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The Sullexis Blog

World NOC Congress – The Mexican Energy Reform

Alejandro Del Palacio

At the end of September, I attended the World National Oil Company (NOC) Congress in Cancun, Mexico. The host of the event was PEMEX, who set the theme as “Building the energy partnerships of tomorrow”. The attendance at this year’s event was spectacular (500+), including CEOs and top-level executives of Operators and Service companies from around the world.

The sizeable attendance and the energy of the attendees was driven by the changing energy landscape in Mexico, which is a consequence of the Mexican Government’s Energy Reform and the opportunity for access to ‘easy oil’ previously owned and controlled by PEMEX. Most of these changes can be found at the National Hydrocarbons Commission webpage.

There was high expectation around definition on the processes that will come as a consequence of the Energy Reform. International companies are seeking to understand if the opportunities are real or not. Until the processes are defined and Tax Law changes concluded, it will be a tough pitch to try to divert billions of dollars towards Mexico without knowing when the return will come.

To date, we know of the five guiding principles of the Mexican Energy Reform:

  1. The Mexican State retains ownership and control of hydrocarbons.
  2. Third parties will participate in the hydrocarbons sector through various types of contracts and a new fiscal regime.
  3. PEMEX becomes a State Productive Enterprise.
  4. Restructuring of the energy sector with new entities, as well as re-definition of roles to strengthen regulatory agencies.
  5. Reform promotes sustainable development of the national oil and gas Industry and ensures transparency and accountability.

Currently, two ‘rounds’ of the process have been laid out.

Round Zero

The Round Zero process was adopted as an international best practice that has been implemented in countries like Brazil (1997) and Colombia (2003). Round Zero has proven its ability to boost the NOC’s performance and its capability to identify and substantially grow their proved reserves in a short period of time. In this round, an “oil auction” is conducted in which a Federal entity evaluates the production and financial capability of the NOC and grants a certain number of reserves for them to operate.

The intention of this process is to enable the NOC to maintain its current production and to boost production in the short term. This practice allows the NOC to become more efficient and profitable, and is accomplished by allowing partnerships and Joint Ventures (JV) to join the NOC, while still allowing the NOC to be the operator.

Round Zero took place in August 2014, during which the Mexican government granted PEMEX 100% of its requested 2P Reserves (proven and probable reserves) and 67% of its requested prospective resources. This action was under the principle of strengthening PEMEX to maximize its long-term value for Mexico. PEMEX has gained advantage over private and public oil companies that will now be allowed to operate in the country for the first time in over 70 years.

Round One

Round one was conceptually defined months ago. During this round ,the Mexican State Entity will tender 169 blocks: 109 will be exploration projects and 60 will be production projects.

The required investment to develop these blocks is expected to be 12.6 Billion USD per year from 2015-2018, with 8.5 Billion USD coming from foreign investment each year.

Thoughts

The agenda defined by both Pemex and the Federal entities for the Congress was ambitious and set a high expectation amongst the attendees. It was expected that there was going to be delineation around how contracts were to be awarded to Operators or JV’s formed with Pemex (Round Zero) and by the State (Round One). This clarity was not provided. Conceptually, it all appears to be there, but once you look closer there is no substance. It’s just not defined yet.

The stage is certainly set, and opportunities will definitely come for Upstream, Midstream, and Downstream companies to join the Mexican Oil rush. A vast number of challenges will be encountered from many angles (integration, standardization, trained personnel to manage the boost in activity, etc.). However, more time is needed to allow the waters to clear. It is expected that a full understanding on the definition of the processes and Tax Law is required to start crunching numbers and making decisions. It is to be expected that Mexico, if they want a chance to succeed on this Energy Reform initiative, will need to provide competitive incentives and transparency to mitigate the high political risks perceived at the moment. This should enable companies to divert their resources towards Mexico.

Truly a very exciting time to be working in Mexico, but lots of hard work still to come.

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