On Dec. 20 last year, Mexico’s President Enrique Nieto signed into law constitutional modifications made by Congress in the energy sector that have to do with oil, gas and electricity that, while reaffirming the nation’s full ownership of all hydrocarbons in place and its exclusivity and control over them, lifted the state monopoly over activities related to their search and extraction.
Oil and gas exploration and production activities can now be carried on not only by Pemex, the national oil company, but the state also can now do so with private companies under industry-standard contract models, such as production sharing, profit sharing or exploration licenses, which were all previously forbidden by the constitution.
The new laws modify Pemex’s charter, which until then was just another state agency subject to all kinds of bureaucratic restrictions, and convert it into a “State Productive Enterprise” with norms and regulations similar to those dictated by industry’s best practices, and gives it the conditions needed to operate as any international oil enterprise would, being able to do joint ventures and contracts with any third party as it sees fit to fulfill its charter.
Additional terms were established in the decree not included as constitutional changes that will be normed and regulated through secondary laws, such as:
- The treasury department (Hacienda) will establish the royalties and contributions to be paid for the extracted products.
- Companies may book for accounting and financial purposes the expected benefits from their licenses or contracts but not the reserves.
- Pemex, through a Round “0,” will have first choice on licenses and may operate them with participation of private companies. The Energy Secretariat (SENER) and the National Hydrocarbon Commission (CNH) will select the partners and manage and control the contracts.
- Contracts and licenses shall have a “National Content.”
- E&P (and electricity) activities will have preference over any other for land and subsurface uses.
- Contracts must have public transparency clauses, will be auditable, awarded with maximum transparency and all terms will be public.
- Authority and responsibilities over the E&P activities will be on:
♦ SENER advised by CNH will define and conduct policy, award licenses, select areas to be contracted, establish bid’s technical terms and guidelines, and award permits for processing and refining.
♦ CNH will manage a geologic and operational database, authorize reconnaissance and surface surveys, carry out bids, establish awardees, sign the contracts, manage the technical issues of the licenses and contracts, supervise operational plans and regulate the E&P.
♦ Energy Regulatory Commission (CRE) will regulate midstream and gas products.
♦ Hacienda will establish the economic conditions of the contracts in terms of fiscal conditions assuring an income contributor to their long-term development.
In addition, public subsidies of energy products will be phased out.
Also, the CNH and CRE will have new responsibilities, authority and budgeting processes. CNH will manage a National Hydrocarbons Data Center with all seismic and cores of the E&P works.
After-tax-income and proceedings from E&P licenses and contracts will go into a public trust fund responsible for their payments that will cover government programs, research, petroleum audits and sustainability funds. The trust will continue funding the federal budget at the same proportion of the GDP that it did in 2013.
A “National Natural Gas Control Center” will operate all the trunk pipelines and storage facilities and similarly a “National Energy Control Center” will do the same for electricity.
New legislation will set the bases to assure the protection and care of the environment in all process related to this decree, and new policies will promote cleaner technologies and fuels and Congress will issue a law to regulate the use of geothermal resources.
The National Industrial Safety and Environmental Protection Agency of the Hydrocarbon’s Sector will be implemented.
The State Productive Enterprises’ purpose is to create value and increase the state’s income under a special tax regime and special organizational structure based on the best international practices with full technical and management autonomies. Their finances shall not compete and conflict with the federal government’s and will have a special regime for acquisitions, leases, contracting of works and services, acquisition of debt and for administrative responsibilities.
New laws will prevent, identify and punish any attempts to influence a public servant to benefit economically.
And finally, Pemex and the Federal Electricity Commission employee unions shall no longer be represented in the Board of Directors of the two companies.
The Reform has the potential to have a huge impact on the energy picture of Mexico and probably of the world, since it opens up to industry an extremely large resource base: Mexico has discovered in the subsurface 263 BBO of oil and 279 TCF of gas, that doesn’t include yet to be found resources in conventionals and unconventionals. Including them, the total endowment is considered to be in the order of 435 BBOE (table 1), and this is only for the producing basins.
