Mexican President Enrique Pena Nieto has submitted 700 pages of proposed legislation that would reform the nation’s energy policies. The proposal includes incentives for foreign investment in oil and gas exploration and production and breaking some of the monopolistic controls currently held by national oil company Petroleos Mexicanos (Pemex).

George Baker, an energy consultant with Baker & Associates in Houston, told NGI that Nieto introduced the legislation on April 30, the last day of the regular session for Mexico’s Congress of the Union. He said he believes lawmakers will reconvene for a special session at the beginning of June to take up the legislation.

“A lot of stuff is going behind closed doors, and the compromises and the back-and-forth are not in the public domain,” Baker said Friday. “It may be that when they reconvene in June the whole legislation is passed, it’s approved. That doesn’t serve public record very well, and it doesn’t serve the public interest very well. That may or may not come to pass, but they’re not going to have the discussion out in the open.”

Baker confirmed that the proposed legislation includes a sliding-scale royalty system for new contracts with private firms, which would be based on price and resource type. Oil contracts would include a 5% royalty on output from the wellhead if prices fall below $60/bbl. The royalty would increase and be calculated with a formula if oil prices go above that mark. There would be no royalty on natural gas should prices fall below $5.00/MMBtu.

Those royalty rates are considered low, Baker said.

“The fact that they’re trying to build an incentive, a strong incentive to get people to come, I think that’s a good sign,” Baker said. “The big story from the production side is that the government is going to have the authority — through the energy ministry and the hydrocarbons commission — to hold public auctions, just as it’s done in the United States, the Gulf of Mexico [GOM], Brazil and everywhere else where you have international companies participate.”

Baker said it would be a game-changer if the Mexican government is given the authority to hold auctions because Pemex has said there are 500,000 square kilometers (310,686 square miles) of deepwater GOM that have yet to be explored.

“My calculations are that, at the current rate of exploration, it will take Pemex approximately two centuries to complete this exploration,” Baker said. “They’re doing a few hundred square kilometers a year. So you need to have 20 companies in the Mexican GOM, and not as contractors to Pemex but as independent operators operating their own algorithms and their own ideas.”

In the midstream, Baker said it appears that the legislation could break Pemex’s hold on natural gas, possibly giving some power to the nation’s electric utility, Comision Federal de Electricidad (CFE).

“Pemex has [always] controlled the import of natural gas into Mexico, and Pemex is determined to keep it that way,” Baker said. “The story isn’t clear yet as to how this is going to work out, but it seems that CFE is going to ask for its own contracts to import gas.

“Today, the U.S.-Mexico border is shut off to private gas exporters except those under contract with a state agency. For anything to happen in natural gas of any consequence, that border has to be opened. You need to have it opened for a contract or gas marketers other than people under contract with Pemex and CFE.”

Baker added that Mexico’s natural gas prices are currently quoted at the Henry Hub. He said Mexico should set a goal for creating its own hub someday, but it didn’t appear that the current legislation submitted by Nieto called for establishing one.

“I’m guessing that it’s not addressed in the 700 pages,” Baker said. “It should be an outcome of the reform, but it’s not a guaranteed outcome because it depends on a whole series of subsequent decisions by regulators to make that happen.

“If you can’t [create a hub], you’re lost. You’re lost because anything you do in the way of new gas production, the gas is going to be priced at Henry Hub. That’s not right. Presumably they would need several [hubs], the same as they do in the U.S. But they don’t have any now, and so there is a big hangup in public policy.”

Baker said the legislation did call for an entirely new energy regulatory structure.

“That’s a big deal,” Baker said. “One of the things they’re doing for natural gas is they’re trying to visualize a natural gas ISO, an independent system operator. They’re trying to reinvent something. I’m told that the ISO will deal only with Pemex’s pipeline system, so there will be interconnections between Pemex’s lines and other lines that will be done by regular commercial agreements. But there will be a government agency directing flows out of Pemex’s lines.”

Last summer, Nieto unveiled an energy reform plan to Congress, which included a proposal to open the nation’s energy industry to private investment. The reforms were designed to increase oil and gas production, decrease electricity costs and boost the country’s competitiveness. Congress approved the reforms in December, and they were swiftly enacted by a majority of Mexico’s state legislatures (see Daily GPI, Dec. 12, 2013; Aug. 14, 2013).

Pemex signed cooperation agreements with France’s Total SA and GDF Suez SA in April (see Daily GPI, April 15).

Last Monday, Mexico’s energy ministry said the government would spend 3.9 billion pesos ($298.1 million) on energy infrastructure by 2018. The ministry said the government would contribute 2.8 billion pesos ($214 million), and an additional 1.1 billion pesos ($84.1 million) would come from private investors.

The ministry also said 2.4 billion pesos ($183.4 million) would be invested in exploration and production activities in the country, of which Pemex would invest 1.7 billion pesos ($129.9 million) and the rest would come from the private sector.

“Thanks to the energy reform program, it will be possible to increase production of close to 2.5 million b/d to 3 million b/d by 2018 from current levels,” the energy ministry stated.

Mexico plans to invest 227 billion pesos ($17.3 billion) to build nearly 10,000 miles of natural gas pipelines. That amount is 10 times what was spent on pipelines between 1995 and 2012, the energy ministry said.

“With these investments, a truly integrated national network of natural gas pipelines will allow us to help create manufacturing industries across the country, and for the government to help reduce the inequality of economic and industrial development between the northern and southern parts of the country.”