News Article

Mexico’s Energy Sector: Moving Forward

Wed, 07/22/2015 - 09:50

The summit began with a presentation from the Ministry of Energy’s Deputy Secretary for Hydrocarbons, Lourdes Melgar, who began her speech by thanking Mexico Business Publishing and Mexico Business Events for organizing the event. After reminding the audience of the processes embedded in the Constitutional Amendment, such as the creation of ASEA, strengthening institutions like CNH, and creating new contract models for the upstream segment, Melgar highlighted the importance of ensuring transparency for the private sector in the now open industry. “It is well known that the Reform aims at increasing the production of oil and gas and the restitution of reserves. It aims to become a model that will foster the development of the country as it has a clear strategy for local content and it fosters a strong industrial base,” she stated.

In 2014, Melgar commented, Round Zero took place, and the Ministry of Energy awarded PEMEX the areas that it will be working on during the coming years. This Round was conducted bearing in mind PEMEX’s technical, financial, and operational capacities, criteria that is stated in the Constitution. PEMEX was awarded 83% of 2P reserves, which equals an area of 90,000km2 and can reach production levels of 2.5 million barrels.

PEMEX can migrate these assigned fields to some contracts. The first way is through farm-outs and this is one of the areas that the Reform did not follow international practices, leading to some confusion in the private sector, Melgar mentioned. “Our legislators decided to make sure that finding the right partners was done in a transparent process through a bidding process. We need to design a mechanism for the farm-outs that complies with legislation, while having flexibility in order to make it attractive for players that wish to participate in the farm outs.”

It is important to reiterate that there is a group of entities that play a hand in awarding the contracts. The Ministry of Energy is in charge of designing the contracts and giving the bidding guidelines. CNH offers the Ministry its technical support and is in charge of conducting the biddings and providing access to the Data Room. The Finance Ministry determines the economic and fiscal terms. It is important to point out that once a contract from PEMEX is migrated, CNH will represent the State in every stage and in all contracts. The Ministry of Economy will ensure that there is compliance in matters of local content.

“When Round One was designed, the context was vastly different since the oil prices oscillated at US$100, which is no longer the case. Yet one cannot forget Mexico’s rich geology and resources,” said Melgar. “Our objective is to have an ecosystem of key players and attract new players. In simpler terms, we want to have diversity in terms of business opportunities.” Melgar admitted her disappointment regarding the awarding of two contracts in Round One L01. Nonetheless, she pointed out the positive aspect, “The good side of the story is that we have strong companies with global recognition participating and these two blocks went beyond the government’s expectations. The public sector is going through a learning curve and the industry is no exception.”

She explained PEMEX decided not to participate in Round One L-01 because the NOC is under financial duress due to the declining oil prices. “PEMEX must be very selective in terms of what it invests in. PEMEX has signaled that it will not participate in the first, second, and third bids. However, it has expressed interest in the fourth bid, which will include farm-outs and synergies.”

Melgar moved on to addressing some concerns of industrial players, one of them being the rules of consortia participating in the bids. “Regarding this matter, we will follow international practices that give the industry freedom to have all sorts of consortia. We are looking at other issues troubling the industry such as corporate guarantee and administrative rescission.”

As for the success of Round One, she mentioned that the authorities established three elements to benchmark. One of them was that transparency was carried throughout the whole process and this was achieved. Another important factor was to create an ecosystem in the Mexican oil industry and have a rich variety of participants. “Now we have two companies in the energy landscape that can do E&P,” she boasted.