The constitutional reform and ensuing enabling legislation ending Mexico’s 76-year-old oil and gas monopoly should be completed this summer, opening markets to foreign participation and unleashing what experts predict will be tens of billions of dollars in new offshore and land exploration, well drilling, pipeline construction and refining. The first contracts could be let by Mexico’s regulatory agency, the National Hydrocarbons Commission, by the first half of 2015.
That was the shared conclusion of a panel of Mexican and U.S. experts at the San Antonio Clean Technology Forum‘s Tuesday program at the Pearl Stable, “Mexico’s Historic Energy Reforms: An Opportunity for Texas.” This was the 15th major program organized by the Clean Tech Forum, according to its chairman and founder, Michael Burke, who first organized the non-profit in 20008.
Petróleos Mexicanos, better know as PEMEX, the state oil and gas monopoly with more than 100,000 employees and one of the nation’s strongest unions, will be transformed into a private enterprise that for the first time in its history will engage in both competition and collaboration with other free market energy concerns. Texas is poised strategically on Mexico’s borders with vast resources already dedicated to oil and gas exploration, extraction and pipeline operations, leaving it in an ideal position to participate in the historic economic and political opening.
What is driving such profound reform under Mexican President Enrique Peña Nieto? In a word, crisis. With the eighth largest oil reserves and six largest gas reserves in the world, Mexico should be a more important player in world energy markets. But a lack of investment capital to fund exploration and a lack of access to advance fracking technology, and poor infrastructure are contributing to Mexico’s declining production and sales.
“Until recently, Mexico has operated in a 21st century world with 20th century political ideas layered on top of 19th century understanding of sovereignty and national identity,” said Raúl Rodríguez-Barocio, distinguished professor of banking and finance at the University of the Incarnate Word and chairman of the Washington, D.C.-based U.S.-Mexico Foundation. “Mexico has one of world’s most monopolistic and inefficient energy sectors and the situation is simply unsustainable. Proved reserves and production are dwindling, leading Mexico to import one-third of its natural gas, half of gasoline, and two-thirds of its petrochemicals needs. Deep water and shale exploration and production are almost nonexistent.”
This underperforming monopoly, unable to compete globally, is precisely why Mexico is experiencing a decline in production, Rodríguez said, even though Mexico has more direct control over its energy sector than any other country in the world.
“This is at the core of Mexico’s paradox,” Rodríguez said. “The country has sustained almost 20 years of superb macroeconomic management, and yet growth levels have been very low, slightly over one percent last year. The country needs to complement great achievements in stability and an open economy with the critical reforms the current administration is endorsing.”
Rodríguez was the opening keynote speaker at Tuesday’s Clean Tech Forum. Following his remarks, a 90-minute panel discussion was moderated by Robert Rivard. The panel included Edgar Rangel, commissioner of the National Hydrocarbons Commission; Eduardo Andrade Iturribarría, corporate director of global energy company Iberdrola México; Duncan Wood, director of the Woodrow Wilson Center’s Mexico Institute in Washington, D.C., and Marcelo Mereles Gras, a partner in EnergeA and former PEMEX executive.
Mereles pointed to PEMEX’s administrative nepotism as a main cause of the problem, noting that for decades it has conducted little or no recruitment at university and technical school campuses, instead opting to hire relatives of employees, regardless of their qualifications. Promotions were not based on professional career path planning and development, but random decision-making often politically driven.
“Pemex has been thinking more like a bureaucracy than a company,” Mereles said.
Rodríguez agreed: “Because the system has been controlled by one party for so long, we need to learn to recreate efficiency, we need to carefully rewrite rules so that there are no gray areas, and we need to create a culture of transparency and accountability where none exists, otherwise investors will look elsewhere.”
Assuming the transition is a well-managed one, Wood said Mexico will quickly reap the benefits of foreign capital and technology transfers that will flood into the country much the way Texans have watched the overnight development of the Eagle Ford Shale Play.
“Right now, every major energy company in the world is opening a branch in Mexico City and their work could eventually lead to $50-60 billion in foreign energy investment,” Wood said. “This investment will then lead to a spillover effect in other sectors and help produce prosperity in the county.”
All of the panelists agreed Mexico’s government and business culture had evolved sufficiently to guarantee foreign companies that they could win contracts and operate on the ground without paying bribes or kickbacks or otherwise violating the Foreign Corrupt Practice Act.
“I am 100% confident that anyone wanting to do business in the public sector in Mexico can do so with complete confidence,” said Andrade. “In more than 16 years of working with Mexico’s public sector I have never had to engage in such activity.”
Andrade advised interested companies to get engaged now to avoid being left in the dust when the markets open and operators from all corners of the globe rush in to find Mexican partners and participate.
Rangel said global energy operators will have to be treated fairly in Mexico, or they will retreat to other opportunities in the Middle east and Africa.
“We know we have to operate with total transparency and fairness, and we know that once PEMEX indicates the exploration and production fields it wants to protect, that we are going to have to make available attractive opportunities for others if we expect them to come to Mexico,” Rangel said.
The prosperity that will be beneficial to Mexico, also will yield benefits north of the border. Panelists said reduced energy costs in Mexico will make it even more competitive for multinational manufacturers seeking stable democracies with affordable labor, while in Texas, the economic activity will benefit border communities, ports, and a multitude of companies in the oil and gas services industry who will be sought after as partners with Mexican operators.
The abundance of oil and gas reserves make Mexico a prime target for investors, but those are not the only sectors that will benefit from the recent energy reforms. The Mexican government has now set out to establish the goal of having eight percent of total energy generation come from renewable sources — excluding hydroelectric ,which already accounts for 11 percent of the country’s electricity production — in the coming years. As one of the largest countries in the world that lie completely in the irradiated zone, Mexico has the potential to lead to world in solar energy production and is now on its way to developing one of the world’s largest solar farm, producing 450 megawatts of electricity.
All of this potential has caused South Texas’ fracking industry to take notice, even as many potential investors are worried about Mexico’s ability to develop the necessary infrastructure to take advantage of the “gold rush” mentality that is about to occur as even Texas – with comparably strong local and state government – has seen clogs in production as investment has outstripped the state’s ability to keep up.
However, it is precisely this lack of infrastructure that in some ways makes Mexico so appealing, Wood said. “There is room to professionalize all sectors at the local level.”
Expect an influx of companies moving to Mexico to help with transportation and others to help supply water. There’s money in building a trading partner.
Speaking to the issue of safety and crime in Mexico, Wood added that investments in Mexico, while challenging, are actually safer than places like Iraq and Brazil – though more expensive because of security concerns.
“Mexico City is actually safer than Washington D.C. and recently all of the northern [Mexican] states have been working to strengthen their area against crime. Over the last few years Monterrey has actually completely turned over their police force creating a safer environment both now and moving forward.”
Safer or not, investors are likely coming and in the end, the economic impact of their presence is likely to equal or surpass NAFTA.
“On the energy side, beyond approving regulations and implementing the reform, challenges are as vast as the opportunities: human capital, security, infrastructure, the environment,” Rodriguez said. “Politically, as was the case with NAFTA, to a certain extent this requires a historic departure from the nationalistic and entrenched stance that has tinted Mexico’s search for identity since the Revolution 100 years ago.”