Late last year, yet another North American energy revolution was unleashed, maybe even bigger than US shale gas. On 15 December 2013,  the Mexican Congress  enacted a law to change key provisions of Articles 25, 27 and 28 to the  Mexican Constitution. Shortly thereafter, on 20 December, Mexican President Enrique Pena Nieto  published the law in the Diario Oficial de Federacion and ended a legacy stretching back to the  legendary petroleum expropriation of 1938. In that year, the constitution amended by President  Cardenas claimed all hydrocarbon rights in the name of  the State. The Mexican oil monopoly is  deeply engrained in the Mexican character. However, hydrocarbon concessions were only expressly  prohibited by virtue of a constitutional change in 1960.

Until the legislative act of 20 December, the Mexican national oil company, Petroleos Mexicanos  (Pemex) had a vertical monopoly over most functions of the oil industry, such as exploration,  production, refining, basic petrochemicals and others. After the constitutional change, new Article  28 clarifies that “the exploration and production of petroleum and other hydrocarbons” is not  reserved to the State. This is an absolute sea-change! Mexico will soon be open for private petroleum investment and this is important news  for British oil companies, oil service companies and indeed for private companies everywhere.

There are also significant changes to the Mexican electricity system.

For a country which has led the way in Latin America on large scale privatisations (Telmex and  others), the long years of the Pemex oil and gas monopoly had led to deep stagnation. The power and  innovation of private petroleum investment were sorely lacking. Mexico remains one of the top ten  oil producers in the World. However, according to the influential US Energy Information  Administration, the country faced the prospect of becoming an oil importer by 2020, given a  continuation of current trends. The two main political parties, Partido Revolucionaria  Institucional (PRI, the party of the 1938 expropriation) and the more conservative Partido Accion Nacional (PAN) could clearly see the writing on the wall. This shared economic and political vision drove the reform process. The easy oil in Mexico has been discovered and is depleting. For example, only five years ago, the giant offshore Cantarell Field  was  the second largest producing oilfield on earth. Cantarell has gone into rapid decline. Mexico  now produces only about 2.7m barrels of oil per day. This is down from 3.4m barrels of oil in 2004.  Even as petroleum revenues decline, they still make up about a third of total government revenue.  In a country with desperate poverty (and of course also conspicuous wealth) oil money fuels  critical social investments such as schools, hospitals, roads and law and order. The truth is that  Pemex has not had adequate funds to invest nor the technology to meet the new challenges.

Some of the key changes in the new petroleum regime are as follows:

  1. The Pemex monopoly is ended, and new contractual models will be established (by subsequent  legislation) to allow private new entrants to contract with Pemex or the State directly.
  2. The new Constitution re-affirms that the Mexican state continues to own all petroleum in place  in the ground (in situ) in Mexico. Its rights cannot be waived and are imprescriptible.

However, new private companies will be able to take title to petroleum at the wellhead and will be able to book reserves, a major  positive development.

  1. Pemex will continue as national oil company and will indeed be given the right to expressly  retain producing or potentially productive acreage. This is being called “Round Zero”. A similar  process occurred in Brazil when the Petrobras monopoly was dismantled in the late 1990s.
  2. A Mexican Oil Fund will be created as a sovereign natural resources wealth fund to invest and  manage Mexican oil wealth.

On the electricity side, the former monopoly powers of state–owned utility Comision Federal de  Electricidad (CFE) are greatly reduced. The electric generation business is fully opened up to  private competition. This should lead to a transformational development, as private capital  enters  this key business.

The big next step will be the publication within 120 days of 20 December 2013 of secondary laws  regulating the areas opened up to the private sector by the recent amending law. These laws, which  will speak to contract forms, royalties, taxes and other key matters will be hugely important.  Secondly, we await to see what acreage is reserved to Pemex by way of Round Zero. Of course, we  would expect to see all productive acreage falling into Round Zero but how much else besides will  be caught up? Will we see new private oil and gas granting instruments in Mexico in 2014 or will  that have to wait until 2015? Either way, the prospect is an exciting one.