Opportunities for Operators: Is the Energy Reform Enough?

Mexico has historically been attractive for oil and gas operators due to its vast energy resources, particularly in the hydrocarbon sector. There is so much to explore and develop not only offshore but onshore as well, and Petroleos Mexicanos (PEMEX) can’t and should not do it alone. The 2013 Energy Reform to the constitutional framework opened the door for the private sector to assist the country in exploring, developing and producing those fields that have been neglected or are marginal for the state-owned PEMEX, or that basically were not  projected to provide best returns and had been abandoned for decades. 

Although the Energy Reform aimed to attract more investment, promote competition, and boost activity in the sector, particularly in upstream activities such as exploration and production, concerns around regulatory uncertainty, political stability and security issues inhibit the full potential of the reform, and as a result, it discourages private investment and innovation. 

For the country to really take advantage of the Energy Reform, a second push is needed, this time on the regulatory framework. On top of everything is the urgent need for regulatory independence. Ensuring that the main regulatory agencies of the energy sector – the National Commission for Hydrocarbons (CNH) and the Security, Energy and Environment Agency (ASEA) – become fully independent of political interference is essential for effective oversight and true implementation of regulations. Having these two major regulatory agencies truly independent of all external affairs outside of their main objective will enhance true and fair competition and will protect the interest of all stakeholders.

Another area of opportunity on this second push should be improving the clarity and stability of the regulatory framework as this is crucial for investors. Evidence-based, consistent and forward-looking regulations enhance systemic resilience while reducing uncertainty and complexity, two of the main complaints of oil and gas operators in Mexico. Although some civil organizations like the Mexican Association of Hydrocarbon Companies (AMEXHI) have assisted by creating a supportive environment for new investment and growth in the sector, smoothing the way for others, the ambiguity in some parts of the regulatory framework hinders investment growth in the sector. 

The current permitting process for some key areas of the sector like exploration, production, and infrastructure is still daunting for even the most seasoned operators in the country, even after years of being implemented. Having to involve multiple regulatory agencies with different requirements and procedures has resulted in a complex and time-consuming process for new investment and different stakeholders. It is worth mentioning that the regulatory agencies have investigated this and have worked hard on the topic, looking to streamline all permitting and requirements to make it easier for the operator and for themselves. However, despite all this effort, there’s still room for much improvement. Minimizing excessive paperwork, delays, and administrative obstacles will greatly benefit current players by accelerating their projects while attracting new investment and project development. Cumbersome bureaucratic hurdles discourage participation in any sector or industry. 

Finally, a revised version 2.0 of the fiscal regime for the sector based on the lessons learned from the contracts signed under the Energy Reform will enhance investment in the sector. The fiscal regime directly impacts the profitability and economic viability of any energy project. A favorable fiscal regime with competitive tax rates for those contracts or areas that produce non-associated gas, for example, with reasonable royalties or transparent profit-sharing mechanisms can attract investment capital and stimulate industry growth. Although current fiscal policy is used to achieve broader policy objectives, such as promoting local content development, encouraging technology transfer, or mitigating environmental impacts, it should also incorporate fiscal incentives, deductions, or exemptions to incentivize desired behaviors and outcomes in the sector, especially on those marginalized contracts with current limited upside. 

Mexico remains an attractive destination for oil and gas operators, given its abundant and diverse hydrocarbon resources, its proximity and integration with the U.S. market, its expertise and the Energy Reform that allows it. However, the attractiveness of the Mexican market also depends on the political and regulatory environment, which has become more challenging and uncertain under the current administration. As a result, both international and national private operators and investors are always carefully assessing the risks and opportunities of doing or continuing business in the energy sector in Mexico. A clear and simple regulatory framework will always keep them interested. That results in competition and promotes energy growth. It will  also push the country closer to energy security and will help Mexico maintain its sustainability goals. Let’s all push in that direction, not the other way around.