Mexican energy reform: what will it mean for international investment?
Join Our Newsletter - Get important industry news and analysis sent to your inbox – sign up to our e-Newsletter here
X

Mexican energy reform: what will it mean for international investment?

By Andrew Tunnicliffe 28 Oct 2019 (Last Updated November 7th, 2019 16:29)

With the election of Andres Manuel López Obrador to presidential office, the question of whether his socialist policies will shut the door on international investment in oil and gas was raised. Whatever the answer, Mexico’s domestic sector readies itself to play a leading role, as Andrew Tunnicliffe finds out.

Mexican energy reform: what will it mean for international investment?
The Hokchi oil and gas field lies in the Salina del Istmo basin of the Gulf of Mexico. Image courtesy of Enrico Strocchi.

At the beginning of 2018, Mexico began the latest round of auctioning of oil and gas blocks for exploration. A total of 29 deepwater blocks were up for grabs, attracting huge international attention. It is part of a five-year-long process to reform the country’s energy sector, spearheaded by the then President Enrique Pena Nieto’s government. The reform aimed at ending the three quarters of a century dominance of state-owned entities by encouraging private and foreign investment.

For some time the restructuring was hugely popular, with supporters heralding a new dawn for the country and its energy model. A total of 112 upstream contracts covering over 30,000km2 were signed off between 2015 and 2018. They comprised 52 onshore, 32 shallow waters and 28 in deepwaters sites.

AMLO’s impact on Mexican energy reform

Since the auction the country’s politics have changed and so too, arguably, has the future of Mexico’s oil and gas sectors. Left wing politician and former Mexico City mayor Andres Manuel López Obrador (AMLO) was elected as president in July 2018 promising to turn the tide on the long established free market economic policy of his predecessors.

It’s a stance that has resulted in confusion for the sector say some. “We have seen a significant shift from the previous administration toward a more inward-focused, nationalist energy policy that has sent mixed signals to investors,” says analyst and ICIS Mexico Energy Report editor Claudia Espinosa. Despite barely talking about the sector during his campaign, she says the President has “chosen it as the theatre for some of his most radical changes and controversial decisions”.

Since taking power, AMLO has suspended further auction rounds until at least 2022, instead favouring to promote domestic production. Arguing such decisions have been fuelled largely AMLO’s “singular focus” on rescuing state-owned producer Pemex and utility CFE, Espinosa warns: “This focus is currently perceived by most energy market participants as being to the detriment of wider energy policy formation, implementation and economic benefit of the nation.”

The difficulties the industry faces are even more acute thanks to a brain drain, she adds, largely of AMLO’s making. “One of the main challenges the country currently faces in the development of its energy industries is the dismissal or loss of highly qualified policymakers and bureaucrats,” she says, adding it is their industry knowledge and openness that would allow Mexico to take advantage of the benefits developments in international energy markets can bring.

Mexico faces down its challenges

President of Blue Bull Energy, Alma Del Toro, disagrees with the negativity however, stating the market to international investment is open and active, with international oil companies (IOCs) and national oil companies (NOCs) currently drilling on and offshore wells. “Some of these operators have already accelerated first oil and are in production,” she says.

The government’s aim of promoting smaller, local companies is also gaining traction. “In the case of developing local suppliers, we are receiving a lot collaboration and commitment from all key oil and gas states,” Del Toro says. Adding that the government is doing what it thinks is best to support the industry: “The (states) are working with us looking to transform the landscape of the oil industry in Mexico by helping local businesses understand, develop and transform to meet the required standards to become a supplier to major IOCs, NOCs and large service providers, including engineering, procurement and construction contractors.”

The challenge, however, is overwhelming. Right now Mexican companies lack the required knowledge on health and safety, finances, ethics and compliance. “They need a baseline,” says Del Toro, “an agreed place to start to self-evaluate and prepare to meet all these standards.”

The involvement of international players is critical, bringing with them expertise and substantial experience that will help promote a safety culture that can protect people, the environment, communities and operations; an area where she accepts Mexico has work to do.

Her view is supported by Espinosa who warns regulators must do their bit too. She believes recent layoffs will hamper the development of a strong regulatory framework at a time when the new government is also embarking on a steep learning curve. She cautions regulations governing the market still lack sophistication and detail, and the loss of talent means the industry faces questions over the accountability at regulators CNH and CRE.

Preparing the industry for the ‘Blue Wave’

In a bid to help address these concerns within the oil exploration and production sector, Blue Bull Energy has created the Blue Wave Supplier Development Platform, a collaboration with former general manager of global procurement at ExxonMobil Eduardo Nunez. It consolidates the standards of more than ten major international oil operators and service companies, as well as industry best practices and government legislation from around the world in one place.

The automated service will give Mexican suppliers access to self-assessment tools, reports, guides for closure plans and online training, as well as let them input company-specific data that will generate a development plan to meet minimum standards required.

“Based on a company’s status, the system will provide access to consolidated international and best practices from world class multinational operators to self-assess their capabilities across six pillars, HSSE, cyber, quality, corporate policies, financials and technical capabilities,” explains Del Toro. A report will be generated highlighting areas in need of attention.

“Once the capabilities and gaps have been understood and assessed, blended teams are formed which can include local suppliers, government, IOCs and funding services.” The initiative is supported by local regulators, state ministries, IOC’s and NGO’s who will sponsor local suppliers’ annual subscription to the platform.

“The system will make a huge difference to the local support available to the oil industry and create opportunities and hope for poorer communities, changing economies and improving lives,” Del Toro adds. “It makes sense for both large international companies and local suppliers and ticks boxes on every level: socially, economically and ethically.”

Is there room for socialism in Mexico’s oil and gas industry?

It’s easy to find commentary on the state of Mexico’s oil and gas sectors, often contradictory but always passionate. Decisions taken by AMLO rarely lack controversy but there is hope they will result in a market that works for all. “The market is attractive, Mexico went from one single operator, Pemex, to now over 40 new operators with large investments. One offshore block in Mexico is the equivalent of around 70-100 US Gulf Of Mexico size blocks,” says Del Toro.

Espinosa agrees, saying that despite the challenges the country faces, ideas proposed by the new administration could end up benefitting market development in the long-term, supporting economic growth and job generation. However, she encouraged the government to clarify its future plans for the sector in coming months.

For Del Toro the Blue Wave Supplier Development Platform has a crucial role to play too: “We are creating the opportunities for international operators to build relationships with local suppliers from the start, so they can decide who they want and need to work with locally… For Mexico, it means good, well-paid jobs are created. The local economy becomes stronger and more appealing opportunities are created for investors.”

It is unclear whether the door to international investment in the country’s oil and gas sector is open or shut, but for now Espinosa says investor patience could mean they “stand to benefit over time”, supported by a domestic sector that’s upskilled and ready to participate.