FocusCorrected: If passed, energy reform may boost Mexico's petchems

16 August 2013 16:07  [Source: ICIS news]

If passed, energy reform may boost Mexico

Correction: In the ICIS story headlined " If passed, energy reform may boost Mexico's petchems" dated 16 August 2013, please read in the third paragraph "... $17.1bn (€12.8bn)…” instead of “…$17.1m (€12.8m)…” A corrected story follows.

(adds paragraphs 24, 27-35)

By Al Greenwood

HOUSTON (ICIS)--The recently proposed energy reforms by Mexico's president could reduce the country's petrochemical trade deficit, one that has continued to grow despite the nation's rich hydrocarbon reserves.

However, the reforms could become weakened by the time they are adopted, limiting any benefit to the country's petrochemical industry.

Mexico's petrochemical trade group, the Asociacion Nacional de la Industria Quimica (ANIQ), noted that the nation would report a petrochemical trade deficit of $17.1bn (€12.8bn) in 2010, up 43% year on year in the latest year statistics were available.

Net imports of petrochemicals are now double that of domestic production. While the polyethylene (PE) deficit should end with new production, the huge polypropylene (PP) deficit will likely persist, said Roberto Guzman, director of Mexico-based Pipa Consulting.

Currently, Mexico lacks the feedstock to add any significant petrochemical capacity, said Bob Bauman, president of the US-based Polymer Consulting International. The upcoming Ethylene XXI project by the Braskem Idesa joint venture would use up Mexico's remaining ethane feedstock to produce an integrated cracker and polyethylene (PE) plant.

"There is not enough for a second cracker," Bauman said.

The problem with feedstocks is tied to energy production.

Mexico is running out of easily developed fields, and the state monopoly, Pemex, lacks the funds and know-how to develop unconventional reserves, Guzman said.

The numbers illustrate Mexico's energy woes.

Oil production was 2.60m bbl/day in 2012, down 25% from a high of 3.48m bbl/day in 2004, according to the US Energy Information Administration (EIA).

From 2006-2011, Mexico's natural gas production had remained stagnant at about 1,700bn cubic feet/year, the EIA said. Last year, it spiked to 1,900bn cubic feet.

Regardless of the increase, imports that year supplied one third of the country's demand for the fuel, up from 3% in 1997.

So far, Mexico has been unsuccessful in developing its unconventional energy reserves to either reverse the decline in oil production or to meet rising natural gas demand.

In 2012, Mexico drilled three wells in shale formations, while the US authorised 9,100 permits, President Enrique Pena Nieto said in his reform proposal.

That is despite Mexico having the world's fourth largest reserves of shale gas, according to the EIA.

That same year, Mexico drilled six deepwater wells in the Gulf of Mexico, while the US drilled 137.

Such unconventional reserves will become increasingly important for Mexico if the country wants to raise its energy production, Pena Nieto said.

To develop such reserves, Mexico will need the investments and capabilities of outside energy firms, the Mexican president said. Even without their participation, Pemex should not bear all of the risk of developing such complex fields.

Pena Nieto proposed reforms on Monday that would allow some foreign participation in energy production in Mexico.

Currently, Mexico has one of the world's most restrictive legal frameworks for energy production, according to the law firm MayerBrown.

The nation's constitution prohibits the granting of any concessions or contracts for hydrocarbon extraction. Exploration and production is limited to Pemex.

Pena Nieto's proposal would allow either the government or Pemex to enter into contracts with private companies to explore and produce oil and gas. The companies would be compensated based on the value of the hydrocarbons produced by the wells.

The reforms would also remove basic petrochemicals and refined products from the list of activities reserved to the state. As a result, outside companies could participate in the production of these products under permits authorised by the federal government.

Mexican law defines basic petrochemicals as natural gas liquids such as ethane, propane and butane, said Jose Valera, a partner with the law firm MayerBrown.

The reforms would also lower the amount of money Pemex contributes to the federal government.

Those transfers have been so large, they have limited how much Pemex could spend on exploration and production, Guzman said.

Importantly, the reforms do not specify how private companies could participate in the country's energy sector, Valera said.

Instead, the proposed reforms remove the country's constitutional restrictions in the energy sector, from oil production to fuel retailing, he said. If adopted, Mexico's constitution will no longer limit Congress from determining the scope of private participation in the country's energy sector.

That leads to the second part of Mexican energy reform. If Pena Nieto's reforms are passed, then Congress will need to decide through legislation the scope of private participation in the country's energy sector and under what terms and conditions.

This legislation would also determine whether energy and production companies can book reserves, a key financial consideration.

If Mexico adopts the reforms, it will still own its subsoil hydrocarbons. However, this is no different than most of the world, Valera said. The US, in fact, is the exception to state ownership of subsoil energy reserves.

For Mexican energy reform, the crucial point for companies is not whether the state owns the subsoil hydrocarbons but whether the state allows companies to book the reserves.

Since the reforms call for changing Mexico's constitution, they would first need approval of two-thirds of the Mexican Congress, Valera said. This first step is likely, since two of Mexico's three major parties support the reforms.

After receiving congressional approval, the reforms would need ratification of the majority of Mexico's states, Valera said.

Any subsequent laws defining the scope of private participation would need a simple congressional majority to pass, he said.

If Mexico adopts the reforms, they should spread benefits throughout the country, including the petrochemical industry, Bauman said.

The increased energy production should provide the feedstock for petrochemical expansion, he said.

Taken as a whole, the reforms should improve the country's balance of payments, increase revenue and create jobs, Bauman said.

"It's a significant, significant event," he said.

However, the reforms do not have unanimous support, and that could threaten whether they will ultimately rejuvenate the nation's energy industry, Guzman said.

Mexico's leftist party, the Partido Revolucion Democratica (PRD), opposes it, as does Andres Manuel Lopez Obrador, who finished second behind Pena Nieto during the presidential elections.

Guzman warned that Pena Nieto could weaken the reforms to appease leftist opponents. The result would be minor, cosmetic changes that would fail to fundamentally reform Mexico's energy sector.

In addition, many of the details of the reforms will be determined by secondary legislation. Such laws could also limit the extent of the reforms, Guzman said. Plus, past reform efforts have failed, he said.

The process is still early for Pena Nieto's proposal, and it is difficult to determine what shape the reforms will ultimately take. "I don't think it is wise to make strong statements about what is going to happen," Guzman said.

If the reforms pass by too small of a margin, then Bauman said companies may be reluctant to risk investing in Mexico.

Still, Guzman said Mexico has become increasingly concerned about its weakening energy sector. In particular, many in Mexico were unsettled by the large size of the country's imports of natural gas.

"Some kind of reform will happen," Guzman said. "The country does not have any other choice."

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By: Al Greenwood
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