The Energy Reform's Tools to Push México Forward

Q: What is the impact of the Energy Reform on the role of hydrocarbon-related revenue on the federal budget and Mexico’s long-term financial stability?

A: The main medium-term challenge to public finances in Mexico is to cope with falling public sector revenues from oil and gas production. Over the last decade, production of oil and gas in Mexico has moved from relatively simple, lowcost fields to more expensive and complex fields, both from a technical and geological sense. In simple words, the era of cheap oil for Mexico has ended. The decline of the Cantarell field since 2004, which has only been partially compensated with additional production from other fields, has resulted in a decrease in oil production of over a million barrels per day, despite the fact that investment in PEMEX has tripled in the last thirteen years, from US$9 billion dollars in 2001 to US$28 billion in 2014, a level on par with other major international oil companies. Without the Energy Reform, and even before the recent price shock, public finances faced a significant challenge, not only because of lower revenues but also because of increasing pressures on the budget to sustain the additional investment. The Energy Reform will allow us to reverse this situation, paving the way to further increases of investment in the sector in a more efficient manner, particularly through a better diversification of risks, as the State will no longer be the only one incurring the risks and costs associated with oil and gas exploration and production. The Mexican Petroleum Fund was established as an autonomous institution whose purpose is to receive, manage and distribute public revenues from hydrocarbon production. Each year the Mexican Petroleum Fund will transfer up to 4.7% of the GDP to the federal budget, and revenues above that level will go to a long-term savings account. The Fund has the mandate to manage long-term savings for the benefit of present and future generations, and to and withstand adverse macroeconomic shocks. The Energy Reform will have broader positive impacts in the Mexican economy, in the form of a reduction of electricity costs and natural gas prices, an increase in oil production to 3 million b/d in 2018 and 3.5 million b/d in 2025, an increase in natural gas production to 8bcf per day in 2018 and 10.4bcf in 2025, the creation of 500,000 additional jobs by 2018 and 2.5 million additional jobs by 2025, and GDP growth of 1% in 2018 and 2% in 2025.

Q: What are the main objectives of PEMEX’s transformation into a productive enterprise of the State?

A: One of the key goals of the Energy Reform is to significantly strengthen PEMEX, by transforming it from a government entity to a productive public enterprise, with full operational, financial and budgetary autonomy and a modern corporate governance framework. The reform also includes the most ambitious overhaul of the tax treatment of PEMEX. While in the past it was taxed mostly on an income basis, the current system places greater focus on taxing profits, thus allowing the company to achieve healthy finances and give an explicit dividend to the government only when profits are recorded. In those cases where PEMEX earns a contract through a bidding round, it will be subject, as any other company, to the fiscal conditions established in the contract and the bidding process. Another key feature of the Energy Reform is to ensure full coordination among every regulatory body involved in the implementation of the Energy Reform to provide a comprehensive, coherent, predictable and harmonic framework that brings certainty and competitiveness to the energy sector as a whole.

Q: What will be the role of the Ministry of Finance and Public Credit in the new contracting framework for the oil and gas industry, and what are your objectives?

A: In the new institutional framework stemming from the Energy Reform, the Ministry of Finance and Public Credit will be in charge of establishing the economic and fiscal conditions of the contracts and their bidding processes. Together with the Mexican Petroleum Fund, it will also provide oversight of the financial operations of the contracts. The main objective of the Ministry of Finance and Public Credit is to maximize the revenues from the activities of exploration and production of hydrocarbons while providing a competitive investment destination for oil and gas companies, balancing the risk and reward equation through the correct alignment of incentives. The design of the fiscal system introduces various types of payments defined on different bases, in order to provide the right incentives in terms of activity and investment under a progressive system that ensures that government participation increases with greater project profitability.

As a whole, the E&P industry should comply with a minimum average national content level of 25% in 2015, reaching 35% by 2025. The government is taking proactive steps to promote and ensure that these objectives are fulfilled in the most efficient manner. For that reason, the Public Trust to promote the Development of National Suppliers and Contractors in the Energy Industry was created, with the objective of promoting the development and competitiveness of local and national suppliers and contractors through financing schemes and support programs for training, research and certification.

Q: What is the ultimate objective of the Energy Reform in terms of achieving long-term economic growth and macroeconomic stability for Mexico?

A: The opening of the energy sector seeks not only to increase competition and efficiency in the energy sector, but also to generate a full set of new participants. Mexico has one of the most diverse portfolio of opportunities to offer in the world, both in conventional (onshore, mature and shallow water) and unconventional (deepwaters, shales and Chicontepec) assets. Mexico also has one of the most open economies in the world, a stable legal framework, and ample human capital. With the Energy Reform, we aim to replicate the success that we have achieved in other sectors, for example the automotive and aerospace industries, and make Mexico into a world-class destination for investment in oil and gas exploration and production. Our main goal with this as well as the other reforms that President Peña Nieto has pushed forward, is clear: to improve the living conditions for the people of Mexico.