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Analysis

Mexico's Energy Reform

Wed, 01/25/2012 - 12:45

The 2008 Energy Reform was nothing if not a compromise; having already watered down their initial plans in order to gain consensus from the PRI, Calderón’s PAN government was then forced into a series of compromises in the face of PRD opposition. Still, the reform made some of the most significant changes to Pemex and the legislative environment in which the company operates since the oil expropriation of 1938.

The reforms were designed to create a more transparent and ecient environment at Pemex, which has been criticized for poor corporate governance and a lack of autonomy that lead to serious ineciencies. The new law, known as the Pemex Law, did not aect the rules laid out by the Mexican Constitution regarding the company, but introduced structural and legal changes to address the problems the company faced.

PROFESSIONALIZATION

As a result of the Pemex Law, the board was given greater authority over the NOC, including approval of the company’s annual budget as long as certain practices were followed: not exceeding the deficit laid out for the company in the annual federal budget, and not increasing sta and pension outlays. The board was also professionalized, adding four independent board members to the table, taking a step away from the corporate governance structure of a state-owned company and aiming for that of a private company. Referred to as Professional Board Members, Fluvio Ruíz Alarcón, Rogelio Gasca Neri, Héctor Moreira Rodríguez, and José Fortunato Álvarez Enríquez were appointed to the Pemex board based on their knowledge of the industry, and are tasked with guiding Pemex in the right direction. In order to approve any new initiative, it must be voted for by at least two of the new board members. At their first meeting, the Pemex board created seven committees with a professional board member at the head of each.

FINANCING

Pemex was also granted increased control over its finances. Although Pemex’s annual budget must still be approved by the lower congressional house, the company now has the authority to decide its own spending programme. It can also obtain financing from outside sources without the need for treasury approval. The Pemex Law furthermore authorized the company to issue ‘citizen bonds’, which can only be held by or on behalf of Mexican citizens and will be linked to Pemex’s financial performance. Analysts hope that these bonds will start to generate more public interest in exactly how well the company is performing financially, and create some form of accountability to the Mexican population.

One of the most interesting changes brought into eect by the 2008 Energy Reform was the new contracting regime that Pemex has since implemented. The reforms allowed the NOC to strike agreements with private companies for the procurement of integrated services that, for the first time, featured incentives. Although Pemex must make payments in cash, and all hydrocarbons produced as a result of these contracts belongs to the NOC, the fact that companies will be rewarded for eciency and productivity is a major step for Mexico. Three such contracts were awarded in August 2011 for the development of three onshore blocks in the Mexican State of Tabasco. Two of these contracts were awarded to Petrofac, a British company, who will receive US$5.01 for each barrel of oil produced, with the third being initially awarded to the Mexican Administradora de Proyectos de Campo (APC), but in October 2011 Pemex announced that the company had failed to present the correct paperwork, and the contract was passed to Dowell Schlumberger, the next lowest bidder.

REGULATION

The final result of the 2008 legislation was the creation of a National Hydrocarbons Commission (CNH) to regulate Mexico’s upstream oil and gas industry. It is hoped that the CNH, which acts as a separate entity under the Energy Ministry, will balance the greater autonomy granted to Pemex and provide an important link between future oil legislation and Pemex’s interests. To date, the CNH has been instrumental in the overhaul of Pemex’s development strategy for the Chicontepec field, has been fuelling the debate on diverse topics including deepwater drilling safety, shale gas, reserves estimates, and gas flaring, and will be reviewing the development plans for Cantarell and Ku-Maloob-Zaap in 2012.