Energy Reform in Mexico

A recent meeting of the Manhattan Institute in New York, a distinguished panel of experts discussed efforts by Mexican legislators to re-write their countries energy laws. The reform, to allow and encourage foreign companies to participate in the development of that nation s vast oil and gas resources, is among the signature acts early in the sixyear term of President Enrique Pena Nieto.

Reforms already enacted and others pending allow, for the first time since the 1930s, private and foreign investment in Mexicoʼs oil and gas fields. This, according to Mark Mills, senior fellow of the Manhattan Institute, is intended to lead to an influx of both capital and technology that will boost domestic production, revitalizing Mexicoʼs economy and setting the stage for North America as a rival to the Middle East and Russia in world energy markets.

The legislationʼs principal features (passed by Mexicoʼs Congress) include:

• Mechanisms for foreigners to bid on leases to explore and drill for oil, ending the 75-year Pemex (Petróleos Mexicanos, the state-owned petroleum company) monopoly
• Independent regulatory bodies for licensing, safety and the environment
• New governance for Pemex
• A sovereign hydrocarbon wealth fund, overseen by Mexicoʼs central bank
• Opening of the nationʼs grid to private power generators to compete with the state monopoly

“Reform, however, will be a long and arduous road,” said Michelle Michot Foss, Chief Energy Economist at the University of Texas at Austin. “Just the transitions for Pemex and CFE alone are likely to encompass years . . . Ultimately, these transitions will involve deep shifts in management and labor culture and an evolution of practices that support vigorous, commercially savvy strategies and tactics. Elsewhere rules and regulations, transparency protections, and international best practices all have to be developed and implemented.”

All this is just the tip of the iceberg, added Foss. Foundation infrastructure — road networks, water resources, ports and harbors, telecommunications, and much more have to rise to the occasion.

Nevertheless, Mexico’s potential to increase revenue from hydrocarbon production is enormous. The nation’s oil and gas resources are estimated at 450 billion barrels of oil equivalent, comparable to the resource base of Saudi Arabia. The nation now operates fewer than 5% of the total number of offshore rigs in the Gulf of Mexico. And to date, only several dozen wells have been drilled into Mexico’s shale formations; more than 40,000 wells were drilled in U.S. shales last year alone, according to Mills.