OUTLOOK '14: Energy reform may lift Mexico economy out of doldrums

06 January 2014 17:00  [Source: ICIS news]

HOUSTON (ICIS)--Mexico's economy could grow by as little as 0.9% this year, but the prospects of energy reform could give the country a much needed boost.

The Central Bank of Mexico lowered its estimate for GDP growth to 0.9-1.4% from an earlier forecast of 2.0-3.0%. Such a rate would place Mexico with Venezuela as having the slowest economies in Latin America, according to the International Monetary Fund (IMF).

The Central Bank attributed the lower forecast to the first six months of the year, which were unexpectedly slow.

Since that soft patch, the prospects for the economy have improved.

Mexico's economy returned to growth in the third quarter, reflecting improved strength in exports, the Central Bank said. In addition, the country is not beset with new problems with natural-gas supply.

Internal demand, however, continues to show mixed signals, the Central Banks said.

In all, the bank expects Mexico's GDP will grow by 3.0-4.0% in 2014 and 3.2-4.2% in 2015. This higher growth rate reflects the gradual effect of structural reforms that the country has adopted, the Central Bank said.

The longer-term prospects for growth could improve because of Mexico's new energy regime.

Both of the country's legislative chambers approved reforms that would end the monopoly of Pemex, the state-owned energy producer.

Mexico's president, Enrique Pena Nieto, said that increased investment and production in the energy should help GDP growth.

The government expects production to rise from the current 2.5m bbl/day to 3m bbl/day in 2018 and 3.5m bbl/day in 2025.

Likewise, natural gas production could rise from 5.7 billion cubic feet/day (bcf/day) to 8 bcf/day in 2018 to 10.4 bcf/day in 2025.

These forecasts, however, are ambitious, according to a research note by Barclays. Developing Mexico's energy resources will be slow and will require investment levels to more than double.

Barclays expects the real challenge to Mexico's energy reform is creating a legal framework to lower the chances of failure in regards to executing the new laws. Also, laws need to reduce such bottlenecks as unnecessary regulation, poor infrastructure and inadequate personnel.

For the reforms, the next step is for Mexico's state legislatures to ratify them, according to Baker Botts, an energy law firm. This should take place by mid-January.

Afterwards, the Mexican Congress will need to adopt secondary laws, which will specify who can develop the country's energy resources and under what terms.

The reforms change Mexico's energy market in two fundamental ways, according to Baker Botts.

They will allow Mexico's Ministry of Energy to grant oil and gas rights to companies. These could be in the form of licenses, production-sharing contracts, profit-sharing contracts and service contracts.

Second, companies can report their rights to revenues or production for accounting and financial purposes, Baker Botts said.

Such reforms are crucial for Mexico's petrochemical industry, which lacks the feedstock to build new plants and to reduce its petrochemical trade deficit.

In 2012, Mexico's petrochemical trade deficit was $8.15bn, according to the Instituto Nacional de Estadistica y Geografia (INEGI), a government agency that keeps economic statistics. For products that originated from petrochemicals, the deficit reached $5.24bn.

Mexico's natural gas trade deficit reached $2.15bn in 2012, according to the INEGI.

Natural gas imports now supply one-third of Mexico's demand, up from 3% in 1997, according to the EIA.

For oil products, Mexico had a trade deficit of $24.7bn in 2012, according to the INEGI.

The country's oil production has fallen to 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).

Mexico's declining energy fortunes come as the country is running out of easily developed fields. Pemex lacks the funds and know-how to develop unconventional reserves.

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

The paltry drilling came 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.

By: Al Greenwood
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