It has been a momentous year for Mexico. In the year since the nation passed a historic Constitutional amendment, progress on the path to a major overhaul of the energy sector has been remarkable in both its speed and reach.

As Mexico approaches its first major test – the Round One oil and gas auction – the outcome will have a significant impact on determining the reform’s durability and eventual success. Moreover, how the nation defines success will help shape the future of the energy reforms.  But make no mistake, the imminent opportunity to review the first contracts and terms being employed by the Mexican government have most of the oil world on the edge of their seat.

These facts spurred intense debate and discussion at the Institute of the Americas’ annual Mexico Energy Roundtable, held on December 2 – 3 in Mexico City.

The Mexican government will auction 169 blocks for exploration and exploitation across a range of oil and gas prospects, from mature fields to shale to deepwater. Round One is itself a series of smaller bids, set to span most of 2015. Having been unanimously approved by the National Hydrocarbons Commission, the terms of the first tender – for fourteen shallow water exploration blocks – are expected to be formally announced soon, with contracts to be awarded by July 2015.

These will be followed by bidding in areas containing extra-heavy crude, unconventional resources and Chicontepec, onshore, and finally deepwater blocks by mid-2015.

The metrics for success are subjective, but they surely include the number of companies involved, the profile of participating companies, and total investment dollars. Mexico’s Energy Secretariat (SENER) expects Round One to raise $50.5 billion for the 169 blocks plus farm-outs between 2015 and 2018.

How Mexico performs on each of these indicators will be influenced by both internal and external factors, at least some of which are beyond the control of the government.

Chief among concerns is the impact of lower oil prices globally and insecurity in Mexico. Within the reform structure itself, observers have also raised concerns around the precise details of fiscal terms for the contracts, particularly government take, and restrictions on partnering opportunities for companies. Some have been quick to ascribe the delay in release of the shallow water tender to hesitation by the government due to plummeting oil prices.

At the same time, Mexico is wise to acknowledge the importance of environmental protection and community relations as it moves forward, a challenge that has become a headache for operators in South America.

In the nation’s electricity sector, investors remain cautiously optimistic that the reforms will bring about a transition from a power market controlled by the Federal Electricity Commission (CFE) to one dominated by private generators.

However, uncertainty around the impact on competition – particularly in the renewables sector – pricing, and infrastructure remains unresolved.

Expanding Mexico’s pipeline infrastructure is an important piece of the energy reforms. A national strategy of ‘gasification’ purports to increase natural gas imports from the United States to take advantage of high supplies and low costs. President Enrique Peña Nieto inaugurated the first phase of the Los Ramones pipeline in early December with promises to increase US natural gas imports by 40%. Several more projects are due to come online in by 2018.

Renewable energy has been perceived as somewhat of an afterthought in Mexico’s energy reform agenda.  The measures have largely focused on promoting oil and gas production, as well as increasing competition in the power sector. Renewables players, who are mostly seeking greater participation in power generation, have been a bit critical of the reforms, which they believe fall short of the country’s obligations to promote clean energy and make progress towards both national and international targets.

Overall, Mexico’s swift progress is worthy of praise and participants at the Roundtable were nearly unanimous in their recognition of the political will exerted to date.  Moreover, many participants acknowledged the pace of reform implementation in Mexico, particularly when compared to similar processes in Colombia and Brazil.

However, it is also fairly clear that new investors should be prepared for bumps along the road and potential setbacks for the government, energy industry, and civil society. The most important metric of success will be its endurance. Patience on behalf of all parties is necessary to get it there.

The Round One bidding opportunity in Mexico was likened by one panelist to the launch of the IPhone 6. But whether companies line up for the new IPhone 6 that is Round One or wait for the bugs to be worked out in the coming months remains to be seen. Indeed, the next several months could very well speak volumes about the long-term viability and potential for success of Mexico’s energy reform beyond the Peña Nieto sexenio.

Pin It on Pinterest

Share This