Mexico is keeping its reforms on track
“They audit you because they want to make sure you are spending the money properly, which is reasonable.” Andy Derman, Thompson & Knight
The Mexican government is three years into the privatization of the nation’s energy complex, and guess what? The reforms are on schedule and on target.
Our southern neighbors have passed constitutional amendments, rewritten energy laws and created a suite of new government agencies. And while oil and natural gas prices collapsed, the government still auctioned off almost all of the blocks offered for new exploration and production.
“It’s a success in that it has attracted a broad range of international oil and gas companies,” said Andy Derman, the international energy practice group leader at Thompson & Knight, which hosted a conference on Mexico’s energy reforms at the law firm’s Houston office.
The Mexican government proved that it has learned from Brazil and other countries that recently opened drilling to foreign companies, and it has avoided their mistakes. It adopted international norms, stuck to an aggressive schedule and enforced strict pre-qualification requirements.
“Meeting the Mexico time frame was difficult for Americans. It was moving a little too fast for us down here, so many couldn’t get their act together,” Derman said.
Fieldwood Energy, a Houston-based company, won one shallow-water block. Tommy Lamme, the company’s assistant general counsel, said signing a complicated production-sharing agreement was worth the opportunity to drill in some of the Gulf of Mexico’s last available properties.
Lamme said the National Hydrocarbons Commission’s
main objective “is to make this work, so they are very committed to helping the bidders and the contractors in these early rounds. The actual, literal investment to acquire the blocks is low. All you’re doing is letting the government know this is the amount of profit we will give you.”
In the U.S., an oil company pays the government to lease a block and then can decide whether to go forward. The Mexican government wants companies to hire workers, begin drilling and share profits later.
“There is a minimum work requirement, so we are going to drill two wells and spend $170 million over the next two years, or else the CNH charges us for it,” Lamme explained.
A production sharing agreement, though, comes with extra paperwork.
“You have a heavy burden of documentation, of auditing,” Lamme said. “You are required to be very diligent.”
Derman said that’s to be expected.
“They audit you because they want to make sure you are spending the money properly, which is reasonable,” Derman said.
Unfortunately, Mexico’s national oil company, Pemex, is not keeping up, Jorge Castilla, Deloitte Consulting Mexico’s managing partner, said in a separate interview.
“Pemex is going way too slow. They found out they have far bigger problems than they thought,” Castilla said. “Instead of focusing on how to transform the company to see how they can compete in a totally different market, and thinking about how they can move outside of Mexico ... they are worried about having enough oil and gas to operate and invest in Mexico.”
That’s disappointing for the government, which granted Pemex 83 percent of the country’s probable and possible oil reserves. The company is too financially and organizationally weak to capitalize on the advantage, or even to farm out the work.
“Pemex cannot be a very good partner to some of these companies. It cannot take on that kind of risk, and its debt is pretty high,” Castilla added.
The next round of blocks up for auction will be onshore, which presents a different set of challenges, especially in the northeastern state of Tamaulipas, across the border from Brownsville.
“Of course there are security concerns, but from my perspective, and from many others, there are riskier places where oil and gas investment goes,” Castilla added. “The state is very focused on ensuring they are a place for a safe landing ... they are becoming more flexible.”
Francisco Garcia Cabeza de Vaca, a native-born U.S. citizen who attended Houston Baptist University, is the first member of the National Action Party elected as governor of Tamaulipas, and he promised to reform the state government and stop drug cartel violence.
“I need to work on security issues and on attracting the investments,” he said. “I really want to help my people. I need to create jobs. The people who create jobs are the entrepreneurs from both sides of the border, and I’m going to protect all of those investments.”
Longtime Mexico observers doubted the government’s ability to implement the reforms, which are intended to attract $50.5 billion in private and foreign investment by 2018. But the bureaucrats in Mexico City are keeping their promises.
So far, so good, but the real test comes when companies begin drilling in the fields and try to hire workers.
“Check back in two, three or four years from now, and then we’ll see,” Lamme said.