First contracts from Mexican energy reform by 2014: analyst

By Al Greenwood

HOUSTON (ICIS)–Mexico will likely adopt the energy reforms proposed earlier this year by President Enrique Pena Nieto, and the first contracts could be awarded by the end of next year, a director of a think tank said on Friday.

The reforms would allow outside companies to participate in oil, gas and natural gas liquids (NGLs) production in Mexico. Right now, production is limited to the state energy producer, Pemex.

By allowing more participation in the country’s energy sector, the reforms could increase oil production in the country and reduce the trade deficit that Mexico has in every other hydrocarbon and derivative, such as natural gas, oil products and petrochemicals.

By allowing third parties to fractionate natural gas, the reforms could even provide the foundation for a petrochemical resurgence along the lines of what is already occurring in the US.

Pena Nieto’s proposals essentially clean Mexico’s constitution of prohibitions on production, allowing the nation’s legislature to draft new rules that would determine who can develop the country’s energy resources and under what terms, said Jose Valera, a partner with the law firm MayerBrown.

He made his comments during a presentation that the law firm gave in Houston titled “Mexico Energy Reforms”.

Amending the constitution will require a two-thirds vote from Congress, and Pena Nieto already has support from two of the three major parties.

Afterward, the reforms would require the ratification of the majority of Mexico’s states. Pena Nieto’s party already controls a majority of those states, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Center, a think tank that researches national and international topics.

Once the reforms pass, Wood expects the first contracts would go to deepwater oil production since it represents the most lucrative venture, he said.

Contracts under the reforms could be awarded by the end of 2014, Wood said.

But given the extent of Mexico’s trade deficit in all other hydrocarbons, companies could pursue other projects as well, such as natural gas and NGL fractionation.

In fact, Mexico could build petrochemical plants that rely on ethane as a feedstock, Valera said.

Mexican firm Grupo Idesa and Brazilian major Braskem are already developing Ethylene XXI, an ethane-based integrated polyethylene (PE) plant.

The ethane, though, will be supplied by Pemex. Moreover, Mexico will lack the ethane for another cracker once Ethylene XXI is completed, according to Bob Bauman, president of the US-based Polymer Consulting International.

Energy reform could allow other companies to fractionate ethane and supply it to other petrochemical plants.

Like the US, ethane would give Mexico’s petrochemical industry a competitive advantage, since much of the world relies on more expensive oil-based naphtha as a chemical feedstock.

“The economics of gas and liquids production in the United States are exactly the same in Mexico,” Valera said.

Wood expects Pena Nieto’s reforms to pass quickly. The country has already pushed through several substantial reforms since Pena Nieto’s election in 2012.

“This is a government that has surprised us all,” Wood said.

Moreover, the momentum for reforming Mexico’s energy industry has been building for years, Wood said.

Three Mexican presidents, starting with Carlos Salina de Gortari (1988-1994), had sought to reform the nation’s energy sector, he said.

Under Pena Nieto’s predecessor, Felipe Calderon (2006-2012), Mexico allowed Pemex to enter into service-type contracts.

While promoting reform, the Mexican public heard repeatedly that Pemex needed to change in order to meet the country’s energy needs, Wood said.

“For the first time in years, Mexico believed that there was a problem,” he said.

This year, all three of the major parties in Mexico introduced proposals to reform the nation’s energy sector.

Despite Mexico’s substantial energy reserves, the country has a trade deficit in every hydrocarbon except crude oil.

In 2012, its natural gas trade deficit reached $2.15bn (€1.61bn), according to the Instituto Nacional de Estadistica y Geografia (INEGI), a government agency that keeps economic statistics.

Natural gas imports supply one-third of Mexico’s demand for natural gas, according to the US Energy Information Administration (EIA).

For oil products, Mexico had a trade deficit of $24.7bn in 2012, according to the INEGI. The petrochemical trade deficit was $8.15bn. For products that originated from petrochemicals, the deficit reached $5.24bn.

Had it not been for Mexico’s oil exports, the nation would have an overall trade deficit in hydrocarbons.

It is unclear how long Mexico can continue exporting oil so that it can pay someone else to supply oil products, petrochemicals and natural gas. Last year, oil production was 2.60m bbl/day in 2012, down 25% from a high of 3.48m bbl/day in 2004, according to the EIA.

Several constraints are preventing Pemex from developing the country’s energy resources, Wood said.

Pemex itself is unlike other national oil companies found around the world, he said.

“It is not even a company. It is a decentralised agency of the state,” he said.

Constitutional restrictions prevented Pemex from entering into partnerships with the private sector, Wood said.

In addition, Pemex’s employment rolls are bloated, he said.

“There are thousands and thousands of Pemex workers who receive a pay check but who do not work,” Wood said. “It produces fewer barrels per worker than almost every oil company in the world.”

Although Pemex makes a lot of money, it has massive pension liabilities and it returns substantial amounts of money to the government, he said.

Those government payouts are one of the reasons why Pemex has failed to meet Mexico’s growing need for natural gas, Wood said, adding that Pemex was encouraged to develop Mexico’s lucrative, low-cost oil reserves at the expense of natural gas.

As a result of so many constraints, Pemex has failed to develop the technology and expertise to develop more technically challenging energy resources such as its deepwater and shale reserves, Wood said.

The reforms could develop those reserves by bringing in outside companies.

($1 = €0.75)

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