CERAWeek 2014 - Mexico's Energy Future

IHS Vice Chairman Daniel Yergin opened Monday's keynote dinner session, "Mexico's Energy Future," by welcoming PEMEX Chief Executive Emilio Lozoya to IHS CERAWeek. Mr. Lozoya spoke about the potential implications across the entire value chain of opening Mexico's oil sector. Discussing the primary drivers for Mexico's energy sector liberalization, he cited declining crude oil production and high electricity costs as the main catalysts that pushed the government to open the sector. The main impact of the reform, he said, would be to substantially increase upstream investment as part of the country's effort to raise US$1 trillion over the next decade. He emphasized new opportunities for investors in building up the country's midstream and downstream infrastructure.

The question and answer exchange focused primarily on the new vision for Mexico's energy sector. Asked about Mexico's unconventional resource potential, Mr. Lozoya said that Mexico possesses the world's sixth largest shale gas reserves. He said he expected reforms to increase production within the next couple of years, as lawmakers and federal regulators are proceeding aggressively with secondary legislation and the planning for Round Zero and subsequent competitive bid rounds.

Mr. Lozoya also said that ongoing reforms to modernize PEMEX's corporate structure would increase profitability. For example, the establishment of a single procurement office is saving PEMEX hundreds of millions of dollars in procurement costs.

When asked about next steps, he emphasized the importance of building up Mexico's regulatory system. He said the National Hydrocarbons Commission will be significantly strengthened to regulate the upstream sector and orchestrate future licensing rounds. Enhancing the country's regulatory framework will be crucial to ensuring a "very successful Round Zero and a very successful Round One."

Regarding future deepwater opportunities for investors, Mr. Lozoya said Mexico and the United States can leverage existing offshore infrastructure to decrease development costs. Mexico is eager to learn from the expertise of US firms in shale gas development, he said, but is also eager to receive foreign capital from "any country." In the coming years, he said, he hoped to see "hundreds of firms" participating across every play type within the upstream sector, citing Mexico's free trade agreements with 44 countries as evidence of the country's eagerness to attract capital.

When asked about the risks that energy reform faces, Mr. Lozoya downplayed potential factors that could derail the reform effort. Noting that Mexico needs jobs, he said that the reform's impact on job creation will ensure that the general public remains supportive. He mentioned the reform's overwhelming support in Congress as a proxy for the legislation's backing from the broader public.

One challenge facing Mexico's energy future, Mr. Lozoya said, was the difficulty of attracting technically capable personnel to develop the country's resource base. Mexico "needs to attract more talent and engineers" and is already training more engineers, he said. Regarding local content issues, he said Mexico recognizes that it is not in a position to enact onerous local content requirements, owing to its numerous free trade agreements. He did, however, mention secondary legislation currently being debated in Congress that will outline local content stipulations. Mr. Lozoya concluded by saying that he is very optimistic about the opportunities associated with the reform and that his initial talks with foreign companies have been "very promising."

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.