Coldwell - The Mexican energy reform is the right step to take

Mexico’s energy secretary Pedro Joaquín Coldwell talks to Chris Cooper about his belief that the latest changes to Mexico’s energy law are moving the country forward

After much pushback from opposing sides, the Mexican Congress approved a bill introduced by President Enrique Peña Nieto to sweepingly overhaul the country’s energy sector, ending the 75-year monopoly on its energy resources and opening the market for global investors, such as ExxonMobil or Chevron, to pump crude from its reserves. The controversial move is a bold step to revamp the country’s declining oil production, which hit an 18-year low in July 2013.

In an exclusive interview with IFLR1000, Mexico’s energy secretary Pedro Joaquín Coldwell said Mexico now has a modern constitutional framework that will allow it to take advantage of its maximum energy potential.

Three articles, 25, 27 & 28, of the Mexican Constitution were amended in conjunction with the reform and the minister called that process the first major challenge to getting the sector transformed.

“The constitutional changes establish the transition of an industry model with a single operator to a different one where several operators are involved in the oil sector,” he said. “Other countries with successful energy reforms, such as Brazil and Colombia, show the importance of having strong institutions. Both countries created regulator bodies and extended attributions in the oil sector.”

Key changes 

The secondary legislation of the energy reform will make specific the state attributions in the oil and power industries. Coldwell said the attributions will seek a balance between encouraging investment in the oil and power sectors and guarantee efficiency and transparency in the use of the county’s energy resources. Nearly 30 laws will be created or amended for the energy market to open without confusion. The deadline to have these laws amended or drafted was April 20, but political differences have delayed the process. Congress ends its current session on April 30 and it is expected that a special session will be held to pass the required laws.

The reform establishes a new model for exploration and extraction of oil and natural gas, private participation in transmission, storage and distribution of oil, oil products and natural gas, and guarantees sufficient electricity supply and lowers the cost of light bills for homes and small companies.

The change leaves the ownership of subsurface hydrocarbons to the Mexican state and allows the Mexican State to execute agreements with private companies regarding upstream, midstream and downstream activities for oil and gas industries. All activities related to oil and gas will cease to be state monopolies. The bill also outlines the creation of a public trust, “Mexican Oil Fund for Stabilization and Development” (Fondo Mexicano del Petróleo para la Estabilización y el Desarrollo) in conjunction with the Central Bank as trustee to receive, manage and distribute income resulting from allocations and agreements with private companies and productive state companies, such as Petróleos Mexicanos (Pemex).

Addressing decline

Coldwell said that in 2013, Mexico’s energy sector experienced a turning point in its history. In a sector diagnosis, it was revealed that Mexico had stopped producing about one million barrels of oil a day in less than a decade after the decline of the Cantarell field, which marked the end of an era of easy-access oil in Mexico. The report showed that Mexico’s natural gas demand increased but production decreased resulting to one-third of the country’s natural gas consumption to be imported. Mexico is the world’s tenth largest producer of oil.

“The country had to decide between defending the status quo, which would jeopardise Mexico’s energy security or choose a far-reaching constitutional reform that modernised the energy industry and re-launch it as an engine for economic growth,” the minister said. “The energy model in Mexico was outdated and it was key that the government and the political parties shared this diagnosis in order to build a consensus for this constitutional reform.”

Coldwell called the reform ambitious and said a discouraging analysis of the oil and electricity industries led to several sectors of society and government coming together in an attempt to transform the industry.

However this apparent political unity was not universal and The Party of the Democratic Revolution refused to support the bill stating that “it would have been a political suicide for us to support any constitutional change in energy”.

Despite this Coldwell insisted that the reform includes proposals and elements from several political forces and sectors across the country. “There was broad consensus on the diagnosis and challenges of the national energy sector,” Coldwell said. “The federal executive has been at all times respectful towards the expressions of opposition to the reform and will remain available to discuss openly and enrich the design of the secondary legislation. We will analyze and incorporate views of all citizens and from the various political forces represented in Congress.”

The problem of Pemex

With investments from overseas, it is estimated that Mexico will increase its current oil production from 2.5 million barrels daily to 3 million by 2018 and 3.5 million by 2025. Natural gas production is expected to increase to 5,700 million cubic feet per day to 8,000 million by 2018 and 10,400 million by 2025.

The exploration, extraction, transportation, and marketing of crude oil and natural gas in Mexico are controlled by Pemex, which was created in 1938 when then-president Lázaro Cárdenas closed the country’s oil markets to global participants. But Pemex is struggling to keep pace with meeting the demands of oil production because of its lack of resources and towering debt. On February 7 2014, the director general of Pemex announced that he accepted the resignation of exploration and production chief Carlos Morales.

Despite these challenges and the fact that the reform ultimately reduces Pemex’s scope and influence, Coldwell said the reform would ultimately strengthen the state company’s position because it is now a fully productive state enterprise with corporate governance consistent with international best practices.

“Pemex may [now] gather additional capital and new technologies for the development of projects of exploration and extraction of hydrocarbons,” Coldwell said. “It will stop undertaking all costs and geological, financial and environmental risks inherent in such activities. Pemex will [also] be able to partner with other companies in the areas of refining and petrochemicals.”

Under the reform, Pemex was given 90 days to decide the areas of its choice that it has made commercial discoveries or has invested in exploration. In a private list sent to the energy ministry on Friday, March 21, Pemex asked to keep 83% of its proven and probable reserves. The ministry has until September 17 to evaluate the company's technical and financial ability to successfully develop the fields.