Mexico energy reform to promote industry competition – Pemex CEO

By Al Greenwood

HOUSTON (ICIS)–Mexico is likely to draw hundreds of companies into its energy industry as it embraces reform to open up the sector to competition after 75 years, the CEO of state energy producer PEMEX said on Monday.

In December, the country’s Congress approved constitutional amendments that would allow companies other than Pemex to produce oil, natural gas and refined products.

The first deals under the new energy regime could be closed by the end of this year, Pemex CEO Emilio Lozoya said at the IHS CERAWeek.

Prior to the reforms, Mexico had one of the world’s most restrictive energy regimes that allowed Pemex to monopolise oil, gas and natural gas liquids (NGLs) production, while forming of alliances with other companies is prohibited.

These rules created a paradox, Lozoya said, citing that Mexico has abundant reserves but energy costs are high.

The previous energy regime had turned Mexico a net importer of every class of hydrocarbon outside of oil, including natural gas, fuel and petrochemicals.

By allowing others to participate in the energy sector, the reforms could lead to higher oil production in Mexico and reduce the country’s trade deficit in other classes of hydrocarbons.

The reforms could even provide the foundation for a petrochemical resurgence along the lines of what is occurring in the US.

By the end of March, Pemex is expected to submit to the government which fields with reserves of oil and natural gas it would like to retain – a phase that Lozoya called “Round 0”.

Round 1 will follow, and this will open tracts to all companies, Lozoya said.

By the end of April, Lozoya said the country is set to adopt the secondary laws that will define who can participate in the nation’s energy sector and under what terms.

Lozoya said with the reforms, Mexican oil production could rise to 3m bbl/day by 2018, up from the current level of 2.5m bbl/day.

Energy production is a crucial factor for Mexico’s petrochemical industry because it provides the feedstock such as NGLs, which are used in the nation’s two ethane crackers.

Mexican energy production has been falling, and this has limited the amount of feedstock available for the country to increase its petrochemical capacity.

Once a $1.05m tonne/year ethane cracker is completed in 2015, Mexico will not have enough of the natural gas liquid to build another one.

At the best, it could expand its existing crackers by up to 300,000 tonnes/year.

If Mexico had more access to feedstock, then it could increase petrochemical production and reduce its trade deficit for the material.

Mexico has a trade deficit in petrochemicals as well as products derived from petrochemicals, a category that includes textiles and plastics.

In 2013, the nation’s petrochemical deficit was $8.63bn, according to the Instituto Nacional de Estadistica y Geografia (INEGI), a government agency that keeps economic statistics. For petrochemical derivatives, the deficit was $5.51bn.

Overall, Mexico imports 65% of its petrochemicals, Lozoya said.

As it stands, the nation’s energy production has been falling for years.

Oil production reached 2.52m bbl/day in 2013, according to the Mexican Secretary of Energy, the lowest since at least 1990, the most recent statistic available from the secretariat.

The figure in 2013 is down by 25% from 3.38m bbl/day, the high reached in 2004, according to the Secretary of Energy.

Total associated and non-associated gas production reached 6.37 billion cubic feet/day (bcf/day) in 2013, down from a high of 7.03 bcf/day reached in 2009, according to the Secretary of Energy.

The last time natural gas production was this low was in 2007, when it was 6.06 bcf/day, according to the secretariat.

Production has fallen despite the country’s rich reserves. Mexico is estimated to have 545 trillion cubic feet of technically recoverable shale gas, the sixth largest in the world, according to the US Energy Information Administration (EIA).

Support grew for the reforms because of the unsustainability of the country’s energy industry, Lozoya said.

Natural gas imports supply one-third of Mexico’s demand for natural gas, according to the EIA. .

The lack of affordable natural gas has caused Mexico to burn fuel oil to produce electricity, Lozoya said. The shortage of local natural-gas production is also one of the reasons why Mexico’s electricity costs are about 70% higher than those in the US. This is especially costly to a country as reliant on manufacturing as Mexico, he said.

Another reason for the reforms is the amount of capital that Mexico needs to develop its existing energy reserves, Lozoya said. Over the next decade, the country would need $1,000bn.

“The state cannot do it alone,” Lozoya said.

By inviting outside companies into Mexico, the energy reforms are also inviting outside capital.

“Capital from all over the world is welcome,” Lozoya said. “We hope to have hundreds of companies operating.”

IHS CERAWeek runs through Friday.