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Mexico’s Energy Sector: Open for Business -- to the World

Mexico's Congress late Wednesday approved long-awaited legislation that opens the country's energy sector to private investment and is aimed at stimulating oil and gas production in the energy-rich country.

Earlier this year, Mexican President Enrique Pena Nieto submitted 700 pages of proposed legislation to reform the nation's energy policies. The proposal included incentives for foreign investment in oil and gas exploration and production and breaking some of the monopolistic controls held by national oil company Petroleos Mexicanos (Pemex) for 75 years (see Daily GPI, May 2).

The first solicitation for bids to participate in the country's upstream sector is expected next year.

Progress on the legislative reforms was slower than many had expected, with the just-adopted enabling legislation seen as an important and potentially perilous stepping stone (see Daily GPI, July 7).

The majority of the new laws were approved by legislators this week. Overhaul of the country's energy sector is the most significant of a package of economic reforms promised by the president.

The laws deal with details -- such as regulation, taxes and concessions -- of broader energy policy reforms that were adopted in December (see Daily GPI,Dec. 12, 2013). These revised the country's constitution to allow foreign companies to engage in exploration and production activities in Mexico. The president is expected to sign the latest legislation in the coming days.

"Today we took a big step toward the future for Mexicans," Pena Nieto said on Twitter. "We will take better and more sustainable advantage of our energy resources."

If reforms in the energy sector are implemented properly, they could generate a windfall for Mexico and its citizens, Amy Myers Jaffe, executive director for energy and sustainability at the University of California, Davis, wrote recently in the Houston Chronicle. 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were its citizens to demand its politicians focus on its future national interest instead of parochial, historically outdated story lines."

Mexico oil and natural gas production has been in decline in recent years as Pemex lacks the investment capital necessary to exploit the country's rich reserves onshore and offshore, and including Mexico's share of the Eagle Ford Shale. Reforms and outside investment are seen as a stimulus to oil production, at least in early years, as Mexico and Pemex are currently more focused on stemming the decline in oil production.

Meanwhile, imports of natural gas to Mexico from the United States have been increasing markedly and are expected to continue rising. Pemex recently formed an alliance to participate more broadly in the North American natural gas markets with an eye to imports (see Daily GPI, Aug. 1).

Pemex oil production has fallen to about 2.5 million b/d. About 10 years ago Pemex was producing as much as 3.5 million b/d.

According to the U.S. Energy Information Administration (EIA), energy trade between Mexico and the United States in 2012 topped $65 billion and accounted for 13% of the $494 billion in overall trade between the countries. Crude oil and petroleum products accounted for most of the energy trade. In 2012, Mexico was the third-largest exporter of crude oil to the United States behind Canada and Saudi Arabia.

Earlier this year EIA said in a report that Mexico is one of the 10 largest oil producers in the world, the third-largest in the Americas after the United States and Canada.

"Oil is a crucial component of Mexico's economy," EIA said. "The oil sector generated 13% of the country's export earnings in 2013, a proportion that has declined over the past decade, according to Mexico's central bank. More significantly, earnings from the oil industry (including taxes and direct payments from Pemex) accounted for about 32% of total government revenues in 2013."

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