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Deregulation and Pemex global competitiveness

By Sonny Atumah

The 37th edition of CERAWeek 2018 energy conference ended last week in Houston, Texas. CERAWeek is a world premier energy event that fosters a culture of idea exchange to address the future of global energy. Petróleos Mexicanos or Pemex, the Mexican state-owned petroleum company chief executive officer, CEO, Carlos Treviño, who took office last November, was at the conference and sought ways to explore new business opportunities as the company enters a crucial stage of implementing the 2017-2021 Business Plans announced in December 2016. The Business Plan among others encourages the creation of joint ventures along Pemex’s entire value chain as a mechanism to increase investment and efficiency as well as eliminating losses in the National Refining System by 2021.

Three weeks ago Pemex held its 1st Drive Oil and Gas Technology Convention in Mexico City. Many Mexicans expect a rapid technological advancement, environmental, social and good corporate governance. In 2013, the Mexican government embarked upon reforms to enhance economic growth and competitiveness. The government amended Mexico’s constitution to allow private investment in the petroleum sector. These amendments, and a series of laws enacted in 2014 established a new legal framework for Mexico’s energy industry and ended about 80-year-old monopoly held by Pemex to attract domestic and foreign investments.

Are there uncertainties as Mexico implements the energy reform?    Their transformations are in: the upstream is for exploration and production while the downstream is for gas processing, NGL fractionation, crude oil refining, and petrochemical production. The government also created areas of drilling, logistics, cogeneration and services, fertilizers and ethanol. Many believe the reform measures would boost competition, which ultimately would assist the government improve the Mexican economy.

Other Mexicans view reform as a mixed bag. Private companies now participate in exploration and extraction of hydrocarbons under four types of contracts chosen by the government; production-sharing agreements, profit -sharing agreements, licenses, and the previous option of service contracts was still available. The government also allowed a combination of the four options according to a Harvard Business School work.

The Mexican oil company now shares the country’s resources with outside competitors’ in auctions of oil exploration areas in the Gulf of Mexico. More than 20 global energy giants including super majors are lining up to bid for Mexico’s oil. Mexico has held eight auctions, awarding 91 explorations and production contracts estimated to have an investment of US$150 billion.Mexico has released details of its first ever auction for rights in shale formations in its northern region, seen as extensions of prolific basins across the border in Texas.

But managing transportation costs is posing a problem. Since the 2017 reform there are price variations for fuels across the 90 regions in Mexico. Mexico’s fuel prices have surged between 14-20 percent higher than in 2017 when the reform commenced.  The efforts so far might have put paid to government control of prices and subsidies. Gasoline prices at the pump will reflect those on the international markets, as well as the cost of transportation, storage and processing, the profit margin of each company, taxes, and the peso-to-dollar exchange rate.

Can deregulation be sustained with Mexico’s presidential election coming up in July? Presidential front-runner López Obrador, leftist nationalist plans to freeze the oil auction process of the past three years. What regulatory frameworks to guarantee foreign direct investments in Mexico? Mexican President Enrique Peña Nieto believes that Reforms are the foundation for building a better country.  According to President Peña Nieto, to achieve change, there has to be a structural change throughout society. He believes that reforms are the foundation for building a better country. “We have to be the government that knocks down the walls that are in the way of our achieving a more equitable and just society,” Nieto said.

Pemex’ Carlos Treviño told the Houston Chronicle at the CERAWeek that changing the constitution in Mexico needs two-thirds of each chamber, the Senate and the lower chamber, and to have those votes is difficult. The contracts signed are going to be impossible to cancel or reject or reverse. And Mexico doesn’t have the money to pay back the people or the companies who have signed those contracts. We also have a better arrangement in our corporate governance than we had four or five years ago. Our partners feel comfortable because it’s very difficult to change those things.

Treviño sees a bright future in oil production and partnerships. Pemex is in partnership with BHP Billiton on its Trión project, a deep-water discovery in the Gulf of Mexico. The company plans to open a bidding round for certain onshore projects in the coming weeks and expects to seek new partners for shallow and deep-water projects. Pemex also is allowing foreign companies to open gas stations while expanding its own chain of gas stations in the United States.

The government reforms would make Pemex more productive, increase efficiency, lower fuel prices, improve the Mexican balance of payments, share the benefits with society and increase the amount of clean energy for environmental sustainability. A success of the 2017-2021 ambitious reform plans depends on Mexicans.


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