Larry Pascal and Hunt Buckley in the Inter-American Dialogue’s Weekly Energy Advisor: Will Mexico's Ambitious Energy Reforms Meet Expectations?

01/10/2014


Q: In mid-December, Mexico's Congress and states moved rapidly to pass an energy reform law that allows for more participation from private companies than what President Enrique Peña Nieto included in his original proposal, and Congress must now work to pass implementing laws that determine the reform's final details. How significant is this reform for Mexico's energy sector, and will the country finally be able to reverse flagging oil production? How attractive are the terms of the reform to investors? What are the key issues as Congress passes implementing laws?

A: Larry B. Pascal, member of the Energy Advisor board and chair of the Americas Practice Group at Haynes and Boone, LLP in Texas and William (Hunt) Buckley, partner at the firm in Mexico City: "The energy reform is the first necessary step in what could be promising times for the Mexican energy industry and the domestic and foreign private energy sectors. Although many challenges remain, there is great hope that Mexico could reverse declining oil production, albeit over the course of many years. Within two years, the reform contemplates that Pemex will be transformed into a 'productive state company' with an autonomous budget, the right to operate autonomously and without union participation on its board. Ownership of hydrocarbons in situ remain the exclusive property of the state. No concessions may be granted; but contracts to explore for, develop and produce hydrocarbons will be allowed. Exploration and production will be conducted through contracts between the government and the private sector (or other NOCs) or the state and 'productive state companies' (which would include Pemex). In turn, 'productive state companies' can contract with the private sector and other NOCs. The reform alludes to four authorized contract models: service contracts, profit-sharing agreements, production-sharing contracts and licenses. The scope and content of these models are left to the implementing legislation and subsequent regulations. The reform provides for five contractor compensation models: cash for service contracts, a percentage of profits for profit sharing agreements, a percentage of production for production sharing contracts and licenses (where there may be a transfer of title of produced hydrocarbons), and, importantly, any combination of the foregoing. Related issues, such as the amount of royalty or production share, are left to the implementing legislation and related regulations. It is hoped that the final terms allow the private sector to book reserves. Numerous issues remain, including the specific terms of the contract models to be used. In addition, the Ministry of Energy will assign those producing fields that Pemex requests be assigned to it and that the ministry considers Pemex capable of operating. Of course, the effectiveness of the reforms will also depend on how Pemex makes the transition from a monopoly operator to one partnering with other private and foreign state-owned companies."

Excerpted from the Inter-American Dialogue’s weekly Energy Advisor, January 10, 2014. To view full article, click here. 

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