Mexico's energy reforms are 'truly revolutionary' - Maplecroft

Tuesday, July 22, 2014

The legislation governing Mexico's energy reforms is very business friendly, but could be challenged by political squabbles, corruption and insecurity in some oil-producing regions, according to David Franco, principal Latin America analyst at global risk advisory firm Maplecroft.

"The reform is truly revolutionary. Both domestic and foreign investors will be offered a range of upstream contracts and licenses, including production sharing agreements and licenses," he said in an emailed statement.

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"Though hydrocarbon reserves will continue to be owned by the state, the reform guarantees their private ownership once extracted from the ground, increasing companies' access to capital markets. Foreign companies will also be allowed to own a 100% stake in pipeline projects," he said.

And while the reform package does contain protectionist elements, these are very unlikely to deter investors, he said.

State oil firm Pemex will be given preference in the event of a bidding tie with a foreign company, in addition to retaining a 20% stake in trans-border hydrocarbon projects. Furthermore, a 25% local content rule will apply to all upstream projects as of 2015, increasing to 35% by 2025.

"The last minute change in relation to the local content rule, which was originally set at 25% by 2025, is the result of pressure from local businesses and some elements within the PRI to protect local industry and approve a more balanced reform still largely welcomed by investors," Franco said.

"Despite the last minute change, Mexico will still compare favorably to Brazil, where local content requirements exceed the 35% mark despite recent reductions."

With the senate's approval of Mexico's energy reform legislation, the PRI and PAN parties' majority in the lower house means it will pass into law, but the reform's success depends on its proper implementation and overcoming the associated challenges, he said.

The government and the sector's regulators, the national hydrocarbons commission (CNH), the energy regulatory commission (CRE) and the gas control center (Cenegas) will have the difficult task of properly implementing the reform, beginning with the allocation of the oil and gas fields Pemex requested in the so-called 'round zero,' slated to be completed in September.

He cited widespread corruption, government bureaucracy, renewed political wrangling and high levels of insecurity in Mexico's hydrocarbon-rich states as likely to continue to present serious challenges over the medium-to-long term.

The political wrangling will likely arise from the left wing PRD party's threat to hold a referendum in 2015, coinciding with the country's mid-term elections, in an attempt to revert the legislation.

And while a referendum is unlikely to succeed, as the PRI and PAN would block any such initiative in congress, "the PRD will use all legal and political means to delay and obstruct implementation of the reform and this may include holding a non-binding but highly symbolic public consultation," Franco said.

"The PRD may also be able to delay projects at the local level, where PRD-governed municipalities may choose to obstruct permitting processes."

Mexico's leftist PRD party began gathering signatures last year in a push to call a national referendum on energy reform, according to local press. The party aims to collect 1.6mn signatures and call a referendum for 2015. Observers have pointed out that such a referendum would be unconstitutional, however.

BNamericas will host its fourth LatAm Power Generation Summit in Santiago, Chile, on August 13-14. Click here to download the agenda. It will also host its second LatAm Oil & Gas Summit in Houston, Texas, on September 10-11. Click here to download the agenda.