In December 2013, the Mexican Congress approved a historical constitutional amendment that ends the state's monopoly of oil, gas and power activities by opening up the entire energy sector to private investment from Mexican and foreign companies.  According to Wood Mackenzie, this overhaul has the potential to revitalize the country's oil and gas sectors and effective secondary legislation, including competitive fiscal terms to attract investment, are essential to its success.
 
The approval process for Energy Reform in Mexico is at its final stage as the Mexican Congress has initiated the passing of secondary legislation.  Political opposition to the reform has been negligible and no major modifications are expected as the reform passes through the Lower Chamber.
President Enrique Peña Nieto faces a challenge in implementing four major reforms, in additions to energy, simultaneously. The government is already committed to delivering lower power and gas prices by 2016 and any failure to meet this commitment will trigger a wave of negative sentiment towards the Reform.
 
Wood Mackenzie has analyzed the implications of the proposed secondary legislation that could open up the country's energy sector, which are highlighted below:
 
Upstream
• Once the secondary legislation is approved, the attention will shift towards the Energy Ministry’s ruling on Pemex's Round Zero requests and the subsequent Round One.
• Wood Mackenzie expects Round One in 1H 2015. Companies will be able to form JVs in Pemex's assets, and also to pursue opportunities independently.
• Wood Mackenzie expects a variety of assets to be made available during the round, including deepwater exploration acreage, existing deepwater discoveries, as well as Chicontepec fields and extra-heavy oil assets.
• The proposed local content rules with a target of 35% by 2025 (excluding deepwater developments) will not be an issue.
• Deepwater projects, originally excluded, now include a local content target determined by the Economics Ministry.
• Wood Mackenzie still maintains that the success of the Energy Reform will be dictated by the attractiveness of the fiscal terms to be set in place. Mexico is aware of the need to strategically position itself with competitive government take levels to attract investment.
 
Midstream
Midstream investors will benefit from operating pipeline and storage capacity as joined networks called Integrated Systems. The existing gas network will operate as a National Integrated System.  New private projects could opt to join or to be operated independently.
 
Downstream
• Energy reform in Mexico is expected to revitalize declining crude production by opening the oil and gas industry to private investors.
• Mexico has the largest gasoline deficit in the Americas, but despite forecasts for growing product demand leading to larger deficits it is unlikely that a new refinery will be built by the end of the decade.
• Low refinery margins, high investment costs, and proximity to growing product supply from the US Gulf Coast discourage new refinery investments.
• Investments in the existing refineries could yield increases in net cash margins.
• The introduction of free market pricing of petroleum products could make the refining industry more attractive to private investors.
 
Gas & Power
• Investment into gas pipelines and power generation should flow more rapidly. While local content provisions were included in the legislation, no targets are in place yet, only preferential access to rounds.
• The new legislation also provides stability as permits for current private generators remain in place and a five year transitioning period is provided.
• The government optimistically expects 35% of domestic power generation will be from renewables.
• The Energy Ministry will organize a geothermal Round Zero at the end of 2014 to promote private development of sites relinquished by the Comisión Federal de Electricidad (CFE).
• Trading of Clean Energy Certificates will be promoted to achieve the target. Wood Mackenzie forecasts that most of the additional power generation will come from gas-fired capacity and not renewables.
• The reform will be successful in attracting investment in gas and power, but a revision of the current tariff system is still required.
Source: Wood Mackenzie