A Step Closer To A Renaissance

BMI View : The Lower Houses' approval of secondary legislation that would further open up Mexico's O&G sector brings these bills a step closer to implementation. We maintain our view to see their passage within 2014, thereby affirming a brighter outlook ahead for Mexico's O&G. This will not only benefit foreign upstream players but also provides growth opportunities for oilfield services and midstream firms. 

On August 2 2014, the Lower House approved of President Enrique Pena Nieto's secondary legislation to the country's energy sector reform. The bills in this legislation build on the country's landmark decision to open up its energy sector for foreign investment ( see 'Landmark Energy Reform To Reverse O&G Sector's Fortunes', December 13 2013) and promise to further improve Mexico's above-ground environment. They will now be passed to the Senate for debate, which could be signed into law by President Pena Nieto if no further amendments are made.

Small Amendments, But Upbeat View Remains

Better Times Ahead
Mexico - Crude Oil & Liquids And Gas Production

BMI View : The Lower Houses' approval of secondary legislation that would further open up Mexico's O&G sector brings these bills a step closer to implementation. We maintain our view to see their passage within 2014, thereby affirming a brighter outlook ahead for Mexico's O&G. This will not only benefit foreign upstream players but also provides growth opportunities for oilfield services and midstream firms. 

On August 2 2014, the Lower House approved of President Enrique Pena Nieto's secondary legislation to the country's energy sector reform. The bills in this legislation build on the country's landmark decision to open up its energy sector for foreign investment ( see 'Landmark Energy Reform To Reverse O&G Sector's Fortunes', December 13 2013) and promise to further improve Mexico's above-ground environment. They will now be passed to the Senate for debate, which could be signed into law by President Pena Nieto if no further amendments are made.

Small Amendments, But Upbeat View Remains

These bills tackle issues such as the logistics of Mexico's licensing rounds, local content requirement and the structure and role of national oil company (NOC) Pemex ( see 'Market-Friendly Secondary Legislation Could Presage Upswing In Investment', May 2). However, they were passed by the Lower House with small amendments:

  • Landowners sitting on oil and gas produced on their property will be given small percentage payments;

  • Companies may have to include their workers in profit-sharing schemes. This was originally ruled out from the initial proposal;

  • State and municipal governments will be paid a larger proportion of oil receipts than initially proposed;

  • Federal government will have to take on part of Pemex' and state utility Comision Federal de Electricdad's pension liabilities - coming in at about USD130bn - to boost their finances. This will come into effect after they restructure their pension systems a year from the passing of the legislation. In return, the Congressional Audit Committee will look into the two state-owned firms' labour liabilities for irregularities. The Lower House also raised the retirement age for Pemex' employees.

The first and second points could decrease the returns of investing in Mexico's upstream, though this was a risk we had highlighted ( see 'Market-Friendly Secondary Legislation Could Presage Upswing In Investment', May 2). Nonetheless, we maintain our view that overall, the reforms introduced by the secondary legislation will provide net benefits to Mexico's oil and gas sector and should be implemented within 2014.

The implementation of the secondary legislation is set to see foreign capital flow into the O&G sector on the promise of better investment returns from a less involved Pemex. Several companies have already expressed interest.  Chevron is the first major company to seek a partnership with Pemex to explore its offshore and unconventional resources ( see 'Opportunities Abound As Reform Near', May 14). Japan's JOGMEC will be cooperating with Pemex, particularly in shale gas, while Russia's largest independent oil producer Lukoil also has a partnership agreement with Pemex to jointly work in Mexico.

Other international oil companies (IOC) will likely follow suit, due to Mexico's favourable profile: rich below-ground potential and a large immediate market in Mexico and Latin America to sell to. While much of the attention of Mexico's future potential has been focused on its shale and deepwater resources, its shallow water could also be given a fresh lease of life from drilling technology advances, such as better seismic survey work and the deployment of horizontal drilling offshore. IOCs can bring this valuable technological expertise to the Mexican market.

This underpins our upbeat view for both oil and gas production in Mexico. While crude oil and liquids output is still expected to trend downwards in the short-term from 2.88mn b/d in 2013 to 2.86mn b/d in 2017, we project a reversal of this trend from 2018 as the effect of new investment begins to kick in. Thus, we see production trending upwards from 2018 to reach 3.20mn b/d by 2023. While we expect gas to continue to an uptrend throughout our forecast period to 2023, as with oil, growth will be more pronounced only from 2018.

Better Times Ahead
Mexico - Crude Oil & Liquids And Gas Production

A New Era For Services

Oilfield services (OFS) will benefit from the wave of capital that Pemex and Mexico is set to receive from further liberalisation. Since 2013, top offshore rig builders Keppel FELS and Sembcorp Marine have received at least 14 orders for newbuild rigs from Mexican clients preparing for a drilling boom in the market. The need to replace Pemex' older rigs and the move into the deepwater Gulf of Mexico as well as new land rig requirement to tackle shale oil and gas exploration could also see another wave of rig orders. Local content requirements would see many of the OFS either enter or expand their existing operations within Mexico.

Pemex itself is also preparing for this growth. On August 4, Chief Executive Emilio Lozoya stated in a local radio station interview that as part of Pemex' restructuring plan, it will be setting up a wholly-owned company providing drilling equipment and services for internal use and to be rented out.

The expected oil and gas renaissance in Mexico will also bring about a growth in logistics demand. Another wholly-owned subsidiary Pemex is looking into is a transport and logistics firm to 'support foreign companies' access to Pemex' existing pipeline infrastructure'. The infrastructure opportunities available in Mexico have not been lost on the private sector. Al Monaco, chief executive of Canadian pipeline giant Enbridge stated during its Q2 2014 results conference call that Mexico is 'obviously in significant need of pipeline infrastructure'. The firm could enter the market depending on 'how these regulations work through'.

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Related sectors of this article: Oil & Gas, Upstream, Exploration, Development, Production, Transportation, Deepwater, Unconventional, Energy Policy, Oilfield Services, Marine and Subsea, Rigs, Seismic Surveys
Geography: Mexico
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