Gabriel Quadri de la Torre
Managing Partner
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The Right Energy Reform?

Mon, 09/01/2014 - 15:59

Q: Does the 2013 Energy Reform deliver what the country’s energy sector needs?

A: The Energy Reform contains positive surprises. It establishes principles, some of which had not been previously discussed among the main actors, for a deeper reform in the power sector. This makes it a holistic reform and not just one exclusively targeted towards the oil industry. The electricity sector is more important in the long term than the oil industry in Mexico. For example, I was pleased to find out about the creation of the National Energy Control Center (CENACE) and its autonomous nature, as well as the commitment to reducing greenhouse gas emissions in power generation. Since oil has a symbolic value for many Mexicans, the oil industry was naturally a heavy component of the Energy Reform. Here, the reform surpassed all expectations. For instance, concessions were included under a different name, licenses. However, the Energy Reform fell short on making PEMEX a real enterprise. It says PEMEX will become a productive enterprise of the state, but I would have liked to see PEMEX become a public firm controlled by the state, but with shares listed on the Mexican Stock Exchange. Perhaps, this will be done in the future. The fact that the Mexican Petroleum Fund for Stabilization and Development will be administered by the Central Bank is a positive choice.

Q: How does the Energy Reform fit in the overall wave of reform that Mexico experienced in 2013?

A: Last year was hectic in terms of legislative changes. Mexico had never undergone such an intense process of deep reforms. The approved reforms will have relevant and beneficial impacts for society as a whole. These legislations are aimed at radically modifying the institutional environment in which the energy sector operates. In consequence, this will help bring more FDI from private parties to Mexico in the medium-term, increasing job opportunities and economic growth rates. By freeing the market, counting on an impartial CENACE, and establishing guidelines and conditions that promote renewable energy generation, the country will be able to take advantage of the Energy Reform and use it for a serious mid-term energy transition. We must not overlook the symbolic effect behind these amendments: these reforms demonstrate that Mexico is capable of changing itself and letting go of past ideologies and dogmas. Back in 1938, the nationalization of the energy sector had geopolitical motivations that were valid for the times, but linking national sovereignty to a commodity is an invalid idea nowadays. National sovereignty will be strengthened by having an efficient government, competitiveness, and a country able to competently embark on an energy transition to slowly reduce its dependence on hydrocarbons.

Q: Which fields should PEMEX keep during Round Zero, and what should be the subsequent role of the private sector?

A: PEMEX will keep its most profitable fields. For example, KMZ has extraction costs of US$8-10 per barrel and PEMEX is well-acquainted with this field, it should therefore keep it. The same goes for Cantarell. More difficult projects, such as those in deepwater, complex zones in Chicontepec, and mature fields – which are not the most profitable for PEMEX – could be awarded to the private sector. The government will take a portion of the revenue according to the established regulations. This should be a technical, financial, and economical decision rather than a political one. If PEMEX is the most suitable candidate, it should be allowed to operate fields. Otherwise, someone else must be allowed to do the job. Private parties participating in upstream operations will have to pay the corresponding taxes, royalties, and fees designed to provide the nation with a higher revenue stream. Fiscally, Mexico should follow international best practices for its upstream operations.

Q: In which ways should the secondary legislation increase certainty for foreign companies?

A: The schemes for the contracting process, the guidelines to be used to select the fields to be included in licensing rounds, and the license structures are the first things that come to mind. The creation of an independent regulator with a clear mandate and authority is also an essential element for attracting private investment. Regarding power generation, the new Law for the Electricity Industry will be the backbone of the country’s energy sector. We will see how CENACE will truly operate, dispatching rules and regulations, and guiding principles addressing both the operation of market and the National Energy System.