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FEATURE: Plight of Mexican industry spotlights need for 'profound' energy reform

Mexico City (Platts)--20 Nov 2013 553 pm EST/2253 GMT


The plight of the Mexican energy industry highlights the urgent need for what President Enrique Pena Nieto has called a "profound" energy reform, whose details have yet to be revealed.

Mexican business leaders say they lost $2.25 billion in revenue in the first six months of 2013 as a result of natural gas shortages, according to the Mexican industrialists' trade group, CONCAMIN. In addition, the group says that the state-owned Federal Electricity Commission, or CFE, has also lost $1.5 billion in revenue over the same period as a result of these issues.

Meanwhile, the Mexican central bank has forecast economic growth of as little as 0.9% in 2013, down from an earlier 3% prediction. In the second quarter of 2013, the gas shortages hit growth by 0.3 percentage points, according to the bank.

Ruling party officials have only said that a congressional debate on the energy reform is to begin, though they maintain that it will be passed by the end of the current session on December 15.

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Gas shortages began in 2012, spurred by lower prices. Mexican gas prices equate to the US benchmark Henry Hub price plus transportation costs. When the US shale gas production boom began, the price of gas dropped and Mexican industry began using more of it.

Through June, Pemex had imposed 15 "critical alerts" that rationed supplies for several days, according to Mexico's energy secretary, Pedro Joaquin Coldwell. Each alert cost Mexican industry 462,000 Mcf/d.

The crisis has led the two state energy monopolies, CFE and Pemex, to spend billions of dollars on building two pipelines to bring US shale gas to Mexico. Meanwhile, Pemex currently produces 6.3 Bcf/d of gas, down from 7 Bcf/d only three years ago.

The gas crisis is a result of the failure of Pemex to heed the advice of the Energy Regulatory Commission, or CRE, says George Baker, president of the Energia.com consultancy.

The rush by Pemex and the CFE to build new gas pipelines show "how the market and the state have been blindsided by the absence of information about capacity utilization," said Baker.

"Had a secondary market in pipeline capacity existed -- a goal that the CRE has pursued for years -- pipeline companies, shippers and customers would have foreseen the pinch in gas deliverability and would have taken timely steps to devise a financing package for new lines that would not have had Pemex or CFE as the anchor customer," he added.

The CRE and the National Hydrocarbons Commission are not regulators in the usual sense -- their findings are usually regarded only as recommendations.

Mexico has plenty of shale play potential. The country's geological formations may hold 545 Tcf of shale gas and 13 billion barrels of shale oil, according to the US Energy Information Administration. Pemex, however, has only carried out exploratory drilling.

PEMEX'S CRUDE OIL PRIORITY

Luis Miguel Labardini, a partner of the Mexico City-based Marcos y Asociados consultancy, says Pemex has no plans to develop the gas resources. "The priority of Pemex is to revive its slipping crude production," he says. "That's its priority."

"It would make no sense to invest in shale, where the margins are extremely tight," he added.

That is why energy reform is important. "And the companies involved in [the Eagle Ford play] in the US are not going to come to Mexico unless they get the same terms and conditions as they get north of the border," said Labardini. "Eagle Ford is fiercely competitive, and Pemex couldn't live with that."

Shale and deepwater exploration are two of the main targets of the reform program, Pena Nieto has said, but he has yet to explain how that could be done.

Mexicans themselves are bemused. As Baker says: "The Pena Nieto administration has not explained its reasoning, nor has it tried to educate the public about why ... energy reform is at all necessary ... In 2008, the previous Felipe Calderon administration at least tried to explain the reason for partnerships in deepwater" fields.

Opinion polls show that the majority of Mexicans are very critical of Pemex and want it to be reformed. But 60% of them are opposed to allowing the private sector to explore for and produce Mexican oil, which is the nub of the reform.

However, "Mexican legislators do not respond to their electorate's wishes," said political analyst Jorge Zepeda.

He, and most other analysts, believe that Pena Nieto's Institutional Revolutionary Party (PRI), and the pro-business National Action Party (PAN), have sufficient votes to ensure the new legislation, whatever the form it takes.

The government first said that the reform would provide for joint ventures between Pemex and the private sector on the basis of profit-sharing. That was meant to soften the proposal for its political critics, who remain true to the 1938 nationalization of the oil industry.

But, as Adrian Lajous, a former Pemex chief executive and current board member of Schlumberger, has argued, profit-sharing and production-sharing amount to the same thing in practice, and neither has produced satisfactory results.

Lajous and others have recommended the introduction of licenses, which they say are much more attractive to international companies. Leaks to the press on what are secret talks between the PRI and the PAN indicate that licenses are being considered.

"That seems to be the way things are going, at least for deepwater, but there's no clear information," said Labardini.

--Ronald Buchanan, newsdesk@platts.com
--Edited by Keiron Greenhalgh, keiron.greenhalgh@platts.com

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