Mexico’s Energy Reform: What’s Next for Business?

If Mexico’s energy reform succeeds, Mexico will evolve from a major supplier of oil to strategic global supplier in the next decade, David Goldwyn—the State Department’s former special envoy and coordinator for international energy affairs—told a conference of energy executives in Houston, Texas. The Mexican Congress moved into phase two of energy reform in February of 2014, taking on the task of promulgating the implementing legislation. The next two years in particular will be critical for constructing competitive contract terms to attract international investors and establish effective regulatory institutions.

New Mexican Undersecretary of Hydrocarbons María de Lourdes Melgar presented a play-by-play of the next two years for the Mexican oil and gas and electricity industries. Four types of contracts will open to incentivize international investors: service contracts, profit-sharing contracts, production-sharing contracts, and licenses (which operate similarly to concessions).

Despite progress on these new contracts, top of the list for Mexico will be getting the transparency and anti-corruption measures right: “these could make or break the reforms,” Lourdes Melgar highlighted. Not only will there be autonomous regulation of the sector, but these agencies will be independently funded, which fundamentally changes PEMEX’s current way of operating. Mexico will adopt international best practices on contract transparency, external audits, and disclosure of payments that, if implemented well, will catapult Mexico “to the head of its class, and on par with Norway,” said Goldwyn.

The Atlantic Council’s recent report authored by David Goldwyn, Mexico Rising: Comprehensive Energy Reform at Last?, outlines the biggest commercial opportunities for investors to watch in the near-term. “The first ripe basket of opportunities will come from joint ventures with PEMEX,” Goldwyn explained. International companies can immediately begin helping develop the “bitten apples,” or mature fields that PEMEX has only partially developed. Next opportunities will be seismic analysis (much work still to be done to assess potential reserves); new acreage when the first bidding rounds start in the next two years; and power sector opportunities, including both creating generation capacity and bringing US gas into Mexico.

The energy reforms are promising for Mexican prosperity and global economic competitiveness, but even more important for the United States are the geostrategic implications of Mexican ascendance. Peter Schechter, director of the Atlantic Council’s Adrienne Arsht Latin America Center, explained: “There is a sense in Washington that what’s happening in Mexico is very important. Mexico is going to strengthen North American energy independence and reduce dependence on the Middle East.” Even so, reforms must create a sense in Mexico and abroad that there will be a strong PEMEX no longer managed by the government, that these changes will strengthen civil society, and that the reforms will bolster government ability to deliver social investments in schools and hospitals.

The Houston conference was jointly hosted by the Atlantic Council and the University of Texas at Austin (UT). Jorge Piñon, director of UT’s Center of International Energy and Environmental Policy, moderated the discussion with Undersecretary Lourdes Melgar.

Related Experts: Peter Schechter