Public-private deal eyed for building infrastructure

Syed Rashid Husain Top Mexico delegation, under President Enrique Peña Nieto was in Riyadh last week – promoting closer ties with Saudi Arabia and seeking investments in the country. The delegation was here - and elsewhere in the Gulf – showcasing investment opportunities in Mexico – especially in the energy sector. Saudi Arabia and Mexico have a long history of relationship. Pointing out, Oil Minister Ali Al-Naimi said “I’ve been to Mexico more than ten times; as a tourist about forty years ago and then as a government official on official business. I visited its mountains, deserts, forests and beaches, either to the north, south, west or east, and enjoyed its wonderful and diverse nature.” While speaking at the International Energy Forum Secretariat in Riyadh last Sunday, the minister also expressed confidence that through cooperation among major stake holders, oil markets would ultimately rebound. And Naimi had history behind him. When oil prices plummeted in 1998, Saudi Arabia and Mexico, along with Venezuela and others cooperated closely to restore market stability and boost prices. Mexico is an important stakeholder in the global energy markets. As IEF Secretary General Aldo Flores-Quiroga, himself a Mexican, underlined at the conference, ‘when Mexcio is in motion, (energy) markets take note.’ And he had reasons to say that. In the 1930s, with the founding of Pemex, Mexico virtually began the era of national oil companies, while in the 70s, the country discovered one of the last known super-giant oilfield – Cantarell. Then in the 1980s Mexico introduced a formula to price oil that went on to become the standard for international oil market transactions while in the recent years its success in hedging against oil price volatility – one of the most complex challenges of the times – was keenly noted. But the 76-years old state control over the country’s vast oil and gas resources and the monopoly of the state owned Petroleós Mexicanos (Pemex) over energy resources turned out to be disastrous for the energy sector of the country. Growth remained stuttered. Lack of investments and, as some claim, mismanagement, resulted in sharp decline in crude output of the country - from 3.4 million bpd in 2004 to close to 2 million bpd in recent years. And this was especially stunning, as just across, on the US side of the Gulf of Mexico, intense exploration and crude production activity was noticeable where oil majors have been highly successful, while Mexico’s side of the maritime border remained largely unexplored. Mexico was definitely lagging behind. And it was in this perspective that on August 11, 2014, President Enrique Peña Nieto signed the energy reform bill into law, ending the 76-years state control over the country’s vast oil and gas resources and Pemex monopoly. The new law introduced profit- and production-sharing contracts for foreign companies, as well as licenses that allow companies to be paid with the oil and gas that’s extracted in mining projects. The government then said that Pemex would be allowed to keep 83 percent of the country’s proven and probable reserves, including its current oil fields and discoveries awaiting development. However, Pemex was only to be permitted to keep about a fifth of prospective resources, including any as-yet undiscovered deposits. While signing the reform bill, President Peña Nieto hence had underlined that “with this reform we can extract deep-water oil and more effectively use our great shale deposit to obtain gas that allows us to generate electricity at a lower cost. The country will reduce its dependency on foreign supplies and will guarantee its energy security.” Mexico has an estimated 60 billion barrels of untapped onshore and deep-water crude oil. The most promising fields to be explored, and most appealing to major US oil majors, were expected to be the deep waters of the Gulf of Mexico. Bidders were then expected to vie for the estimated 27 billion barrels of deep-water oil reserves in the Gulf. The areas up for grabs reportedly included a broad mix from deep waters to mature fields and non- conventional reserves such as shale gas. The Ministry of Energy in Mexico had then estimated that $100 billion in investment was needed over the next 10 years to develop Mexican shale resources, although some press reports mentioned the required investment figures closer to $250 billion. Until then, Pemex has only invested approximately $250 million in Mexico shale gas exploration and production. The prolific Eagle Ford shale formation in Texas that extends south across the border into Mexico’s Burgos Basin was known to be accounting for two-thirds of Mexico’s shale gas resources. Mexican recoverable shale gas resources were reported to be touching 600 trillion cubic feet mark – the sixth largest in the world. Mexico was also estimated to possess 13 billion barrels of recoverable shale oil resources ranking the eight largest in the world. With the development of Eagle Ford and the energy reform, many then believed that Mexico had the potential to replicate Texas’ success. Although, one issue, that was known to be faced by shale extractors in Mexico was the vast amount of water needed to drill reserves. The issue was – from where to provide the required water? In Coahuila, where a vast quantity of the untapped shale is located, the water supply is scarce. In fact, Coahuila is Mexico’s second driest state and agriculture activities alone require three-quarters of the state’s total supply. Have all these expectations - raised when energy reforms were first floated – been fulfilled or are close to it? In the meantime, the overall energy market sentiments have undergone a complete transformation. Crude market prices have collapsed. Did oil majors get interested in tying themselves up in major ventures in Mexico, in an era when investment decisions are being deferred almost on a daily basis? This was a major question haunting mind, while this correspondent was being driven to Riyadh last Sunday to meet the Mexican entourage. Lourdes Melgar, the Vice Minister of Hydrocarbons, did not mince words while answering the above question: ‘There has been a zero interest in extra heavy crude.’ The emerging scenario literally forced the government of President Enrique Peña Nieto to change its course drastically. In the presentations made by Minister Melgar and Director General for State Productive Enterprises Víctor Luque, it was clear, that the Mexican push for investments and joint ventures have been pushed away from upstream crude oil and gas production to downstream, electricity generation, distribution and natural gas transportation, besides indeed the hydrocarbon sector. The focus has shifted on the development of infrastructure through public-private partnerships. This appears to be a different slate than what was originally presented in August 2014. The changing global energy scenario has taken another major toll.