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The opening of Mexico’s oil and gas sector to foreign companies creates opportunities not only for E&P, but also supply chain management...

Former CEO of PEMEX: ‘Scope and depth of reform is really a game changer’

Dr Jesús Reyes-Heroles, former CEO of PEMEX, discussed the progress of Mexico’s energy reform at the 2014 Deloitte Oil & Gas Conference in Houston.

Dr Jesús Reyes-Heroles, former CEO of PEMEX, discussed the progress of Mexico’s energy reform at the 2014 Deloitte Oil & Gas Conference in Houston.

By Joanne Liou, Associate Editor

The opening of Mexico’s oil and gas sector to foreign companies creates opportunities not only for E&P, but also supply chain management, infrastructure development and equity investment. In December last year, Mexico’s energy reform bill became a law. “The energy reform that President Enrique Peña Nieto put forward is center to his economic strategy. The only way to accelerate Mexico’s economic growth is based on a structure of reforms,” Dr Jesús Reyes-Heroles, CEO of StructurA consulting group, said. Dr Reyes-Heroles, former CEO of PEMEX, discussed the energy reform at the 2014 Deloitte Oil & Gas Conference in Houston on 18 November. “The most important thing is that the ball is rolling and that the scope and depth of reform is really a game changer, not only for Mexico’s energy sector but also for Mexico itself.”

The energy reform alone is expected to add 1.3% per year GDP growth for Mexico, and Dr Reyes-Heroles said that he expects the reform to boost the GDP to 4.7-5.2% by 2019. One of the biggest caveats of the reform, Dr Reyes-Heroles said, is that the reform keeps PEMEX under Mexico’s budget, restricting PEMEX’s financial capabilities. He presented data that showed the amount of taxes and duties PEMEX paid the government were higher than the company’s net income. “That can’t go on. What has to happen is the Treasury will have to reduce the taxes to allow PEMEX to be competitive because PEMEX will face competition in every stage of the production chain,” Dr Reyes-Heroles said.

As the government continues to make progress in establishing rules and regulatory bodies, in November, Mexico’s Ministry of Economy published national content rules to gradually reach 25% in 2015 and 35% in 2025. “There will be a lot of leeway to really gradually become more specific about what they want. They know they cannot go too far and be too strict because they would prevent some investments to move in,” Dr Reyes-Heroles explained. There will be exceptions to the rules, including deepwater operations. The government’s intention with the national content requirements is to ensure the reform benefits the domestic industry and domestic players, he explained. “This domestic content will depend on a lot of definitions and a lot of interpretations that are not clear now and will only become clear with time.”

Round One, in which more than 150 blocks will be tendered to private companies and PEMEX, is scheduled for mid-2015. Mexico’s National Hydrocarbon Commission is expected to auction 169 blocks, of which 109 are exploration and 60 are production, covering approximately 28,500 sq km. Although many experts, including Dr Reyes-Heroles, have commented on the quick speed at which the reform process is moving, E&P projects, especially in deepwater, will take time. “Even if the rules and basis of participating in that will be ready in March, as the contracts are discussed and the activities are initiated, the nature of investments required will not really produce interesting results until probably six or seven years from now,” Dr Reyes-Heroles stated.

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