Mexico is set to open its doors to private investment in its energy sector for the first time in 75 years. Since 1938, much of the Mexican energy market has been a state-controlled industry with almost no scope for outside investment. In 1960 the Mexican constitution was amended to create state monopolies in both the oil and power sectors, with private sector participation banned.
Despite numerous reforms to Mexican energy legislation over the last two decades, the constitution still limits private sector participation in the oil, gas, petrochemical and electricity industries. These limits, together with the fiscal and budgetary constraints faced by the state-own entities in charge of these industries, have led to a chronic lack of investment in the energy sector, which is now urgently in need of transformation.
The current Mexican government announced earlier this year that it intended to propose energy reforms to address these problems. This announcement created huge levels of expectation within Mexico and the energy industry as a whole.
Finally, this week, Mexican President Enrique Pena Nieto submitted the proposed constitutional amendments to Congress, which would eliminate the current ban on certain oil and gas contracts and open up the oil, gas, petrochemical and electricity industries to private sector participation.
If President Pena Nieto’s proposal is approved and passed by Congress, further energy legislation will then be required to determine the specific form of the new “profit sharing” exploration agreements which will allow the Mexican Government to participate with the private sector in developing the oil and gas sector. It is anticipated that these agreements will include payment mechanisms based on the amount of hydrocarbons recovered.
Although this “profit-sharing” approach may be less appealing to oil companies than a “production sharing” or “concession” based model, it dramatically increases the probability of getting the proposed reform approved by Congress. Conversely, it is likely that any reform that granted actual property rights to foreign oil companies would be resisted, not only by the opposition parties but also by some of the Senators and Congressmen of the current ruling party. In any case, the legislation should allow enough flexibility in the payment mechanisms within these “profit-sharing agreements” to attract foreign oil companies to Mexico.
President Pena Nieto’s proposed reforms also pave the way for a major restructuring of the Mexican power sector, with the power market split into separate transmission, distribution and generation segments, and private sector participation allowed in the latter. This market model corresponds to the structural reforms put together fifteen years ago by former Mexican President Ernesto Zedillo, with CMS as legal advisor. This is no surprise, as both Ernesto Zedillo and Enrique Pena Nieto belong to the same political party, and many current public energy officials were part of the government fifteen years ago.
Mexico’s economy has grown significantly in recent years and the Mexican government’s plans may generate outstanding opportunities for investors. Not only is Mexico one of the largest crude oil exporters, it has huge promise in the deep waters of the Gulf of Mexico and the country’s reserves of shale gas are the fourth largest in the world. With all this potential, the proposed reforms could revolutionise the oil and gas sector in Mexico and investors across the globe are no doubt watching closely hoping to be part of it.