Reforms to Mexico’s energy sector were signed into law late last year. The legislation proceeded rapidly from President Enrique Peña Nieto’s announcement of the reforms in August, to the negotiations among the major political parties during the fall, to voting in both houses of Congress, resulting in a majority of the 31 state legislatures changing the Constitution. For the first time in 75 years private participation will be permitted in Mexico’s energy sector, not only in oil and gas, but also in electricity and power generation. The repercussions of this reform will be felt not only in Mexico but across the hemisphere, including Canada as increased development of Mexico’s energy sector is a win-win for Mexico and the rest of North America.
The reform has led to large expectations and deservedly so. It goes further than what was originally envisioned when Peña Nieto announced the reforms in August 2013. The two conservative political parties, Peña Nieto’s Institutional Revolutionary Party (Partido Revolucionario Institucional, PRI) and the National Action Party (Partido Acción Nacional, PAN), molded the legislation to make it deeper and more robust. The opposing liberal party, the Party of the Democratic Revolution (Partido Revolucionario Democrático, PRD), demonstrated rampant opposition to the reforms as they viewed them as a “privatization” of Pemex, the state oil company. The PRD is still hoping to halt the reform through a popular referendum, but the success of this initiative is unlikely.
They say the devil is in the details, and proponents of turning around Mexico’s declining oil and gas production appear pleased with the components of this legislation. The vehicles that allow foreign investment vary in the amount of risk involved. These include service contracts, profit-sharing agreements, production-sharing agreements, and licenses. The latter functions in the same way as a concession, and faces a potential legal hurdle as Mexican law prohibits concessions. Nevertheless, these contracts allow foreign companies to have more skin in the game, and catapult Mexico into the top 10 in the world in terms of investment regime offered.
Most of the attention has focused on the oil and gas side, but power generation will also be positively affected. The reform calls for Mexico’s electricity monopoly—the Federal Electricity Commission (Comisión Federal de Electricidad, CFE)—to become a “productive enterprise,” meaning that private companies will be able to participate in the generation and distribution of electricity.
Now that Mexico has approved the legislation the real challenge is what is to come. Congress has four months to pass implementing legislation. Pemex would then decide which projects to keep and which it will open up to investment. Then the National Hydrocarbon Commission (Comisión Nacional de Hidrocarburos, CNH) will run the bidding process on the new projects, with Pemex eligible to bid. However, it is unlikely that bidding will occur until at least 2015. Companies will review the terms of the new laws and will determine whether to invest.
But optimism is still rampant despite the upcoming challenges. There are approximately 29 billion barrels of recoverable reserves in the Gulf of Mexico that are crying out for private sector investment. Developing these reserves would double the size of Mexico’s proven capacity. The licenses offered in the energy legislation will allow companies to risk investing in the deep water areas in the Gulf of Mexico. Shale gas is another huge opportunity, but the technology needed is found north of the border. Despite sitting on extensive natural gas deposits, Mexico has to import natural gas, mostly from the United States, but also from places like Nigeria or Yemen, at prices four times higher than what is available in North America.
Still, Mexico’s potential energy boom represents an important opportunity for Canada as Canadian companies will be looking to invest in oil, gas and power generation, depending on the attractiveness of the opportunity. Furthermore, electricity costs 25 percent more in Mexico than in the United States, which has led many manufacturers to leave the country. Lowering costs through more efficient generation lowers energy input costs into manufacturing, which is huge for Canadian companies that seek to invest in Mexico.
While increased production of Mexican crude oil might be thought to compete with Canada’s exports, this will not be an issue due to the different quality of supply and refining process. Combined with the oil and gas boom in the United States, North America has deepened its status as an energy superpower. Increased production will find new export destinations as Canada, the United States, and Mexico reap an energy bonanza, and combined with lowered costs, and more refined market access will lead to higher competitiveness. Mexico’s energy reforms will prove beneficial not only to North America broadly, but also to Canada.