ON 11 AUGUST 2014, ENRIQUE PEÑA NIETO, THE MEXICAN PRESIDENT, APPROVED SECONDARY LEGISLATION FOR THE ENERGY REFORM AND ANNOUNCED A SERIES OF MEASURES TO IMPLEMENT IT

By passing the secondary legislation2, a new era is due to begin in the hydrocarbons and electricity market, opening the market to private investment. The new legislation should be developed by means of further regulations in the coming months, to complete the sector reform.

PROGRESS OF THE REFORM

With the passing of the secondary legislation that regulates the new energy sector, the government has introduced a number of measures to speed up the implementation of the reform.

  • Resolution Round 0 – Awarding exploration and production areas to Petróleos Mexicanos (PEMEX) in preparation for opening to private investment.
  • Round 1 – Delimiting the areas that will be opened to the private sector through partnerships and oil auctions.

1. Round Zero3

On 13 August, the Mexican Energy Secretary (SENER), with the support of the Mexican Hydrocarbons Commission (CNH), announced the areas awarded exclusively to PEMEX for exploration and drilling, following its application submitted last March.

  • Proven and probable reserves (2P) – PEMEX was awarded 100% of 2P reserves.
  • Prospective reserves – PEMEX received 67% of what it requested (a large part of unproven reserves in Mexico are located in deep water, areas that are not in PEMEX's domain).

Pemex will control 83% of the proven and probable reserves, and 21% of prospective resources. This amounts to an area of close to 90,000 km2 which will have an estimated production of 20.6 billion barrels of oil, reaching 2.5 million barrels per day over 5 years of exploration and 15 years of drilling.

2.  Round 1

Once areas have been awarded to Pemex for exclusive exploration and drilling, the remaining areas will be open to private investment. Private investment in the hydrocarbons sector will be regulated in the following way:

2.1.  By migrating existing contracts (comprehensive contracts for exploration and drilling and production – known as CIEP – and contracts for publicly financed works – known as COPF) to new contractual schemes set out in the new legislation: associations or farm-outs

These areas will not be tendered as they already have a contractor and were already tendered in the past, albeit under the previous legislation; the migration was divided into two packages:

  • The first considers 11 fields: it is expected that the migration will take place in the coming six months. These are the fields in the South Region, and the assets in Poza Rica, Altamira and Burgess in the North Region, with more than 569 million barrels of 2P reserves and with potential resources of nearly 1.3 billion barrels.
  • The second comprises 11 fields: these contracts will migrate to new contractual arrangements between February and August 2015. This field are in Chincotepec and in Burgos with more than 1.6 billion barrels in 2P reserves and the estimated investment that will be needed to exploit the 2P reserves will amount to nearly US$ 33 billion.

2.2.  PEMEX will look for strategic partnerships and associations for the development of the fields that were awarded to it in Round 0

PEMEX have identified 10 projects that, due to their technical complexity, capital intensity or for other strategic reasons, require the participation of the private sector to explore and exploit them. These projects requiring associations have been divided into four packages:

  • The first package includes mature fields with the aim of optimising oil recovery and profitability. They concentrate 248 million barrels of crude oil equivalent in 2P reserves and require a minimum investment of US$ 1.7 billion over the next 5 years.
  • The second package is focussed on marine oil fields with heavy crude oil. These fields have 2P reserves of 747 million barrels of crude oil equivalent and will require an investment of more than US$ 6.2 billion over the next 10 years.
  • The third package includes enormous deep water gas fields that contain 212 million barrels of crude oil equivalent in 2P reserves and will require an investment of US$ 6.8 billion over the next 10 years. These fields are in the deep water natural gas basin that is in the Lakach field.
  • The fourth package is focussed on developing recently discovered deep water fields. These fields are still being marked out; it is estimated that they hold 3P reserves with a potential of 500 million barrels of crude oil equivalent, and will require a minimum investment of US$ 11 billion dollars over the next 8 years.

PEMEX has identified 10 projects for which it is looking for strategic partnerships with businesses in the private sector; these projects need an investment of US$ 32.295 billion over the next 5 to 10 years.

2.3.  First oil auction

The areas not awarded to Pemex will be open to private investment through oil auctions. Private sector businesses can enter the hydrocarbons market through bidding processes.

The government has made known roughly the fields and areas in which private sector businesses can participate in the exploration and extraction of hydrocarbons in the coming months (here - In spanish).

It is expected that the preliminary terms of the first round will be published in November 2014 (including definitive areas, types of contracts and economic and tax terms), with the bidding process beginning for the first round of oil auctions in February 2015.

TIMELINE

 What has happened recently?

  • 11 August – Approval of secondary legislation by the President.
  • 13 August – The government announced the results of the first round: the areas assigned exclusively to PEMEX for exploration and production.

What's happening now?

  • SENER is preparing the first round of bidding, foreseen for the first half of 2015.
  • PEMEX is working on the migration of existing contracts to the new contractual arrangements: associations/ farm-outs.
  • PEMEX is looking for strategic associations with private sector businesses for the fields where it does not have the technical capacity or financing for exploration and production.
  • Appointment of independent advisors of the Federal Electrical Commission (CFE), PEMEX, the Mexican Oil Fund, and commissioners for the National Commission of Hydrocarbons and Regulation of Energy.
  • Creation of the Mexican Oil Fund and presentation of the strategic programme for the training of human resources.

What is going to happen?

  • October – Publishing of the regulations with relation to hydrocarbons, which will give legal certainty to new investments, restructuring of the Mexican Oil Institute and the publishing of a legal framework and regulations for the application and marketing of certified clean energy.
  • November – Establishment of the National Agency for Industrial Security and Protection the Environment for the hydrocarbons sector.
  • First half of 2015 – First oil auction.