Mexico is an important country to both the regional and international energy systems. The recent energy sector reforms will affect many stakeholders all over the world, gradually changing the rule of the game set with the 1938 nationalization of the petroleum industry.
Mexico’s recent energy sector Reforms were meant to open up the country’s energy sector to international and local private players, spurring competition in a country where the state oil company Petróleos Mexicanos (PEMEX), born after the 1938 expropriation process, has been dominating the energy sector for decades. International partnerships and alliances could help PEMEX to improve its performance, although changing its role. Public and private entities will in fact have new roles and responsibilities, bearing in mind the final global goal: attracting investments while ensuring transparency and rule of law, while improving energy security and the environmental sustainability of the energy sector. The Oxford Institute for Energy Studies (OIES) analysed this topic in the Issue 109 of its Oxford Energy Forum (OEF).
OIES and the Oxford Energy Forum
Well known all over the world and acknowledged as a leading independent and autonomous energy research institute, the OIES is a Recognized Independent Centre (RIC) of the University of Oxford. Founded in 1982 to advance research into the social science aspects of international energy, the results of OIES research are published as working papers, energy comments, presentations and articles. The OEF is a quarterly journal meant to debate energy issues and policies, usually devoted to a specific market, country or region of the world which is undergoing important changes or reforms, or specific events and policy news affecting the energy sector. The topic of each issue is usually debated and analysed via a number of articles of different stakeholders of private and public companies, consultants and researchers, so that the reader can compare a variety of views and voices.
Mexico in the energy world
Based on the World Bank latest data on GDP in 2016 Mexico was the 15th largest economy in the world. The coutry energy mix is dominated by oil and gas, with oil having traditionally played a major role as a fuel for power generation, although it is losing ground to natural gas, thanks to its cost advantage reinforced by the shale gas boom in the United States. Non-fossil fuel generation comes primarily from hydropower and nuclear, while wind is far below its potential and the market for solar photovoltaic is nascent. According to the International Energy Agency (IEA) the total country’s energy demand has grown by a quarter since 2000 and electricity consumption by half, and with a per-capita energy use still less than 40% of the OECD average, there is room for further consumption growth.
According to the 2017 Organization of the Petroleum Exporting Countries (OPEC) Annual Statistical Bulletin, Mexico is one of the main Latin America crude oil producers, and globally counted for little less than 3% of the total production in 2016 (Table 1). In terms of proven crude oil reserves Mexico ranks definitely worse than in production both in Latin America, where Venezuela has a dominant role, and in the world (Table 2).
Mexico’s reform in the OIES-OEF contents
Which are the main focal points and challenges for Mexico highlighted in the OIES forum ?
The required conditions. The forum opens underlying the conditions needed to have well-functioning markets: clear rules of the game, strong property rights, unhindered information flows, low barriers to entry and exit, and enough market players to sustain a competitive price formation. Mexico government is deemed to have given the right sequence, pace, and transparency of implementation, so that the liberalization process resulted credible and trustable to local people. Upstream, midstream, and downstream went and still are going through an incremental and gradual reform process, attracting investment commitments of up to USD 74 billion through the entire value chain. But the way liberalization has been held is not the only reason for the high investment attractiveness: investors and stakeholders are aware of the large untapped potential oil and gas resources, and Mexico is a large and growing market.
Obstacles… Then five major obstacles that could impair the effectiveness of the energy reform are identified:
- The financial dependence between government and the energy sector, which could lead to prioritise the government budget constraints over the industry investment decisions
- The resistance of the incumbent to reduce control
- The existing political linkages
- The degree of independence of regulatory bodies
- The influence of domestic economic groups.
The role of PEMEX. The energy reform is changing and challenging the long lasting relationships between the Mexican state, PEMEX, and private oil sector operators, giving rise to some tensions. According to one OEF author the Mexican state set up the conditions to weaken the dominant role of PEMEX in order to make room to new players, repelling the company’s formal autonomy, non-recognizing the full economic value of its investments and imposing a worse than before fiscal regime.
But on the other side the company is facing several problems on the upstream: reserve replacement below 100% for over 10 years (see Table 2); high decline rates from mature fields (accounting for more than 80% of its active assets); slow pace of development of new fields. Furthermore there are downstream inefficiencies, and an over dimensioning of the workforce size/payroll. These issues show the medium term need to have a plan to go to the market in order to transform PEMEX into a semi-public international company.
So where is the company headed to? Notwithstanding the upstream problems motioned above, and an expected 2.19 million barrels a day (mb/d) of crude oil output by 2021, significantly far from its 2004 peak production of 3.4 mb/d, it is the upstream segment that has the greatest potential, since downstream and petrochemical have operational losses of close to USD 5.23 billion… making it difficult attracting investors and partners.
The Mexican electricity sector. Mexico could take advantage of being a “latecomer” in the electricity sector transformation, incorporating the international best practices and taking into account the lessons learned… but some aspects should be taken into consideration when liberalizing a centralized electricity system with the prospect of penetration of decentralized technologies:
- market liberalization and renewable penetration are not ultimately compatible
- business and regulations are focusing downstream, but the future of retail is uncertain
- new regulations are needed to create markets for services that are still latent, to avoid permanent transition costs.
Mexico–USA energy relations. With the recent “renaissance” of the North American oil and gas production and markets, the integrated North American energy market is assuming an increasing important role. This should be properly discussed as negotiations get started on the future of the North American Free Trade Agreement – NAFTA, due to the long-term economic and security potential concerns for the USA in providing “a growing market (Mexico) for higher volumes of US natural gas production and refined products, as well as for exports of advanced oil field services and equipment”.
A remark goes to the increasing dependence of Mexico on US petroleum products and natural gas, due to the internal increasing demand and the decreasing Mexican production yields and the increased US production. The deteriorating bilateral relationship between the USA and Mexico since Trump’s election should let government to consider alternative strategies, in particular regarding the dependence on natural gas imports, which would be more difficult to import from other parts of the world compared to other more global market products.
Keep your eyes wide open
Many authors argue that the Mexico’s energy reform is going on well, at a right pace and without demanding too much to the market players involved. At the same each author stresses the importance for the policy makers and all stakeholders to don’t let their guard down, highlighting something maybe obvious but always worth to mention: liberalization processes are not easy tasks.
 The estimated quantities of all liquids statistically defined as crude oil. They consist of those quantities of crude oil which by analysis of geoscience and engineering data can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating methods and government regulations (2017 OPEC Annual Statistical Bulletin)