The Transformation of the Mexican Oil and Gas Industry

Mexico’s approach to its Energy Reform has not only been fast but transparent, with regulators looking to adopt international best practices as the Reform moves forward, Lourdes Melgar, Deputy Minister of Hydrocarbons at the Ministry of Energy, told the third annual Mexico Oil & Gas Summit in Mexico City.

Melgar opened the two-day summit at the Sheraton Maria Isabel Hotel with a presentation highlighting the main points of the transformation over the past year, saying the Reform’s goal was to completely overhaul the industry.

Unlike other countries that have targeted energy reforms one sector at a time, the Mexican government launched an ambitious and comprehensive plan, although secondary legislation took a little longer, coming into law in August 2014. The Energy Transition law was among the most recent acts to be put in force.

Hand in hand with the new institutional arrangement, regulators CNH and ASEA have been strengthened to match international best practices. These regulators have a certain degree of autonomy but Melgar highlights their transparency above all else, saying that players can follow meetings with CNH on the internet, for example, because every meeting with providers is recorded.

Green energies are also a target of the Reform. There is an entire chapter in Hydrocarbon law to ensure activities are safe, Melgar said. Social licenses help avoid community confrontations during development projects and to protect and generate benefits for indigenous communities. “There has been groundbreaking work done in Mexico,” she said.

The country could continue producing 2.5 million barrels a day but the goal is for PEMEX to become a consortium to develop new areas of production. The Reform was not established solely to secure revenues but was intended to generate new jobs, to benefit the local population and the economy, Melgar said. The Energy Reform established local content requirements in all contracts to secure the growth of local industry. Melgar added that the Ministry of Energy is working closely with the Ministry of the Economy and the industry to ensure growth of all areas that support the oil and gas industry.

“I believe that Mexico could become an energy hub that could supply the whole world,” the Deputy Minister said. “Given our success in the manufacturing sector, we should be able to do the same [in oil and gas.]”

Melgar also cited Mexico’s enormous penetration in the automotive and aerospace industries worldwide as an example of how powerful the country could become and how important Mexico’s economy is.

The summit follows the previous day’s announcement of Round Two. The Ministry of Energy took lessons learned from the shallow-water bid into account and COPARMEX and international experts also weighed in with feedback. The blocks are similar to block 7, measuring 500km2, and many are thought to contain natural gas. This next round will take place in March 2017, with the first barrel to be produced in 2020.

Just one year after being awarded the first contract, 16 innovators are already operating in Mexico, Melgar said. “So many operators working in tandem with PEMEX means we will see energy security, job creation and greater production.” To date, 30 contracts have been awarded, 24 of which have already been signed while the remaining six will be closed in September. There are 26 companies prequalified for deep water drilling. The country is eagerly awaiting deepwater and ultra-deepwater bids.

Melgar spoke in depth about Natural Gas, saying, “we tend to talk about the development of the pipelines.” The current presidential administration is developing over 10,000km of pipelines throughout the country to bring natural gas to every state. Of course, this is together with increased links with the US, which enjoys the cheapest natural gas. “Today we can say we have gone almost two years without critical alerts,” she said.

Any company interested in developing a commercial pipeline can do so at their own risk with permission from the state, Melgar said. The government will manage those intended to push specific economic development to states that lack natural gas. The Ministry will present the new Natural Gas policy next Monday, wherein pricing will be reflected to ensure competitiveness for PEMEX to continue producing natural gas. Sound pricing will boost the development of infrastructure as well as domestic production, she said.

Melgar pointed out that Mexico consumes 53 percent of the gasoline produced here and 35 percent of LPG, suggesting an opportunity to supply this growing market. In terms of gasoline and diesel, the Ministry has launched branded competition, having already awarded several fully inclusive permits for the gasoline and diesel that is imported into Mexico.

“We have seen new brands established in Mexico, new brands of gas stations, and there is an urgent need to increase this as well as transportation and storage for refined product,” Melgar said. “These are areas of opportunity for investors. Mexico urgently needs to increase its storage of refined products, along the lines of those used in OECD countries.”

Politically speaking, Melgar said that there has been a lot of production of energy and that many contracts have been signed. “The industry knows that many barrels will come out of the Reform but not before 2018 when the government leaves office. We can measure success because of the high priority to achieve transparency.”

The Deputy Minister continued: “We have adjusted some terms regarding corporate guarantees or compliance guarantees and reporting, among others.” The country is moving toward common rules around the world and the Ministry of Energy has implemented adjustments to make contracts competitive by international standards.