’s 10th largest oil producer, exceeded only by Russia, the US, China, and Canada as an important non-OPEC oil producer. It is estimated that the country has the 8th largest tight oil reserves in the world adding another 13 billion barrels. Ageing infrastructure has been the main contributing factor to the country’s dwindling reserves, which declined by 20% between 2005 and 2009, at a rate of 1% per year since that time. Its offshore shallow water reserves account for the majority of production at 75%, located in the Ku-Maloob-Zaap (KMZ) and Cantarell fields in the Bay of Campeche in the Gulf of Mexico. Cantarell had formerly been one of the largest oil producing fields in the world, but following pressure problems in the mid-1990s, KMZ started picking up the slack, reaching almost 864,000 bpd by the end of 2013. Cantarell’s production in the same period was 440,000 bpd. The country’s long-term oil production is expected to rise from its 2013 level of 2.9 million bpd to 3.7 million bpd by 2040, according to the US Energy Information Administration (EIA). Because of its technological handicap, Mexico has pursued only a small fraction of its deep water resource potential in the Gulf of Mexico, especially compared to the US production in the same basin.
GAS IN NUMBERS
Between 2000 and 2012, Mexico’s natural gas demand increased by an alarming 80%. While its production capacity has in fact grown from 2000 levels, the stark reality is that most of natural gas consumption funnels into powering oil production and national electricity generation. Naturally, Mexico has increased its reliance on gas imports as a result, which now account for 27% of current consumption levels. Back in 2000, the entirety of gas imports originated from the US, while since 2006, expensive LNG imports began flowing into its three LNG import terminals—two on the Pacific and one on the Atlantic—from Qatar, Nigeria, and Peru. The total value of Mexico’s natural gas imports increased from $995.7 million in 2007 to $2.5 billion in 2013, according to the Secretariat of Energy.
At the end of 2012, Mexico’s proven natural gas reserves were 0.4 trillion cubic meters (tcf), down from 2 tcf in 1992. Underinvestment in exploration has caused proven gas resources to decline, while production rates have suffered due to unfavorable price differentials influencing Pemex to prioritize oil production for better profits. Natural gas production in 2012 was 58.5 billion cubic meters (bcf), compared to 83.7 bcf of consumption.
Incoming private investment is excepted to give both conventional and unconventional gas development a much needed boost through added storage, transportation, and distribution infrastructure.
Mexico’s goal is to generate 35% of its electricity from renewable resources by 2024. According to Pedro Joaquín Coldwell, Secretary of Energy, in addition to the new regulatory framework that will create a wholesale energy market, Clean Energy Certificates will be a main factor to achieving this goal, along with the creation of a specific law for the promotion and use of geothermal energy. To reach this goal, Mexico will have to increase the capacity from 10% to 20% for wind and solar plants, to result in 6,000MW of installed capacity, according to Jose Alberto Valdez, the President of the National Solar Energy Association (ANES). By 2024, Mexico should generate a total of 8,000MW. According to a report by ProMéxico, Mexico is among the top five most attractive countries for foreign investment in solar energy, due to the fact that 90% of its territory is located in the tropical “Sunbelt” region between the tropics of Cancer and Capricorn
US-Mexico energy trade
Mexico’s relationship with the US is arguable one of the most crucial aspects for their energy future, and both country’s—which share a 2,000 mile border—have a lot to gain. As a top trade partner and crude oil supplier to the US, both Mexico’s economic growth and the US’s energy security depends on Mexico’s oil and gas production. According the United States Congressional Research Service, US Congress approved the US-Mexico Transboundary Hydrocarbons Agreement in December 2013, exemplifying US interest in the Mexico’s energy reforms and their implication for American hydrocarbon trade. The reforms are expected to generally increase North American competitiveness in the international energy market and provide opportunities for American hydrocarbon companies, as well as oil services and infrastructure development companies. The agreement’s primary function is to facilitate joint development of the Gulf of Mexico’s oil and natural gas reserves. US Congress is also likely to consider legislation facilitation cross-border natural gas pipelines, which was already approved by the House of Representatives in January 2015.
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