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Congressional testimony: Mexican energy reform

World Pipelines,

Below are highlights from the testimony given by Ambassador Carlos Pascual, Senior Vice President, IHS Inc. before the House Foreign Affairs Committee, Subcommittee on the Western Hemisphere regarding recent reforms to the energy sector in Mexico in the context of greater North American energy independence.

“Since 2012, Mexico has embarked on an historic opening of its energy sector to allow private investment and competition in the production, transit and sale of oil, gas and electricity, and in the coming years in retail markets as well. On July 15, Mexico completed the first tender since 1938 for the sale of hydrocarbon assets. Even though the results did not meet expectations, it formalised a process of opening the energy sector to private investment, and with that, the benefits that will eventually ensure from infusions of capital and technology. Mexico will benefit from these reforms, but so will American businesses and workers. North America can improve its energy security and play a more profound role in stabilising energy markets regionally and globally.”

Mexico’s energy reforms

“Although Mexican oil production grew steadily in the 1990s, as of 1938 the Mexican constitution prohibited private investment, and as a result deprived Mexico of revolutionary progress in energy technologies. Production peaked in 2004 at approximately 3.6 million bpd, and since then has declined to current levels of approximately 2.35 million bpd, a 35% decline. This decline, contrasted with the general international practice of allowing international companies to participate in oil and gas production around the world, influenced the Mexican government under President Enrique Pena Nieto to make energy reform a core pillar of its policy agenda when it took office in December 2012. Equally important was the recognition that a healthy energy position was necessary to support economic growth and create opportunities for Mexican workers, and that such a position required opening up the industry. The pace, breadth and depth of implementing these energy reforms has been unprecedented.

“In December 2013, within a year of taking office, Mexico passed a constitutional reform to allow private investment and competition in every aspect of its energy sector.”

“Private investment is also advancing in pipelines and refineries, and will be open for retail sales in 2016. Opportunities will expand further when subsidies are phased out on LPG in 2016 and for gasoline in 2018. Both CFE and PEMEX have completed tenders to expand the national gas pipeline system and to complete new interconnections with the US. This expansion of the pipeline system will bring US natural gas to Mexico, help reduce household and industrial costs, and increase North American competitiveness. By the end of 2015, the Mexican Energy Regulatory Commission will complete new regulations that will allow investments in existing and new refineries, either as a partner or in competition with PEMEX.”

North America’s interests

“In hydrocarbons production, the completion of these reforms gives the United States, Canada and Mexico an opportunity to make North America a new foundation for global energy security.”

“Mexico’s new focus on extending gas pipelines has created business opportunities for US companies and investors. In one pipeline extending from Arizona to Mazatlan to the Mexican Pacific coast, El Paso Natural Gas won the contract to build the US portion.”

“Similar investment patterns in the power sector and refineries are possible as final regulations and market rules come into effect. CFE has launched a major program to invest in natural gas power, creating opportunities for suppliers of generation equipment, but also leaving much of the renewable energy sector open to private investors. Mexico imports 40% of its gasoline and has huge and urgent demand to upgrade existing refineries to meet environmental standards and expand supply. All of these openings in the energy sector will certainly drive Mexico’s economic growth and competitiveness, but they represent a huge strategic and business opportunity for the US. To realise that potential, Mexico and its investment partners will have to manage difficult market challenges.”

Ronda 1 and global oil markets

“Since Mexico amended its constitution to allow private investment in energy, the price of the Brent benchmark price for crude oil has dropped from a range of US$105 – 110 per barrel to approximately US$50 – 60 per barrel over recent months. This hearing is not the forum to address the reasons for this price collapse, but there is no doubt that it affects the implementation of Mexico’s reforms. Lower prices are forcing oil companies to reduce capital expenditures, financial institutions to cut investments in independent producers, and oil producing countries to demonstrate that their fiscal terms compete with the best international alternatives. Mexico has a disadvantage: international players do not have first hand knowledge of Mexican assets and how to operate in Mexico. Simply put, to compete effectively, Mexico has to make completely clear that its assets, contracts, fiscal terms, and local business and security environments offer investment returns that attract production and capital to Mexico at a time when the industry is cutting expenditures and costs.”

“On July 15, Mexico saw the impact of the difficult business climate in global oil production with the disappointment interest in Phase 1. 39 companies paid for data to investigate the blocks offered in Phase 1, 34 companies prequalified to compete, but on July 15 there were only nine bidders, with four of the bids coming from consortia. Only two out of 14 blocks were awarded. Six blocks received offers, but five were under the minimum bids set by the government and were not awarded, and one lost to another bidder.”

“In the energy field, no other region has today what North America can offer: energy abundance and technology leadership across three democratic states and market economies, with huge consumer markets, financing potential, and a global reach and influence. The successful implementation of Mexico’s reforms is critical to make the most of these opportunities. The global oil price collapse has made the reform challenge more complex for Mexico. The correct response is to learn from these market conditions, adapt, and use these lessons to capture the potential for investment, production and trade.”

Edited from testimony by Claira Lloyd

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