Mexican President Enrique Pena Nieto is proposing legislation that will ensure Petroleos Mexicanos owns at least 20 percent of oil and gas fields that span the country’s borders.
The proposal is part of secondary legislation to implement an energy law approved last year, Energy Minister Pedro Joaquin Coldwell told reporters today after the legislation was sent to Congress. The northern border on-shore region is home to some of the world’s largest shale oil and gas fields, including the Eagle Ford play, which produced about 1.2 million barrels a day last year, according to data compiled by Bloomberg.
Pena Nieto jettisoned a 75-year state oil monopoly in December in order to lure international producers from Exxon Mobil Corp. to Chevron Corp. to develop oil fields in Mexico. The additional legislation calls for companies to use Mexican providers for an average of 25 percent of supplies and services by 2025 and stops short of requiring Pemex to operate cross-border fields, both signs the proposal is market friendly, energy consultant George Baker said.
“Twenty-five percent by 2025 seems like a perfectly attainable goal,” Baker said in a phone interview from Houston. “My first impressions are that the government is making serious concessions to global oil opinion about what will work and what won’t.”
The peso strengthened 0.2 percent today to 13.0793 per dollar. The yield on peso-denominated government bonds maturing in 2024 fell two basis points to 6.23 percent.
The oil bills also propose the gradual reduction over 10 years of state-owned Pemex’s tax burden, which currently funds about a third of the government budget, Finance Minister Luis Videgaray said at today’s event to present the legislation.
The new tax regime will increase Pemex profits three- or four-fold, Videgaray said. The tax structure will be “highly progressive” and provide Pemex the financial space to be able to compete with private energy firms, he said.
Weaning government funding off Pemex’s earnings is a key element of the Dec. 20 law approved by Pena Nieto that ended the company’s 75-year state oil monopoly to allow for foreign companies to develop oilfields in Mexico.
The energy overhaul intends to halt nine straight years of declines in Mexico’s oil output and will boost economic growth by 1 percentage point by 2018, the government has said. The overhaul may bring in as much as $30 billion more in annual foreign direct investment, according to Edgar Rangel of the National Hydrocarbons Commission.
Under the bill, the sale of gasoline would open gradually to competition and maximum prices would be set for fuels, Coldwell said.
While Pemex would be able to decide which private companies it partners with when it wins a tender, regulators will hold bidding processes to choose partners for Pemex fields maintained in non-competitive or “round zero” entitlements, Coldwell said.
Industry regulators will have some budgetary and technical autonomy, while Pemex would no longer need the Finance Ministry to approve its budget.
“The time has come for the Finance Ministry to remove its hands from the administration of Pemex and the Federal Electricity Commission,” Videgaray said.
After missing a mid-April deadline to implement the secondary legislation, Congress is racing to push through the rules needed to offer companies production sharing and license contracts by early next year.
Lawmakers plan to vote on the bills during special sessions in June as the current congressional session ends today.
Although Pena Nieto’s proposal sets a 25 percent average local content, “at first instance, with conditions of quality, price and delivery being equal, the national provider will have priority over foreign” companies, the government said in a statement outlining the main points of its proposal.
The content requirement appears high, although because it is an average it may allow flexibility to keep the percentage lower in areas Mexico hasn’t developed, according to Dallas Parker, an energy analyst and partner at law firm Mayer Brown in Houston.
The requirement seems to be “a goal rather than a mandate,” Parker said. “A block anywhere in the chain will slow the entire process, so the allocations must be done carefully and thoughtfully to achieve maximum productivity for Mexico.”
Production at state-owned Pemex averaged 2.52 million barrels a day of crude in 2013 and slid to its lowest monthly level in almost two decades in March as output at Mexico’s biggest discovery, Cantarell, declined. Monthly production fell 2.1 percent in the first quarter this year, Gustavo Hernandez, acting director of exploration and production, said on an earnings conference call today.
Mexico will probably offer its first oil drilling contracts to private companies as early as this year or the beginning of next year, Videgaray said in a Feb. 6 interview.