Reform in Mexico has been talked about for many years, but substantial change that would likely involve some degree of constitutional amendment seems finally at hand, a Mexican energy legal expert said Thursday.
With production dwindling and the prospect of becoming a net oil importer inching closer, Mexico must act soon, David Enriquez, a partner in oil and gas/maritime division at Mexico City law firm Goodrich Riquelme Asociados, said during a Credit Suisse conference call on the potential for energy reform in Mexico.
A middle-of-the-road approach is more likely than minimal or radical change, he said.
"This is the mother of all reforms [in Mexico]," Enriquez said. "The political capital of [President Enrique Pena] will be invested in this one."
Because declining production contains what Enriquez called a "public finance element" -- state company Pemex's current revenues fund about one-third of the federal budget -- reform agreements between Pena's ruling PRI party and the conservative PAN party, which was in power during the previous two presidential administrations, are "more likely than not," he said.
The most feasible reform, Enriquez said, is not one of extremes but an "intermediate scenario that takes into account political tensions, the technicalities of the industry and the role of [international] supermajors and independents." That scenario "considers a full range of contractual possibilities" and would involve creation of either a new national oil company or a similar entity alongside Pemex with the power to enter into production-sharing agreements and concessions, he said.
Enriquez projected that some kind of constitutional amendment would be forged and signed by year end; next year, various government agencies would develop and implement them.
"We expect later this year a constitutional amendment and then in 2014, a constitutional design and legislation," he said. "Realistically ... in a year, a year-and-a-half from now, we'd expect to have full implementation of the reform."
Oil and gas is currently property of the Mexican state, and while foreign upstream companies do operate in the country, they do so under fee-for-service agreements and are not allowed to book reserves. Most of the handful of operators in Mexico are small, privately held independents.
Mexico's oil production is now 2.6 million b/d, down from a peak of 3.4 million b/d less than 10 years ago, Enriquez said. He said the level of capital spending by Pemex needed to raise production to even 3.1 million b/d is $30 billion/year.
However, about three-quarters of the country's estimated 115 billion barrels of estimated petroleum reserves are figured to be unconventional -- in deepwater, tight oil and natural gas, and shale oil and gas -- said Enriquez, and are more costly to extract than conventional reserves. Consequently, the amount of funding needed to raise production from unconventional sources to 4 million b/d would likely be triple that amount -- perhaps as high as $100 billion/year, he said.
Because of the urgency of production declines, Enriquez said he does not expect fierce political obstacles as in the past. The PRI and PAN have historically been at odds, but given the need for reform he expects them to form a supermajority in Congress to get the measure passed. The left-leaning PRD party would oppose it, but could not muster enough support to block it.
A simple majority of states is needed to ratify an amendment, said Enriquez, which is "not a problem," since they are PRI-controlled. The PRI ruled Mexico for 70 years until the PAN took over from 2000-2012.
Amending the constitution is not uncommon in Mexico, Enriquez said.
"Compared to some other countries' constitutions, Mexico's is amended on a very frequent basis," he said. "The last one was for the telecommunications industry, and it happened a couple of months ago."
He said creating a new state operating entity or national oil company would also require a constitutional amendment because of the "nature of production-sharing agreements and concessions."
