Mexico takes flexible approach in its energy reforms, officials say

Mexico is responding to depressed crude oil prices by taking a flexible approach as it implements far-reaching energy reforms, officials said at an Atlantic Council event. “Low oil prices have an impact,” conceded Lourdes Melgar, Mexico’s deputy energy secretary for hydrocarbons. “Given that Mexico is the last country to open its energy sector, we are looking at other countries’ best practices.”

Salvador Ugalde Mancilla, who heads the hydrocarbon income unit in Mexico’s Finance and Public Housing Credit Secretariat, said, “We don’t think the current low price is a big issue because oil producers forecast for the long term. We don’t want to have a knee-jerk reaction, and prefer a flexible approach.”

Juan Carlos Zepeda Molina, the President Commissioner of Mexico’s National Hydrocarbons Commission, said blocks in a variety of fields from onshore mature areas to shallow and deep water and unconventional formations will be offered in the first bidding round throughout 2015. Blocks were selected from those that looked most promising with potentially high reserves, with many close to where national oil company Petroleos Mexicanos already has pipelines, he said.

“The Mexican government has been listening and reacting to [foreign producers’] comments,” Zepeda said. “Many important changes have been made already.”

Transparency and accountability remain key reform components, Melgar said. “All the steps by regulatory bodies can be followed live on the internet,” she said. “There also are clearing feedback mechanisms throughout the bidding process.”

Mexico’s constitution prevents the country’s offering outright concessions like other oil-producing nations, she noted. “We do have production-sharing contracts, and are considering other kinds where appropriate,” Melgar said. Comments from producers have led to reforms in administrative and contractual rescissions, guarantee requirements, and PSC durations, she said.

Recent changes

For example, said Zepada, if partners in a project want to change operators, it could be allowed within days if the new operator was one of 34 that are prequalified. “As we move into deep water, we’ll allow for longer filing periods,” he said. The NHC has time limits for approving projects; if it exceeds them, a project is deemed approved.

“Many companies would like to mingle blocks for advantages of scale, which we allow now,” Zepada said. “We extended the period in which changes can be made to the structure to up to 15 days before the bidding day.”

Melgar said that at the end of the month, contracts will be presented for onshore mature fields, followed this summer by those for deep water and extra-heavy oil. In every case, terms will be specially tailored to reflect a field’s unique conditions, she added.

Ugalde noted, “We did not want to ask for large signing bonuses up-front because they can be gone within a year. We preferred to concentrate on profit-sharing. We’re also offering very attractive areas and don’t want to discourage investments with requirements that are too onerous.”

Zepeda said that when it came to safety, Mexico created two separate agencies—one that handles licensing, and a second that concentrates on safety—like those formed in the US following the 2010 Macondo deepwater well blowout and crude oil spill.

The new offshore oil and gas safety agency can incorporate international standards into its rules, which its predecessor could not. “Our objective is to work with the US and have a single safety standard framework for the Gulf of Mexico,” Zepeda said. “This is possible because we can incorporate API and other international standards into our regulations.”

Deepwater approach

He said every type of field deserves its own kind of contract, with deepwater having a specific timeframe and procedures. “Our view on deepwater contracts is that the closer we can get to what the US does, the more competitive we can be,” Melgar said.

Certain contracts will include local content requirements, she said. “We believe it’s important to develop content locally and provide training,” Melgar said. “Companies which submit bids will have to show how they plan to do this. We’re trying to develop small-to-medium sized companies who can supply the industry locally first, and then internationally.”

She said Mexico knows from experience that it doesn’t have the manufacturing capacity to be too aggressive in local content requirements for deepwater projects. “This could be adjusted if it grows, but for now it’s around 1%,” Melgar said.

Considering natural gas, she said Mexico’s efforts to construct more pipelines have been stimulated by the national electric utility’s emergence as a financing player with its interest in more combined-cycle power generation.

Asked about gas flaring associated with crude production, Zepeda said enforcement responsibility will be transferred from NHC to a new environmental agency. “Back in 2009, Pemex flared 30% of its associated gas,” he said. “That’s been improved to about 5%. We are very worried that here in the US, gas flaring is high because fields were developed without pipeline capacity. We want to make sure our pipelines will be there before we start developing our own tight shale resources.”

Melgar said, “We would like to develop more refining and petrochemical capacity. Pemex is feeling financial pressure because of low crude prices, so it is looking for downstream project partners.” Asked if Mexico would be interested in swapping more of its heavy crude for light US crude from tight shale oil formations, she said it would like to be treated similar to Canada when it comes to US crude purchases.

“Ironically, our refineries are configured to handle light crude so it’s been fortunate we can sell so much of our heavy crude to the US,” Melgar said. “But we need to reconfigure our refineries and must blend imported light with our own heavy crude in the meantime. That is why Pemex is looking for outside partners in refining and petrochemicals.”

Contact Nick Snow at nicks@pennwell.com.

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