Bidding in Reformed Mexico Energy Sector Could Move Ahead of Schedule

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Mexico’s progress on developing secondary legislation that will shape reform of Mexico’s energy sector is moving more quickly than expected, and could be ready by midweek, an upstream analyst told Rigzone. On Aug. 1, Mexico’ Congress fully passed secondary legislation after making modifications, and sent it to the Mexican Senate for approval.

The Mexican government could announce results for Round Zero sooner than the original close date of mid-September, Pablo Medina, Latin American upstream analyst for Wood Mackenzie, told Rigzone. Through Round One, assets will be offered which will require companies to partner with Mexico’s state energy company Petroleos Mexicanos (PEMEX). These assets will include deepwater discoveries and certain extra-heavy oil projects which PEMEX would have a difficult time developing on their own. For this round, a new fiscal regime would be applied to PEMEX.

Previously subjected to a fiscal system that was heavy on the company, PEMEX will now be subject to a modified fiscal regime that will kick in over the next five years. Instead of paying several taxes, PEMEX will now only pay three: a surface rental fee, a royalty sliding scale fee that will be determined by hydrocarbon prices, and then a portion of its profits, Medina said.

Companies interested in partnering with PEMEX can’t directly negotiate with PEMEX; instead, companies will offer a signature bonus, and Mexico’s Energy Ministry will decide on potential partners based on the size of the bonus.

The round of joint venture-related bidding could take place by year-end, and the licensing round for assets that don’t require a joint venture with PEMEX could be announced by year-end and happen in the first half of 2015. In this round, companies can form a consortium with PEMEX, but doing so is not required. Awards in this round will be made based on which company offers the most profit to the government depending on the fiscal regime, and which company or companies are willing to do the most work in terms of drilling and seismic.  

The Mexican government decided to include deepwater projects in its local content requirement targets as a means of further developing Mexico’s energy sector. Under the new energy sector laws, oil and gas projects would have a local content requirement would start at 25 percent and increase to 35 percent in 2025.

However, Medina said that Wood Mackenzie doesn’t see the local content requirement as a challenge due to the competitiveness of Mexico’s service companies with global peers. The local content requirements also are very flexible, with content requirements as low as desired for offshore projects with higher local content requirements for onshore projects. Medina sees the move as “very pragmatic” in terms of enhancing Mexico’s deepwater fiscal terms so it can compete for deepwater investment dollars with other countries. In addition to expertise, PEMEX also will need significant capital to finance new development projects.

“Mexico has one opportunity to get investors to come to the country,” Medina commented.

Even though the current fiscal terms are not yet known, Wood Mackenzie expects the terms to be on the same par with deepwater Brazil, Africa and the U.S. Gulf of Mexico. As one of the last countries to reform its energy sector, Mexico has the opportunity to learn from different lessons seen throughout the globe.

Security concerns are localized in northern Mexico, home to unconventional resources in the Burgos Basin. However, development of Mexico’s onshore shale resources will take a little longer than most people think due to lack of infrastructure and water. Attractive economics also will be needed; to date, PEMEX has found mostly dry gas instead of liquids that could justify the construction of infrastructure.

While Mexico’s government has not yet announced any specific program to address security, Medina said the government is “very aware” that security could pose a problem for oil and gas development.

The role of the Comision Nacional de Hidrocarburos (CNH) in Mexico’s energy sector remains a significant challenge for implementing reform, Medina commented. The biggest challenge remaining is the fact that PEMEX has not transferred all of its subsurface data to CNH. Medina said Wood Mackenzie would like to see the pace at which PEMEX is sharing all sub-surface data with CNH pick up so the agency has everything it needs.  

This subsurface information has given PEMEX as sole operator in Mexico a competitive advantage. Some negotiations are ongoing as to what information should be released. Getting this data will be crucial to getting investors’ attention right off the bat, Medina noted.

New investment in the midstream sector will be a key component of the reform and one of the main drivers of the industrial development in the following years, Ixchel Castro, midstream analyst with Wood Mackenzie, told Rigzone.

Only on the natural gas side, an estimated 2,485 miles (4,000 kilometers) of new pipelines is expected to be developed by Comision Federal de Electricidad (CFE) in association with private companies, Castro noted. This is the equivalent to expanding the current gas network by more than 30 percent just in the first phase, as gas-fired power generation expands.

“In the next 20 years, Mexico will have to double its current pipeline network to reach its maximum potential of gas consumption, as several regions in the West and South of the country remain cut off of the network,” said Castro. “The success of the reform in promoting the expansion of the network will depend on the incentives and the advantages that will be provided to the integrated systems, that are yet to be defined by the Secretaria de Energia de Mexico and the Comision Reguladora de Energia.”

Wood Mackenzie expects a much more moderate expansion on the refined products side, as the main opportunities will come from solving bottlenecks in the existing network, Castro noted.

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