Mexico Energy Reform Moves Forward

By Chris Carpenter 27 May 2014

After missing an April deadline to implement the secondary energy reform legislation, Mexico’s Congress is debating the rules needed to offer companies production sharing and license contracts by early next year. Secondary legislation to the law proposed to Congress on 30 April may be approved by June.

International oil companies and service providers are eager to enter Mexico’s market. Chevron became the first major international oil producer to reveal partnership plans with Mexico’s national oil company, Pemex, since Mexico signed landmark legislation to reopen its doors to foreign producers. Chevron said it is in talks with Pemex for exploration opportunities in deepwater, shallow water, and possibly shale.

In a recent regulatory filing, Pemex said it replaced only about two-thirds of the oil it produced last year with new reserves, a sharp fall from 2012 as it reduced work at its biggest onshore project. Pemex’s reserve-replacement ratio fell to 67.8% in 2013, down from 104.3% the year before.

Pemex has acknowledged that energy reform will mean big changes for its company. A topical breakfast during the recent Offshore Technology Conference in Houston titled “Mexico Energy Reform: Challenges and Opportunities” explored the transformation of Pemex from a national oil company (NOC) to a state-owned oil-producing entity. This change, according to speaker Gustavo Hernández García, Acting General Director of Pemex Exploration and Production, will have a significant effect on how Mexico’s increasingly important hydrocarbon resources are developed and produced, creating new opportunities for partnerships and profit with some of the world’s largest shale-gas resources.

Hernández discussed the aggressive 24-month schedule, launched in December 2013, to change Mexico’s longtime NOC into a state-owned company so that it no longer functions as a branch of the Mexican federal government—a significant economic and political distinction. The transformation will introduce competition into the Mexican energy sector and yield plentiful benefits, including a concentration upon value-driven enterprises, an enhancement of Pemex’s technical competencies as partnerships are created with other entities, and a transparency of processes that will attract further investment. However, Hernández explained, this transformation means an enormous amount of work as well as potential political and social tests. On 30 April, Mexico’s Congress was presented with the complex legislative package associated with the change. This package will affect laws on many levels of Mexico’s society and economy and will allow a new autonomy for Pemex while at the same time strengthening the authority of Mexican agencies to coordinate the efforts of their new state-owned company. “We know this is a great deal of work for our Congress,” Hernández acknowledged, “but we are confident that its members will be able to meet the higher purpose of our goal.”

In addition to the heavy legislative work that will shift the relationship between Pemex and international companies, Pemex itself faces a number of challenging internal tasks, including restructuring of its remuneration and salary schemes—a step that will affect, among others, the 61,000 Pemex employees in exploration and production alone—and an emphasis on recruiting and hiring large numbers of talented technical personnel required by expanding partnerships with international oil companies. “We want to remain a top employer in a competitive environment and are committed to retaining the talent,” Hernández said. The organizational changes will involve much deeper shifts than those affecting organizational charts or constitutional mandates, however; Hernández went on to describe a necessary “change in our culture and mindset to become a results-oriented one” better able to operate in what he called an “increasingly technically complex environment.”

In discussing the possibilities of partnerships with international oil companies, Hernández referred to the importance of the joint ventures and joint operations agreements that currently control 35% of industry acreage and 71% of total reserves. Pemex does have a number of well-established technical competencies, including conventional onshore oil and gas as well as shallow-water production, but Hernández said that Pemex knows it must encourage these partnerships to best develop new expertise and to exploit Mexico’s abundant unconventional resources better. Existing reserves likely surpass Pemex’s total production of 55 billion bbl over the last 100 years. These unconventional resources offer an enticing opportunity to the private sector; as an example, Hernández cited the expanding operations in the Mexican portion of the Eagle Ford formation.

Chris Carpenter is the Technology Editor for the Journal of Petroleum Technology.