Good News in the Pipeline for Mexico

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Last July, as part of Mexico’s energy reform, the National Hydrocarbons Commission (CNH) – the government’s upstream energy regulator – successfully carried out the second and third bidding round of the second tender process (Round 2.2 and 2.3) for 24 onshore blocks, and awarded 21 of them. The government estimated that, in total, the bids will generate investment of $2billion and at least 20,500 direct and indirect jobs. According to CNH head, Juan Carlos Zepeda, these investments will add 80,000 crude barrels per day and 378 million cubic feet of natural gas to Mexico’s current production of around 2 million barrels per day.

More good news came in August when Mexico’s Finance Ministry announced plans to lower the fiscal pressure on state-owned oil firm Pemex to free up funds so the firm can fix declining production. The new proposed framework is expected to allow Pemex to increase the share of revenues it can count as costs on the output of its onshore marginal and mature fields, therefore leaving more resources for its investment and exploration activities. It also suggested that Pemex should form partnerships with private enterprises to boost the profitability of its current projects. The new measure demonstrates the government’s genuine desire to get foreign firms involved in tapping into Mexico’s vast potential of energy sources.

Welcoming investors

Following the 2.2 and 2.3 bidding rounds, the CNH modified most bidding rounds to make it easier for international private firms to take part. Tender requirements were streamlined while it has become easier for firms to form consortia with other competitors. There is also a mechanism for companies to suggest new areas for bidding. Meanwhile the federal government modified the constitutional mandate of the CNH to enhance its position as an independent entity and to protect it from any changes in the political environment, especially resulting from the 2018 presidential elections. Finally the CNH’s reputation as an oasis of honesty in Mexico’s sea of corruption was enhanced in July when UK-based commodity-focused NGO, Natural Resource Governance Institute, praised the transparency of the CNH’s bidding rounds.

It has also become clear that the federal government is keen to push the progress of the energy reform as much as possible before the elections in 2018. Minister of Energy, Pedro Joaquín Coldwell, announced that authorities are looking into launching a Round 2.5 prior to the polls. This round will look to involve shale oil, gas leases, and other unconventional resources to encourage natural gas exploration and extraction contracts. With regards to the areas assigned to Pemex in Round Zero, Pemex has a two-year period to achieve its exploration objectives – a very short timeframe by international standards. The government seems keen to establish as many partnerships as possible to capitalise on the potential benefits. This will certainly open up further opportunities to international firms in the industry.

Will politics get in the way?

Andres Manuel Lopez Obrador (AMLO), the left-wing populist leader of the opposition National Regeneration Movement (Morena), is the frontrunner in Mexico’s 2018 presidential election. AMLO has vowed that, if elected, he would seek to review all exploration and production contracts signed as part of the 2013 energy reforms. This would be part of a crackdown on corruption, which will increase scrutiny into the current administration.

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