Report: Reforms to shake up Mexico’s underperforming energy sector

Mexico, the world’s fourteenth-largest economy, is about to get a major shot in the arm. Historic reforms will shake up and open its underperforming energy sector and “go a long way toward modernizing Mexico’s economy,” according to a new report by The Boston Consulting Group (BCG). The report, titled The Promise of Mexico’s Energy Reformswas released this week.

The pervasive and persistent shortcomings in the country’s nationalized oil, natural-gas, and electricity systems spurred the passage of far-reaching constitutional reform in 2013. Local production, distribution, and transmission systems have been unable to keep up with the underlying growth in domestic demand. To reverse years of declining oil production and lagging investment, Mexico is setting up a regulatory infrastructure that will invite and attract new participants. The report systematically analyzes the major sectors in oil, natural gas, and electricity and lays out the potential opportunities.

“These reforms, while still in their opening stages, represent a significant departure from recent history,” said Iván Martén, a BCG senior partner and coauthor of the report. “The government recognizes that it needs hundreds of billions of dollars of investment to modernize the energy sector.”

A Revolution at Pemex

The most urgent reforms surround Pemex, the national oil company, which has held a monopoly on hydrocarbon production in Mexico since 1938. Mexico’s oil production, which helps fund a large chunk of the national budget, has been falling in recent years, as Pemex’s most prolific oil wells have matured. In an effort to boost production sharply, Pemex will begin to engage in licensing, profit-sharing, and product-sharing arrangements with private oil companies. “Pemex needs outside partners to help it reach the deepwater oil resources in the Gulf of Mexico,” said Eduardo León, a BCG partner and coauthor of the report.

As Mexico’s middle class has grown, domestic demand for refined oil products has risen steadily. But Pemex hasn’t built a refinery since 1979, and Mexico imports large quantities of gasoline from the U.S. For the first time, Pemex will engage in joint ventures to build new refinery capacity, and permits may be granted for independent refineries. Major changes are also coming to the oil pipeline, transmission, and distribution businesses. Private investors will be able to participate in the pipeline business, and competition could finally arise in the gasoline station sector.

Tapping into Natural Gas

Even though natural-gas distribution has been open to foreign investors in Mexico for nearly 20 years, the sector still presents a huge opportunity. Natural-gas demand has risen at an annual rate of 5.6 percent. But Pemex has not yet begun to exploit the shale gas reserves in the north, which are adjacent and similar to the booming shale formation of Texas. As part of its effort to boost natural-gas production by 82 percent by 2025, “Mexico will need significant new investments in gas exploration and production,” said Martén.

In line with the larger regional trend, energy producers in Mexico often prefer clean-burning, cheaper natural gas to coal. That means Mexico needs to significantly expand its gas storage and distribution systems as well. “At present, Mexico has no underground natural-gas storage facilities,” notes the report, which was coauthored with EnergeA, a Mexicobased energy consulting firm.

Powering Up the Power Sector

Mexico’s power sector is poised to undergo a similar transformation. Modernizing the grid and increasing the nation’s generating capacity will require investment of about $93 billion through 2026. In order to boost capacity to cope with growing demand, upgrade reliability, and stimulate renewable-energy production, CFE, the state-owned power agency, is embarking upon a host of reforms. A new regulatory regime aims to create a single free market for power regulation and will permit the sale of energy directly to large commercial users.

The reforms affecting the energy sector are in their early stages. In the coming year, new regulations and enabling legislation will provide a clearer picture as to how companies can proceed. By 2015, Martén said, “we could see the first bidding round for exploration and production in oil and gas.”

But it’s not too early to start thinking and learning about how these reforms will alter Mexico’s landscape. As León noted, the changes won’t just bring Mexico’s energy industries into the twenty-first century; they will provide a spur to energy-intensive industries — and to the Mexican economy at large.

A copy of the report can be downloaded at www.bcgperspectives.com.

 

Source: bcgperspectives, April 11, 2014; Image: Wikimedia

 

Share this article

Follow Offshore Energy Today

Events>

<< Oct 2019 >>
MTWTFSS
30 1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31 1 2 3

Executive Oil Conference & Expo 2019

Executive Oil Conference and Exhibition is a unique opportunity to meet with all of the region’s…

read more >

Oil & Gas Vietnam 2019

Oil & Gas Vietnam (OGAV) 2019 is the only specialized oil & gas event in Vietnam that brings together an international congregation of both upstream and downstream oil and gas companies and also its supporting industries gathered in the heart of Vietnam’s oil and gas industry in Vung Tau, to showcase the latest developments in the oil and gas industry.

read more >

Jobs>

Looking to fill a job opening?

By advertising your job here, on the homepage of OffshoreEnergyToday.com, you'll reach countless professionals in the sector. For more information, click below...

apply

Looking to fill a job opening?

By advertising your job here, on the homepage of OffshoreEnergyToday.com, you'll reach countless professionals in the sector. For more information, click below...

apply