Whatever changes Mexico's energy sector will take, they will be radical compared to the status quo. At least this is what you might think, if you've followed Mexico's energy reform debate since 2008 and President Enrique Pena Nieto's announcements following his ascent to power in December 2012.
The wind of change to Mexico's heavy crude is blowing. I doubt that — a lot. And having put some thought to what the options are for Mexico's production impasse, I finally concluded that the possibilities are very slim.
At the very extreme, the energy industry is in a catch-22 situation allowing for no reform. Having said that, there is such a great need for reform, there might be some tiny changes. Yet, these might not be big enough to attract investment on a grand scale.
Since 2004, Mexico's oil and gas industry output took a negative turn and with it, its exports to the U.S. Varying by grade, Mexico's production of heavy crude oil fell by an astonishing 46 percent from 2004 to 2012 (mainly due to steep production declines of the Cantarell field), while its production of light and extra-light crude oil increased a little by 0.2 million barrels per day (bbl/d) during the same period. At the same time, exports to the U.S. fell by 34 percent, decreasing Mexico's share of total U.S. crude oil imports to 11 percent in 2012 from 16 percent in 2003:
On a more worrying note for Mexico, however, this decrease in production has come about with an increasing per capita consumption of energy over the last decades, and some specialists estimate that Mexico's energy demand and production will cross between 2018 and 2020, if no sector reforms happen. This is a dismal future, taking the fact that one-third of Mexico's budget is currently financed through its oil and gas income.
No wonder Mexico's Congress enacted energy reform legislation that resulted in allowing foreign companies to participate in the oil sector through service contracts. Under a service contract, the right to explore and take ownership of the oil once it is extracted does not transfer to the IOC. But to counter this downward trend in production seriously, this is not enough.
In order to overhaul more than 60 years of state control over the energy sector, Neito would have to amend three articles of the constitution (Articles 25, 27 and 28), of which article 27 is regarded as the most contentious one because it prohibits concessions.
Earlier this year Nieto openly floated the idea to sell minority stakes in Mexico's state-owned oil giant Pemex, a partial privatization a la Brazil's Petrobras. Yet the official announcement of his energy reform proposal has just been delayed for another week, and it is questionable how radical his reform propositions will be regarding immense popular opposition and possible disagreements within Congress, which has to approve the reform by two-thirds.
The conservative National Action Party (PAN) — the main opposition party to Nieto's Institutional Revolutionary Party (PRI) — already handed in a radical proposal, including a reform of all articles and a proposal to strengthen the country's energy regulatory bodies by making them autonomous. At the other end of the political spectrum, the leftist Party of Democratic Revolution (PRD) vows a massive opposition to any reforms.
But more importantly, Mexicans are not happyabout giving foreign companies a share of the oil pie. A poll by the Center de Investigacion y Docencia Economicas (CIDE), shows that 65 percent of Mexicans are against opening up Pemex. In face of this opposition, room for maneuvering is small — despite how much Mexico's politicians might yearn for it.
Some analysts don't even believe proper production-sharing agreements will take hold. For instance, Latin America analyst Daniel Kerner stated that the most ambitious Nieto could get are risk contracts, a tiny upgrade from a service contract in which a third party shares risks and rewards related to results instead of receiving a flat fee. On a more hopeful note, PRI's president, Cesar Camacho, said in a recent interview that Nieto will propose production-sharing contracts for exploration and output while crossing out any concessions.
But, in any case, if the government wants to attract investors, deals have to be sweeter as the situation Mexico's industry is not necessarily the best. That means that even if they implement some less radical changes, the conditions might not be enough for investors to come.
So what's in it for foreign investors? Exxon, Chevron and Spanish oil producer Repsol SA are among the companies thathave expressed interest in Mexico's oil fields.
Yet what awaits them might not necessarily the best industry environment. The country's proven and probable reserves have fallen from a combined 31.5 billion barrels in 2007 to just 26 billion as of last year. The industry's infrastructure hasn't been updated for years, which has been symbolically demonstrated by a massive explosion that destroyed parts of Pemex's headquarters in Mexico City in January. When it comes to investment in existing and new infrastructure, Pemex spent about $19 billion across its business — less than half the total amount budgeted for investment by Petrobas.
