Mexico Plan To Expand Energy Sector Passes Final Hurdle

Mexico Plan To Expand Energy Sector Passes Final Hurdle

By Alfredo Corchado and James Osborne, The Dallas Morning News

MEXICO CITY — Mexico’s plan to radically expand its energy sector passed its final legislative hurdle Wednesday, leaving behind 76 years of state monopoly for an uncertain future driven by competition.

The Mexican Senate voted 90-27 to pass the so-called secondary rules outlining the framework under which foreign companies will drill for oil and natural gas in Mexico. A cornerstone of President Enrique Pena Nieto’s ambitious economic overhaul, the law is expected to open the door to what some believe could be more than $1 trillion in investment and create a new energy paradigm for North America.

“Mexico will now join the energy revolution that is taking place in North America by opening the industry to national and international private investment under strict and transparent regulation,” said Javier Trevino, a congressman from the northern state of Nuevo Leon who played a key role in negotiating the legislation. “Energy reform and its secondary laws represent a historic leap forward for Mexico.”

The approval came amid scattered protests. About 500 people chanted outside Wednesday as the Senate voted, stopping traffic along Mexico City’s main thoroughfare, Reforma Avenue. Outside the Senate’s towering ivory-colored building, a handwritten sign was displayed by critics led by the leftist Party of the Democratic Revolution, or PRD: “Mexico Will Not Forgive You.” The sign was quickly taken down.

A block away, Enrique Garcia Garcia, 26, a gas attendant for the past six years, lamented: “This is the end for us gas attendants. In a few years you’ll have gringos owning gas stations operated by credit cards. Yes, that’s more efficient, but we’ll be without jobs.”

Beyond the pessimism and nationalistic sentiment that reign within segments of society, a sobering and desperate reality lies: Over the last decade, oil production by Pemex, the national oil company, has dropped more than 20 percent, to 2.4 million barrels a day. Mexico’s failure to keep pace with technological advances and its history of corruption have hampered the company’s chances of developing oil and gas in the deep-water Gulf of Mexico and shale formations.

With the law, experts see a dramatic change looming. Within five years, North America could surpass the Middle East as the largest oil and gas producer in the world, said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University.

“When we add Canada, United States, and Mexico, we’ll be so much bigger than OPEC,” Weinstein said. “We’ll be an energy colossus.”

The center of the U.S. energy industry, Texas, which shares history and a 1,200-mile border with Mexico, is expected to play an outsize role in that development.

So far, the terms of the reforms have been largely embraced by energy companies in Houston and Dallas. Companies will share their profit with the government on terms similar to those in other countries. And they can count Mexican reserves as their own, a critical point for Wall Street.

“At a high level, they’ve presented an economic reform that should stimulate interest and attract foreign investment,” said Carlos Sole, an energy attorney with Baker Botts.

But there is a long way to go until the likes of Exxon Mobil and Chevron are drilling in Mexico.

Pemex, the state oil company, has asked to retain control over more than 80 percent of Mexico’s proven oil and natural gas reserves. The government is to decide how much the company will keep in September.

And then there is the matter of how quickly the government can expand its regulatory agency to handle what could be an influx of hundreds of companies.

“Mexico is starting from scratch on regulation. …,” said Jose Valera, an attorney with Mayer Brown in Houston. “That is going to be a natural limitation to how fast they can ramp up.”

But few doubt the foreign oil companies will eventually come.

In the Gulf of Mexico, oil deposits thousands of feet below the surface are being heavily drilled on the U.S. side of the international boundary but remain virtually untouched in Mexican waters.

“I’m certain Texas companies and investors know the stakes,” said Antonio Garza, former U.S. ambassador to Mexico and now counsel in the Mexico City office of White and Case. “What they’re seeing is an enormous, perhaps once-in-a-generation opportunity — and in a neighboring country, with the potential for partnerships with people they know. They’ll be smart, but they also know that the biggest risk may just be in not being here.”

Pena Nieto, whose terms ends in a little more than four years, faces significant political challenges.

Mexico enters midterm elections next summer, just as the bidding process for foreign oil companies is expected to begin. The government has promised that the overhaul will lower the cost of electricity and natural gas, but many Mexicans expect the energy law will save them money on gasoline.

There has been persistent criticism that the changes will benefit only foreign oil companies and Mexico’s elite.

“The government says oil belongs to the Mexicans,” said Gerardo Moreno Jose, 16, who shines shoes outside the Senate building. “That’s a lie. I hope this reform brings down the price of gasoline.”

In fact, over the next few years, gas prices are expected to keep rising, according to Finance Minister Luis Videgaray.

The result could be a backlash against Pena Nieto’s governing Institutional Revolutionary Party, or PRI, which nationalized the country’s oil in 1938 to great fanfare.

The outcome could benefit leftist parties such as the PRD, which opposed the energy reforms.

And there is the matter of whether their claims on the country’s oil and gas resources hold true.

The Mexican government is hoping to attract drillers to its shale fields in the north, just as the Eagle Ford Shale in Texas has. But a lack of geological data and continuing violence along the border has dampened enthusiasm.

“Everyone says it’s the same as the Eagle Ford, but there has not been much there in terms of exploration,” said Caldwell Bailey, senior consultant with PacWest Consulting Partners in Houston.

In Mexico, landowners don’t own what’s underground. The government does. In order to foster local cooperation, the secondary laws contain economic incentives for those whose property sits atop the oil and natural gas.

AFP Photo/Karen Bleier

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