Fluvio Ruiz Alarcón
Independent Oil and Gas Analyst and Former Independent Advisory Board Member
PEMEX
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Energy Reform: Past, Present, Future

By Pedro Alcalá | Mon, 11/30/2020 - 13:10

To watch Fluvio Ruiz Alarcón's presentation during Mexico Oil & Gas Summit 2020, click here. To read our summary of it, click here.

 

Q: What can you tell us about the Energy Reform seven years after its enactment?

A: The Energy Reform in essence is structural. For example, if we consider the growth and economic objectives that were originally established as part of the Energy Reform’s mission statement and secondary laws, approved in the summer of 2014, then we can conclude that the oil and gas sector’s current situation is very different today to what was envisioned back then. If we compare the promises that were made back then in regard to where the Energy Reform has led us today, then the results are not very flattering. These promises included production levels of up to 3MMb/d by 2018. Obviously, that was not accomplished. They also promised a significant increase in gas production levels, which did not take place – we are still heavily dependent on imported fuels.

Investment volumes that were promised ended up being much smaller once new operators actually entered the market. The job growth was not comparable to what was promised. I could go on and on. The point is that the econometric values that were estimated and foreseen originally to explain the motives behind these laws were definitely not accomplished. These set goals were not obtained because this reform was sold at too high a price. The promises that were made simply could not be fulfilled. For example, the promise that gas prices would be fall was contradicted by the fact that Mexico does not have any setting or points of reference to fix gas prices internationally, like the US has with the Henry Hub. In addition, some aspects of the Energy Reform that were supposed to be constitutional mandates were never fulfilled. For example, PEMEX was never appropriately compensated for the development that it had already completed on the blocks that were later auctioned off, since PEMEX did not get to keep them during Round Zero. Another concern of mine was that, of the 65 licensing contracts that we granted during Enrique Peña Nieto’s administration, none of them included the payment of a signing bonus that was obligatory under article six of the Hydrocarbons Revenue Law. Some payments were made in cash to keep up appearances but those did not amount to a signing bonus. The promises that were made were unrealistic and another part of the issue was that the actual stipulations of the reform were, in some cases, not followed. 

To sum things up, the contracts that have been granted need to be evaluated in an integrated fashion, meaning that the current administration needs to go beyond the question of how much these operators are producing and how much they are investing. We also need to look at what the implications of these contracts have been in terms of technological transfers, development of local content, environmental and social impacts, and how these variables are broken down by state and region, among other factors. This includes acknowledging the real distribution of hydrocarbon revenue between operators and the state. The conditions originally set forth by the Energy Reform were very beneficial to the state. Nevertheless, with certain contracting models, such as production sharing agreements, we still need to see these operators produce at full capacity so that we can determine how costs are being recouped and how these models compare with what was contemplated originally in the percentages set forth by the Energy Reform. We also have to consider if the institutional design of the public organisms involved is adequate. I think there are grounds for a readjustment in this regard. Institutions like COFECE need to be involved in this readjustment. In general, I would say that the Energy Reform was necessary but its implementation ended up being needlessly aggressive toward the productive enterprises of the state.

Q: What are the most realistic scenarios for the political development of a new Energy Reform?

A: It is important to remember that the Energy Reform is not set in stone. This reform is open to modifications and has, in fact, already been modified since it was originally passed. Some changes accelerated the opening of the fuel retail market, while other changes made to the Hydrocarbons Revenue Law resulted in having a more negative impact on PEMEX than what was previously considered. This is an important framework that needs to be addressed: modifying the Energy Reform has been done previously and thus does not represent a huge change. With that being said, I personally consider it unlikely that the Energy Reform will be repealed in its entirety. Dealing with the material implications of a constitutional change of this magnitude would prove unrealistic, given the way in which this reform has determined the current shape of the Mexican oil and gas industry. Reverting to a legal framework previous to 2013 is just too difficult.

I do see a need to modify certain aspects of the secondary laws but the political friction these changes imply would make it difficult. It is probable that future modifications will focus on consolidating PEMEX as the main actor in the industry. These changes will prompt PEMEX, SENER and CNH to establish closer ties with each other. I expect this to be achieved through modifications to the secondary laws rather than through any attempt to change the Constitution one more time.

Q: What does the NOC need to do to reach production levels of 2.3MMb/d by 2024?          

A: The first question to answer would have to be why does PEMEX want to reach this specific production goal. These production levels may not prove profitable under certain oil price conditions. PEMEX needs to be allowed to operate as a more or less normal oil company. For that to happen, the state needs to abandon this notion. The questions of how relevant is this production really and is PEMEX´s financial independence more important are crucial. Production goals are always considered a function of the state’s short-term fiscal needs, instead of the actual relevance they might have to the goals of the company as an entity.

In regard to private operators, their expected contributions need to be assessed. In general, national production levels need to be reconsidered, particularly in light of the recent agreements made with OPEC. All of this needs to happen in conjunction with a general tax reform that should address the fact that Mexico should not have to rely so heavily on PEMEX. This is what would truly give PEMEX the financial independence it needs.

 

Fluvio Ruiz Alarcón is an academic specialized in physics, economy and oil exploration.

Pedro Alcalá Pedro Alcalá Journalist and Industry Analyst