Guillermo Pineda
Energy Specialist
PwC Mexico

The Promise and Potential of Energy Reform

Tue, 01/22/2013 - 13:58

As we enter the second half of 2013, so approaches the next round of energy reform for Mexico. Accompanying the anticipation is much speculation and analysis, hope and fear, fueling the public debate about the potential that this reform could have to stimulate the oil and gas industry and the wider Mexican economy. Guillermo Pineda, Energy Specialist at PwC Mexico, analyzes the varying degrees of success of the country’s previous energy reforms, assessing how learning from previous experiences can help Mexico’s current political leadership to achieve comprehensive energy reform.

“The government has faced several tough challenges in the past two decades, but it has failed to convert them into opportunities,” Pineda says. “The lack of modern regulations is hindering the growth of the Mexican oil and gas industry. While investors got their hopes up during the preliminary discussions of past reforms, they were ultimately disappointed by the limitations on private participation that have persisted in Mexico’s legal framework. This has led some foreign investors to see Mexico as being ‘all talk’ with regard to meaningful energy reform. “In our visits to promote Mexico as an energy investment destination, international companies get enthused about the prospects that the sector o†ers,” says Pineda. “However, the lack of legal certainty that is essential for large investments made in the energy sector is o†-putting for potential foreign investors.”

The change of government and the support of Mexico’s three main parties for the Pact for Mexico, as well as the growing consensus that energy reform is essential to supporting the country’s economic growth and maximizing the value created by the industry, has renewed hope for meaningful energy reform. “Mexico has been waiting for the big wave to come and it seems like it is finally here,” Pineda states. “In the presidential campaign, all candidates supported the idea of making changes to the way the industry is regulated. This is also a priority for President Enrique Peña Nieto, who has the ambition of achieving far-reaching energy reform.”

PwC Mexico’s Energy Leader sees an opportunity to capitalize on previous reform negotiations. “We need to take advantage of the experiences from the discussions that were held five years ago. A lot of work has already been done to identify the main issues, even though the results of those e†orts were minimal,” Pineda adds. “With those experiences and the current awareness of the need for change, the only possible outcome seems to be a fully inclusive energy reform.” Pineda believes that the groundwork for creating comprehensive reform has already been laid by its previous promoters, and the cultural conversion is also in place. “The government has a plan and a well-driven impulse to generate real change. We can deduce from open discussions and the Mexican media that the ambition to make whatever changes are necessary is there, no matter which regulations need to be tweaked to do so,” he argues.

These changes should provide Mexico with better access to technology. As Pineda argues, “Pemex needs to be even more e·cient and, in order for this to be achieved, the company needs to partner with companies that have the necessary technologies and equipment to bring improvements. From there, the main question is: ‘how will we achieve this?” For Pineda, contracting is likely to be a central part of the discussion during the reform process. “Contracting also starts to be an issue: the incentive-based contracts that Pemex is currently o†ering will not bring additional players to the industry. Will production-sharing agreements finally be allowed in the Mexican market? This is the way Norway, China, and other countries are working – through concessions and PSAs, which are the real incentive-based contracts. These types of contracts generate an additional commitment by sharing risks and results. In any case, for Pemex to acquire the technologies needed to take the next step, the industry needs to have a strong regulatory body that can tower over its players.”

While the National Hydrocarbons Commission (CNH) is already executing the regulator role, Pineda believes it has not yet been given the proper authority for it to comply with its mandate. “The industry still needs to create an autonomous, independent body that oversees the way that projects are selected and undertaken,” he establishes. 

“CNH is making its best e†ort under the circumstances; nevertheless, it is not taken seriously enough by the industry, since it regulates a company that surpasses it in terms of authority, due to its size and power. For the country to better control Pemex’s operations, it needs to grant the CNH the necessary resources to do all the research it is set to be done, and entrust it with the power and authority to hand out orders with which Pemex, and possibly additional players, will comply.” Pineda is confident that the CNH already has the adequate people to fulfill its mandate, but that with more authority and support it will be able to better carry out its objective of helping Pemex to optimize its portfolio and strategy. “This stronger body has to regulate which projects should be embarked upon, perhaps even setting guidelines for their execution, but overall, it needs to have the su·cient strength to enforce all of those rules and to ensure greater e·ciency in the industry. With a fullbodied, strong regulator, the whole strategy for Pemex would be more cost-e†ective and it would also help to bring additional players that have the technologies that the NOC is currently lacking into the market.”

September 2013 will mark the first target date for assessing the progress on the energy reform, but Pineda believes that in order to assist lawmakers in finding a solution that faces the least resistance, the bigger picture needs to be shared with the entire population. “Mexico needs to understand that the more comprehensive the reform gets, the bigger benefits it will enjoy from it,” he pleas. “If we compromise on some of the changes, the benefits will diminish in the same proportion, risking an outcome that would be similar to the 2008 Energy Reform.”