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Realities of a Third Generation Counter Energy Reform

By Alfredo Garcia Mondragón - SIE7E ENERGY
Executive Managing Director


By Alfredo Garcia Mondragón | Executive Managing Director - Thu, 10/15/2020 - 13:14

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Recently, a counter-reform was issued by the Chamber of Deputies that would seek to change the constitution to return hydrocarbons to the nation and to reverse the associated laws. This has been confirmed by President Andrés Manuel Lopez Obrador, who has also made clear that this request seeks to restore the preponderance of PEMEX and CFE as the main actors in the energy sector. 

However, it must be understood that nationalism was not lost with the 2013 Energy Reform. In fact, the law has many elements that, while making the Mexican legal framework competitive, allow private investors, domestic and foreign, to invest in Mexico so that Mexico can attract investment. It is nationalist in itself, and much of the new regulatory and contractual structure tends to over-protect the state in the hegemony of decisions sought under the leadership of the state, which is one of the reasons why the sector's regulatory bodies should continue to be reinforced, even leading ASEA to become one more regulator that does not rely on SEMARNAT.

Hydrocarbons are the property of the nation, according to the current constitution, and since they are the property of the nation, you cannot grant a concession to something that is inalienable. Through the SENER executive, the nation is therefore empowered to exploit its hydrocarbons in the way it deems best, either through its state oil company or through private industry. When the decision is made to go with private industry, it is to invite them to invest in risky projects and share the benefits of the results, but one must never lose sight of the fact that the projects are risky. This is what has made companies that accepted contracts decide to return the areas because these contracts are not what they expected.

The implementation of the reform has not been fully realized because the cycles of oil projects are very long. The exploratory rounds into which the nascent oil industry has entered with multiple players to invest, explore, develop and produce are starting their cycle from scratch. Many say that the reform has not yielded results, but the cycles take eight to 10 years to begin to produce in deepwaters and those of shale gas, although terrestrial, are greater than four to six years. So many of the advantages will not be seen until the next presidential administration, after 2024.

The decision to stop the oil rounds ends up being a plot against the Energy Reform and, at the same time, against the country itself, without realizing that, even if PEMEX were to only conduct exploration, it would not have the economic or human resources necessary to do everything on its own. And it would also be a waste of time. The rounds are a virtuous circle of oil operations, which can be offered in subsequent rounds by those who fail in exploratory phases to continue exploring the same areas and all this at the risk of private operators.

While a new reform would do well to cover the flaws and vices left over from the 2013 reform, further improvements to the legal framework should be focused on making Mexico more competitive and attractive for investment, which could trigger its supply industry to supply not only the domestic but also the international oil industry. 

Part of the unknown is the downstream sector, which has nothing to do with the ownership of hydrocarbons but does have something to do with the fuel market. Before the COVID-19 pandemic, the problem in Mexico was the growing consumption of fuels, and from there dozens of projects have emerged to supply this market, while increasing storage reserves and decreasing imports of gasoline and diesel. As a result, the construction of the Dos Bocas refinery was initiated. At the beginning of this year, however, the worldwide pandemic stopped the world and fuel consumption fell by more than 20 percent. This continued throughout the year and refineries around the world are operating with programmed stoppages due to the lack of consumption. For the Dos Bocas refinery, the pandemic comes at a time when it has planned investments while refineries are being sold instead of being built.
It is the same for the Federal Electricity Commission, which has already canceled five bids for combined cycle plants, due to the lack of financial resources to build them. The preliminary National Infrastructure Plan was recently announced, in which it is proposed that the new CFE plants fall under the Pidiregas scheme, which is a very dangerous scheme because it runs the risk of increasing debt again through the awarding of construction contracts. A scheme that suits CFE best has yet to be defined but it is a sign that there is a need for investment to cover national demand. 
So, why would we think that an energy reform that leads us to a state model where the state must assume all risks and exploit fields at any price is not considered the most convenient formula at this time? I believe that Mexico, through its regulatory bodies and ministries, should finish implementing the 2013 Energy Reform to the limit, where the expected benefits are seen and felt. The current legal framework is of such magnitude that it could position Mexico as an oil power in the long term.

Oil production continues to decline and the production of light crude oil is not sufficient to restore the production of existing refineries in Mexico and, because of this, Mexico should consider importing light crude oil to supply its refineries and thus partially reduce imports of gasoline. Mexico is focused on building a refinery to stop imports, but we also import more than 60 percent of the gas we consume, placing Mexico in a global supply dependency.
If Mexico wants to increase its electricity generation through combined cycle plants, the international gas supply will have to be outsourced and those volumes will be lower for us. That is why the tax regime for hydrocarbons needs to be improved, to encourage the production of gas, to increase the deductibility of expenditures, to increase the registration of recoverable expenditures in production-sharing contracts and to increase the registration of national content, so that this information can generate public policy to attract investment.

To ensure the supply of natural gas in Mexico's energy diet, shale gas rounds must be conducted, there are no other options. Fossil fuels have a greater potential for energy generation, even above renewable energies. Perhaps there will be those who do not agree, but we must think about ensuring the supply of energy in the coming years.

Photo by:   Alfredo Garcia Mondragón

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