Of this endowment in 100 years only 41 BBO and 72 TCF have been extracted, leaving behind an enormous quantity of resources.
Assuming Pemex’s numbers for the yet to be found conventional and unconventional resources are correct, and not considering what remnant today is “uneconomic,” there are at least 159 BBOE waiting to be produced.
Considering the EUR established by Pemex is based on traditional practices that have forever been hampered by lack of resources, the 220.7 BBOE considered uneconomic represent a huge resource base that, through the application of technology, science and investments, would substantially improve the EUR.
The reform will open up numerous business opportunities for the geosciences community in particular and for the upstream industry in general.
The changes went further than expected.
The specific terms and regulations (secondary laws) will be ready by second quarter 2014 and there will probably be bid rounds as early as third quarter. The government now has a lot of flexibility on the type of contract schemes it may use to improve the energy conditions of Mexico. Success of the reform will depend on the economic models that will be established in the secondary laws.
A Bit of Background
Pemex is the national oil company and, until today, the only operator Mexico has ever had, although a handful of companies are working in the country under service contracts. It was created after the March 18, 1938, expropriation of 17 mostly European oil companies by then-President of Mexico Lázaro Cárdenas, thereby creating a profound sense of nationalism in the country around the oil industry.
The state-owned company was formalized on June 7, 1938; and today is the largest company in Mexico and thirteenth largest in the Americas.
In the 1980s Pemex became one of the most important exporters of petroleum in the world, thanks to the discovery and exploitation of Cantarell, the world’s largest offshore field in Campeche Sound, with reserves of 40 BBO. The oil company, due to its excellent production infrastructure and high oil prices, had income of $US 126 billion in 201 – the largest amount in its history.
Mexico is one of the Latin American countries with enormous petroleum potential.
The country has large petroliferous basins developed mainly around the Gulf of Mexico, both onshore and offshore. The most important petroleum basins being:
- The Gulf of Mexico proper.
Current reserves (BBOE) are 43 (3P), 26.2 (2P) and 13.8 (1P), with prospective resources of 54.6 BBOE (Pemex, 2012).
Lately, Pemex has focused in the Gulf of Mexico deepwater potential having done in 2013: 10,595 square kilometers of 3-D seismic acquisition, the drilling of four wells, two of which producers invested $1 billion (USD) that resulted in the discovery of 608 MMBOE of reserves.
Mexico’s petroleum potential includes unconventional oil and gas and resources distributed in diverse regions of the country.
Systematic studies have been carried out in the last five years with several exploration wells drilled in order to determine tight oil and shale gas potential, which has been identified in Veracruz, Chihuahua, Sabinas-Burro-Picachos, Burgos, and Tampico-Misantla. The unconventional hydrocarbon resources are principally associated with the Eagle Ford formation of Cretaceous age as it extends from south Texas into northern Mexico, the late Jurassic Pimienta formation in the northern and eastern part of the country.
Resources in Paleozoic and Cretaceous hydrocarbon rich rocks are also being investigated. Pemex estimates its unconventional resources at a mean of 141 TCF and 32 BBO (figure 2) – potentially the world’s fourth largest unconventional reserve.
The development of these resources could triple gas production to 20 bcf per day, contributing to fully satisfy the national energy needs and promoting a robust growth of the petrochemical industry.
The rich endowment of the country’s oil production declined from 3.4 mmbod in 2004 to 2.5 mmobod today, regardless of increased investments (figure 3), which together with the constant reduction of the reserves led the government to reconsider its long-term policy of having Pemex as the country’s sole E&P operator and make constitutional changes that now allow third-party participation in the upstream sector.
Previously in 2008, the Mexican Congress had approved a series of energy measures that would allow Pemex to bring in foreign and private companies in order to carry on E&P activities based on service contracts, however these reforms were so slight that they did not manage to attract the interest of international operating companies.