The State of Mexico’s Energy Reforms

Falling oil prices in the U.S. are putting a damper on the excitement over Mexico opening its energy market to private investors outside the country, panelists said during a recent discussion about Mexico’s economy at the Americas Society and Council of the Americas in New York.

“It is very bad timing that oil prices collapsed right after Mexico passed the secondary legislation,” says Alonso Cervera, chief economist for Latin America at Credit Suisse, of the energy reform legislation that began implementation in 2014.

Last August, Mexico’s president, Enrique Peña Nieto, enacted secondary laws allowing foreign and domestic companies into an energy industry monopolized by government-owned petroleum company Pemex since the 1930s.

The commissioners at Comisión Nacional de Hidrocarburos (CNH), which bears the burden of coordinating the contract and bidding process with private partners who will work with Pemex, will be taking care of all the regulation, with Pemex and other agencies doing the tendering of projects and licenses for Round 1. Pemex got first choice on licenses for the inaugural Round Zero and can operate them with the participation of private companies.

Early last September it was announced that the areas to be contracted out by Pemex in Round 1 would be selected by CNH and Mexico’s Energy Secretariat , with 169 blocks to be offered in the bidding process in the first quarter of 2015. At the time, this was to include some shale gas areas onshore near the border with the U.S., some conventional areas in shallow waters, and deep offshore locations.

“When the government launched Round One of the energy reforms, it was expected to add $13B per year to the [Mexican] economy,” says Cervera. “Now, with oil prices 50 percent lower and projects no longer being viable, shale [and] deepwater [drilling] may not be that attractive.”

The country is on track for its energy reform implementation, and there is no threat that a political party could call the legislation’s validity into question, Cervera says. Round 1 of bids is out, and Round 2 is set to come out this month, he says, adding that given the decline in oil prices, the government is reassessing whether it goes into shale oil or deepwater.

There is a lot of volatility in Mexico, added to by lower oil prices, and when the dust settles, Mexico will look better, says Gerardo Rodriguez, managing director, emerging markets strategy, at BlackRock.

“The drop in oil prices tempers expectations [of Mexico] and makes them more reasonable,” he says. He adds that energy reforms are a dominant element in the Mexican economy and will continue to be for years to come.

The lack of human capital is also an issue, Rodriguez says, adding that the will to implement the energy reforms may be there, but institutional capacity is lacking. “You can import technology on the project execution side, but it’s not as easy as just importing and implementing,” says Rodriguez. “You need structure. You need project management experience. You need a lot of things the government hasn’t done in many years. It takes a while to gain that experience.”

Natural gas pipelines are the most interesting infrastructure need in the next five to 10 years, he says. The Comisión Federal de Electricidad is so inefficient in the way it operates that the cost of energy in Mexico is 86 percent higher than in the U.S., he notes, and it therefore creates a chance for natural gas to take up some of that slack.

Cervera says he has heard how excited companies are to come into Mexico. “I would expect investor interest to remain in place,” he says. “What we heard repeatedly over the last few months by oil companies or energy companies was that they were excited by Mexico opening up the energy sector. The framework is rated more favorably than that of other oil-producing countries.”

Rodriguez says the fall in oil prices is a “wake-up call to some people that forget that Mexico is an emerging economy.” Compared to its peers, there remains a large amount of corruption, a lack of transparency, a lack of ability to enforce contracts, and little of rule of law, he adds. But the ability of the country to absorb some shocks and scandals also bodes well in the long term.