With more than 20 pieces of legislation and more decisions plus details to iron out, the landmark transformation of Mexico’s energy sector could take longer than anticipated.
“If this package is not approved before the year ends, it’s going to suffer a lot in terms of politics because there is an election in the summer of next year,” Jordy Herrera, former energy secretary for Mexico, said May 15 during the Mayer Brown Global Energy Conference in Houston. “So we’re running out of time.”
Mexico agreed in December 2013 to open its energy sector, among others, to private investment-- making way for licenses, production-sharing contracts and profit-sharing contracts to be initiated by the government, private investors or state-owned Pemex. Certain resource areas could call for certain types of contracts. However, the final rules and processes are still being devised.
Herrera said he expects Mexico’s Congress to approve the first package of laws in June, July or August. Add this to the fact that Mexico’s energy ministry has until Sept. 17 to make a decision on Pemex’s entitlement request as part of Round Zero—the round in which areas are set aside for Pemex with the rest being made available to private investors—and it looks unlikely that the first bid round would come before the country’s congressional election in July 2015.
“For sure, this is not official. But I’ve been there for a while, and I think the government will not take that risk before elections,” Herrera said. But “this is the last chance for our country to become a stronger, more advanced economy.”
Addressing concerns related to the development of potential unconventional resources—which is one of two areas (the other being the deepwater Gulf of Mexico [GoM]) expected to attract outside investors—could be time-consuming. “We have environmental issues; we have water issues. At the end, it’s going to take time,” he said.
Also expected to fuel debate is whether Pemex is allowed to form joint ventures (JVs) or enter farm-out agreements for assets it secures as part of Round Zero. Herrera predicts farm-out rights will be the main discussion in the legislature. Pemex, he said, wants to farm out assets or form JVs with other companies. However, “in the constitution it says clearly that that is forbidden,” Herrera said. “It is going to be, in my opinion, that Pemex is not going to be allowed to farm out the Round Zero assignations that they have.”
The company has requested 83% of the country’s 2P reserves, a figure that Herrera believes will drop to about 75%. Pemex has expertise in shallow-water exploration and production as well as conventional onshore hydrocarbon development. But it lacks expertise in deepwater and unconventional resources and could, as a result, lose out on blocks in these areas if bidding against companies with more experience.
“Pemex does not have technology. They don’t have money [and] the experience to develop those resources,” Herrera said after noting that the country’s first bid rounds could be grouped by region or common geology, such as a round for deepwater GoM blocks or unconventional blocks.
The U.S. Energy Information Administration estimates that Mexico has about 15.4 trillion cubic meters (Tcm), or 545 Tcf, of technically recoverable shale gas resources. Areas with geological potential, according to Herrera, include Chihuahua, Sabinas-Burro-Picachos, Burgos, Tampico-Misantla and Veracruz.
The reform is also expected to create much opportunity for other sectors including midstream, considering the infrastructure needs that could arise from the development of unconventional and ultra-deepwater resources. Unconventional resources are believed to be located near the Texas-Mexico border in the Eagle Ford, for example, where there is no infrastructure on the Mexican side, he pointed out. Such a need also exists in the upper northern part of the deepwater GoM.
Taxes related to production will be put into a sovereign fund, similar to those in Azerbaijan, Colombia and Norway, to help fund infrastructure improvements, he said.
The reform comes as Mexico tries to reverse declining production, which Herrera said has now stabilized for oil at about 2.5 million barrels per day (MMbbl/d), while gas production continues to fall. Currently, gas production is about 158.6 MMcm/d (5.6 Bcf/d).
Bloomberg reported that Pemex’s output reached its lowest monthly production levels in more than 18 years in March, falling 2.1% in the first-quarter compared to a year ago. The company produced 2.48 MMbbl/d in April and aims to increase that number to 3 MMbbl/d within four years.
Hopes are high for the reform to reverse the trend.
“I think we have the potential to deliver 2 million barrels of oil per day from unconventionals and 3 million barrels of oil a day in onshore known areas that were left behind because of Cantarell,” Herrera said. “I’m pretty sure that in the Gulf of Mexico we should be able to deliver more or less another 2 million barrels a day.
“It may take perhaps another decade,” he continued. “But meanwhile, new investment and fresh money is going to go into Mexico, and this is good for the economy. This is good for job creation, and I’m pretty convinced that this is our chance to transform the region.”
Contact the author, Velda Addison, at vaddison@hartenergy.com.