The Mexican Congress is moving quickly to enact legislation that will drive massive reform in the country’s energy sector, and create both opportunities and challenges for Canadians producers and service providers in the industry.
The Senate this week passed four sweeping bills that overhaul the national oil company, Pemex, and the state-owned power company, CFE, and set up regulatory bodies that will oversee the first direct foreign investment in the country’s energy production and generation business since it was nationalized in the 1930s. The legislation will now go to the lower house, where the governing Institutional Revolutionary Party (PRI) will work with the conservative National Action Party (PAN) to approve it.
While much of the international focus has been on the eventual leasing of properties in the deep water of the Gulf of Mexico, the more immediate priority is opening up the country’s massive shale gas and oil resources to foreign investment, building pipelines to increase imports of natural gas to bring down electricity rates and allowing foreign companies to build power generating stations.
“We are working to create a regulatory framework that will boost activity [in the country’s shale fields], while we also have regulations that ensure these activities have the lowest possible impact,” Oscar Roldan, director-general of planning for the National Hydrocarbons Commission, told a webcast Wednesday. The session was hosted by the Institute of the Americas Institute at the University of California, San Diego.
“There are so many steps we still have to go through in order to successfully implement these reforms,” Mr. Roldan added.
After taking office 19 months ago, President Enrique Pena Nieto moved with stunning speed to win approval for a constitutional amendment that ended the ban on foreign investment in the energy industry, and is now on the verge of passing enabling legislation. Mr. Nieto was driven by desperation – Pemex has seen its production and reserve base decline sharply since 2004, while the country’s electricity sector is beset with higher prices and poor service.
Some Canadian energy companies are already active in Mexico, but mainly in building pipelines, such as TransCanada Corp., or in the oil field services sector.
Export Development Canada (EDC) is providing financial service products – including insurance on receivables – to some 130 Canadian companies operating in the energy sector. And that figure should grow exponentially as Mexico struggles to build a modern, private-sector industry with huge investments in production and transportation or transmission, as well as finance, legal and regulatory capability.
“There is going to be a real sea change in the industry there,” said Peter Hall, chief economist with the Ottawa-based EDC. “They need foreign investment to re-energize the sector. But I think patience is required here. It could be five, six, seven years before the first oil flows as a result of these changes.”
But Mr. Hall said Canadian companies need to engage now “or they will miss the boat.”
The Mexicans are still determining what assets Pemex will keep and what will be offered for bidding by foreign companies under a process known as Round Zero.
In a recent report, the Canada West Foundation also encouraged Canadian energy executives to explore opportunities in Mexico, particularly in the shale gas sector, which extends below the U.S. border from the prolific Eagle Ford play. The U.S. Energy Information Administration has estimated that Mexico has the world’s sixth-largest store of shale gas resources, roughly equal to Canada’s own shale resource.
However, Canada West said Canadian producers could eventually face increased competition in U.S. markets should Mexico succeed in reversing its long decline in production. U.S. imports from Mexico are down 41 per cent over the past six years, opening a major opportunity on the U.S. Gulf Coast for Canadian oil sands producers. But if Mexico can rehabilitate its industry, “Canadian sales expectations to the U.S. might have to be revised,” it said.