Mexico’s Petroleum Sector: Not Yet Out of the Woods

By Thomas Andrew O’Keefe*

Photo Credits: Ian Burt and Alex / Flickr / Creative Commons

Photo Credits: Ian Burt and Alex / Flickr / Creative Commons

The September 30 awarding of three contracts on five oil production blocks that the Mexican government opened for bidding has raised hopes that the Peña Nieto administration’s efforts to reform the country’s energy sector are back on track, but many challenges remain.  In contrast, an auction of leases on 14 blocks in July was a huge disappointment as contracts could only be issued for two of them.  The auctions are part of Mexico’s effort to reverse years of declining petroleum output by permitting private sector and foreign participation in an industry monopolized for decades by the state oil company, PEMEX.  Foreign and private sector firms are now allowed to enter into both profit- as well as production-sharing agreements with PEMEX and thereby retain a percentage of the gains on the oil they extract.  In some cases, outright concessions – termed “licenses” so as not to run afoul of the Mexican Constitution – are permitted.

A careful examination of the successful bids last month, however, leaves doubts as to whether the auction marks a change of fortune.  To entice a better response, the Mexican entity responsible for the auctions, the National Hydrocarbons Commission (CNH), relaxed many rules in a way that may be difficult to repeat and can be challenged politically.  Noticeably absent from the list of winning bidders are the major multinational oil giants.

  • The Italian state oil company, ENI International, won the block that attracted the most bids, while an Argentine-led consortium headed by Pan American Energy won a second block. They are well-known players in several South American countries – Argentina, Bolivia, Ecuador, and Venezuela – where the rules of the game are constantly changing and lack of transparency is a major issue.  The third block had only one bidder, a consortium made up of the U.S.-based Fieldwood Energy and Mexican Petrobal (whose director is PEMEX’s former director of exploration and production, Carlos Morales Gil).
  • The blocks awarded on September 30 are for already discovered shallow water fields, meaning lower geological risks for private operators. In order to make the auction attractive, the CNH lowered the fees required to bid and added the right to explore for new oil as well as pumping oil from existing reserves.

Mexican President Enrique Peña Nieto came to office in 2012 with an ambitious reform plan to revitalize the Mexican economy by focusing on structural reforms, including education, finance, telecommunication, transportation infrastructure, and energy.  While there have been noticeable changes in all five areas, the results have not yet led to significant improvements in Mexico’s economic performance.  The optimistic reform scenarios of three years ago are further clouded by corruption scandals – including one touching the President, his wife, and a finance minister who had houses built by prominent contractors who had won lucrative government contracts – the lack of progress investigating the Iguala Massacre (involving 43 students who disappeared), and high levels of citizen insecurity.  The real test for the Mexican energy reform – and the credibility of President Peña Nieto’s reform policies – will come next year when offshore deep water blocks in the Gulf of Mexico and extra-heavy oil fields are put up for auction.

October 19, 2015

* Thomas Andrew O’Keefe is President of San Francisco-based Mercosur Consulting Group, Ltd.

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