News focus: Mexico's energy reforms could boost petrochemical sector

23 August 2013 09:28  [Source: ICB]

The 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, there is the possibility that reforms could become weakened by the time they are adopted, limiting any benefit to the country's petrochemical sector.

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.

LACK OF FEEDSTOCK

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 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.

mexico natgas

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 1,900 billion cubic feet (bcf) (53 million cubic metres).

Despite 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.

SHALE DEVELOPMENTS

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.

Pena Nieto proposed reforms on 12 August 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 law firm Mayer Brown.

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

LIFTING RESTRICTIONS

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.

Under Mexican law, basic petrochemicals include such natural gas liquids (NGL) as ethane, propane and butane, said Jose Valera, a partner with Mayer Brown.

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.

PRIVATE PARTICIPATION

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.

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

If the reforms are adopted, increased energy production should provide the feedstock for petrochemical expansion, said Polymer Consulting International's Bauman.

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.

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."


By: Al Greenwood
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