Daily GPI / NGI The Weekly Gas Market Report

Steps to Mexico Energy Reform Have to 'Hang Together'

Although Mexico's march toward reform of its energy sector has been bogged down in inter-party squabbling and resistance from citizens, it will come to fruition, Pedro Haas, Hess Energy Trading Co. (Hetco) director of advisory services, told a Washington, DC, audience Monday.

The timeline for completion of the reforms allowing outside investment in the upstream energy sector has been slipping, but nobody doubts that the final legislation will be passed, Haas said at a Center for Strategic and International Studies event. After the final legislation is passed, a regulatory framework needs to be developed and contracts signed.

There needs to be a continuum from the constitutional reform, the secondary legislation and contracting, Haas said. "All of that's got to hang together." It will be tricky. One of the challenges will be to draft secondary legislation that does not put an excessive amount of responsibility on individual civil servants for decision-making, he said (see Daily GPIMay 2). This will take the coming weeks and months to get just right.

Another challenge comes from the logistics of making the Petroleos Mexicanos (Pemex) oil pipeline system open access. As a monopoly, Pemex can shut in producing fields at will as needed to accommodate maintenance and other issues. Once its system is open access, it will not have the latitude to do this as freely, Haas said. Open access will need to be enforceable in order for Mexico's regulatory bodies and its energy sector to maintain credibility among private investors.

Jesus Reyes Heroles, a former general director of Pemex and currently executive president of Grupo de Economistas y Asociados, said reform of the energy sector is critical to increasing domestic and foreign investment in Mexico. The country has experienced slow growth for the last 10-15 years, despite low inflation and relative stability. Investment is needed to accelerate growth, he said.

Most urgent in the near term, he said, is addressing the natural gas deficit in Mexico. This is already under way as earlier reforms opened the country's pipeline sector to outside investment, and pipeline bottlenecks between U.S. shale gas production and Mexican demand are being eliminated (see Daily GPIJuly 2aJuly 2b), he said. Mexico's electricity regulator, Comision Federal de Electricidad, has pipeline projects under way, and six more are to be announced in the coming weeks, Heroles said.

Haas conceded that public opinion in Mexico has not been accepting of energy reforms. He said the public recognizes a need for change in the sector, but there is a fear of corruption and of an inept management of the transition to competition. Mexicans fear that they won't benefit personally from the opening of the energy sector, he said.

Writing in a Houston Chronicle blog post late last month, Amy Myers Jaffe, executive director for energy and sustainability at the University of California, Davis, said the country's energy reforms must succeed for the good of the nation and its citizens. Proper implementation of oil sector reforms could generate $1,055 of per capita earnings per year by 2020 as opposed to only $546 if reforms fail, she wrote. "Mexico could have an oil and gas revolution similar to that of the United States, were its citizens to demand its politicians focus on its future national interest instead of parochial, historically outdated story lines."

Creating durable reform that will win and maintain the confidence of private-sector investors over the long run while achieving legitimacy in the eyes of the Mexican people is the challenge, Haas said.

Haas said he perceives disappointment among some in Mexico's government that the private sector is currently not more enthusiastic about what the country is undertaking. However, private companies, whose international projects must be carefully planned and risk adjusted "to the umpteenth level of detail," are taking a wait-and-see attitude, Haas said.

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