Mexico: What Next For Energy Reform?
There have recently been indications that Mexico's final energy reform bill could be far more wide-reaching and investor-friendly than initially expected. Should this prove to be the case, we would probably adopt an optimistic stance towards the country's oil and gas sector, especially long-term oil production growth.
Mexico has substantial oil and gas production potential. However, the constitution identifies the Mexican state and people as the owners of the country's hydrocarbons, leaving little room for foreign involvement. This has caused output to slump. Indeed, without reform, we would expect Mexico to become a net importer of oil by 2019.
President Enrique Peña Nieto had promised energy sector liberalisation as a part of his election platform in 2012, and a few months ago, the ruling PRI party's draft proposal for energy sector reform was introduced in the legislature. While it was an important first step, it did not go as far as some in the industry had hoped. The draft centered on a profit-sharing arrangement rather than more attractive terms such as production sharing or concessions.
However, earlier this month, reports emerged that the government was in talks with the centre-right opposition PAN party to offer a more flexible and investor-friendly proposal, the terms of which would be based on the risks involved in the production of the resources, in several tiers.
- In lower risk scenarios, profit-sharing contracts (in which companies would share a percentage of any discovery but receive it in cash and not own direct rights to the oil) would likely be offered.
- In more geologically complex plays, there would be the possibility of more attractive production-sharing contracts, such that firms would own the rights to their share of the oil, and be able to book reserves.
- There is even talk about offering 'licenses' for ultra deepwater ventures – which would allow companies to fully control the oil after paying taxes and royalties.
At this point, the situation is still highly uncertain. Namely, there has been no official confirmation from the government that it is considering the above proposals. Furthermore, if such a proposal is being discussed between the PRI and PAN (and we suspect it is), it remains unclear the extent to which the ruling PRI party and centre-right opposition PAN have been able to agree on the proposal. PAN support is absolutely necessary if this bill is to pass.
Nonetheless, if a flexible/tiered energy sector reform does get through the legislature, this would be highly significant. Not only would it represent a huge move away from the small piecemeal reform we have seen in the past, but it could attract substantial investor interest and encourage us to take a positive stance on Mexico's long-term oil production potential.