Editor’s note: Last week, Mexico’s Senate passed a constitutional amendment opening the Mexican energy market to foreign investment for the first time in 70 years. In an interview with Monica Trauzzi of E&ETV’s OnPoint, David Goldwyn discusses challenges facing Mexico as it tries to fulfill these reforms, and the impact of the energy deal on U.S. companies. Read the transcript below and watch the video on E&ETV’s website.
Monica Trauzzi: Hello, and welcome to OnPoint. I’m Monica Trauzzi. Joining me today is David Goldwyn, president of Goldwyn Global Strategies, the former special envoy and coordinator for international energy affairs at the U.S. State Department, and author of a new Atlantic Council report on Mexico’s energy reform. David, it’s a pleasure to have you here.
David Goldwyn: Thanks for having me.
Trauzzi: David, the Mexican Senate has passed a constitutional amendment opening the Mexican energy market to foreign investment for the first time in 70 years. How significant of a historical move is this?
Goldwyn: It’s extremely significant, and really I’m quite envious from an American perspective. I mean, after 70 years of having the oil sector off limits, they managed to cross party lines, getting both the party on the left and the party on the right to unite with them for a whole series of reforms: education, labor, fiscal, electoral, and then now the oil sector. And it’s really breathtaking in both the speed and the scope of what it attempts to do. It opens private investment to the upstream, exploration and production, to the transportation of energy, to the power sector, and to really the whole scale of energy. It also does classic best practice. It separates industry supervision from policy. They have a National Petroleum Fund which if it’s implemented I think would be the most transparent and one of the most progressive that are around. And they have provisions on transparency and on sustainability that would really, again if implemented properly, make them best in class.
Trauzzi: You were telling me before the show this is not a done deal. There are several steps that still need to be completed. What potentially stands in the way?
Goldwyn: Well, the steps are, just so it’s clear for your viewers, the reform, now that it’s passed, goes to the state legislatures, and the PRI and the PAN, two of the three major parties, control most of those legislatures. And the legislatures are supposed to vote on those, and then the president can sign the decree. And then after he signs the decree, then there’s legislation, after legislation, regulation. But there is a possibility that the party on the left, the PRD, could call for a popular referendum which would submit these changes to a vote, not a vote of the legislature, in each of the states. Now the parties that I talked to down there are confident that if there were such a referendum they could win it, but it could be a significant delay in time because you’d have to organize those referenda and then take the votes.
Trauzzi: So if this is implemented, what does it mean for the future of Pemex?
Goldwyn: Well, Pemex is in a sense cut loose a bit from the government. Pemex and the national electricity regulator are both private, or they’re public commercial enterprises. So Pemex will have half of an independent board. The amount that the government can take from it will be capped. And so it will have much more control over its own finances than it has before. But the government will still be highly reliant on Pemex until the reform takes off for money. So I think while on paper it looks like it has a great deal of independence, in practice we’ll have to see what the non-independent part of its board, which is the Ministry of Finance, the Ministry of Energy, will have to say about what the company will do, and particularly how big a dividend it will pay each year to the federal government.
Trauzzi: Does this immediately make Mexico an attractive investment space?
Goldwyn: Not immediately. The first thing that has to happen is this implementing legislation, and while the constitution permits license agreements, which are like concessions, production sharing and profit sharing where companies can book reserves, that’s only permissive. It directs the legislature to provide legislation, but they have to do it. And then companies are going to have to see from the regulator, which is called CNH, the actual contracts. And in their system the energy ministry decides what form of contract will apply, say to the deep water. And then CNH will decide whether that’s valid. And then the finance ministry provides the terms. There are a lot of hands in this pot, and whether that provides competitive terms that make people want to invest in Mexico and therefore lead to production remains to be seen.
Trauzzi: Is it clear whether the opportunity is greater in the oil sector or on shale gas?
Goldwyn: Well, I think in terms of the acreage there are great opportunities in the deep water, in the shallow water, and in shale. My own perspective is that the first place where companies are going to want to invest is going to be in what Pemex calls the bitten apples. And these were shallow water, high-pressure fields that they developed until the pressure dropped, and then they more or less abandoned them and moved on to the next high-pressure field. So with basic enhanced oil recovery, Mexico can probably increase its oil production 300,000, 400,000 barrels a day over the next five years. But that’s going to be of interest to the midsize companies, not to the super majors. I think the second area of interest will be Pemex’s existing exploration and production acreage where it can bring in a joint venture, because that’s been, they’ve got a discovery and they can move quickly, and then the deep water. For me shale is a big question mark because while the acreage is really quite prospective. it’s a mirror image of the Eagle Ford, gas prices, natural gas prices are quite low and there’s not that much interest in the United States. So for companies to redeploy capital from the U.S. to Mexico to move their infrastructure, the deal is going to have to be pretty attractive, and indeed it may be. But it’s early to tell. So I think shale is a question mark. And your question was is there an immediate effect, and I think the answer is not immediate, but it will be gradual over time with the first real bump coming from when they establish the terms and run their first auction.
Trauzzi: How much of an infrastructure challenge exists? How much do they need to do on infrastructure?
Goldwyn: In some areas they have a lot. They’ve got some shallow water rigs. They have a large number of people in Pemex, and they’re close to the United States. Where they’re really lacking is they have no deep water, subsea capability at all. The pipeline system for moving natural gas to the load centers is very incomplete, so there’s great opportunities in the midstream. And I would say on product pipelines, ’cause the future of Pemex may be importing product from the United States deep into Mexico rather than building refineries, and so they’ll need to build out some product pipelines. And then in the power sector there’s really tremendous needs to improve the quality of transmission and the reach of the grid.
Trauzzi: How do you think this deal could affect the U.S.? Is it a net negative or a net positive for the United States?
Goldwyn: I think it’s an absolute net positive for the United States. I mean, the number one interest of the United States in Mexico is for Mexico to have a prosperous economy because prosperity leads to jobs. That leads to less pressure on immigration. It leads to better security. It leads to better participation in the trade relationship. So we’re in a unique situation, and we don’t really need the oil. We’ll import some heavy oil, but not very much. So our interest in Mexico is for Mexico to succeed, and that frankly makes it politically a lot easier for Mexico to deal with us, if they don’t think this is all about the United States trying to get their oil. But I think it’s a huge positive. It’s also a positive for the hemisphere. Mexico has taken a model which, if it implements it the way it’s designed constitutionally, is much more I would say commercial and open and progressive than Brazil, probably on a par with Columbia, and much better than Venezuela and Ecuador. So they will really be setting the benchmark. And there’s a competition for capital right now. Costs are high and you need to show great returns. So if Mexico can implement this framework I think companies are going to look to Mexico first because they’re close to market and close to infrastructure. But if not, then they’ll go elsewhere. But on paper it looks really quite good.
Trauzzi: So then what does this mean for the U.S. oil majors? Do you expect them to start investing heavily?
Goldwyn: I think if the terms are attractive. I think in the deep water you’ll absolutely see the super majors and large companies that are already in the Gulf of Mexico look to get acreage just across the water. I think the big, you know, the international IOCs will as well. But I think it’s a big opportunity for the midsized and independents, as I said earlier. These bitten apples, shallow, onshore, maybe the liquids-rich shale plays as opposed to the dry gas shale plays, that’s where the EOGs and Pioneers and all the people in that class of company will have very quick opportunities early on if they can be drawn there. So I think for the whole slate of U.S. upstream companies, but also service companies and service providers, it could be quite prospective.
Trauzzi: Very interesting. Thank you for coming on the show, David.
Goldwyn: My pleasure.
Trauzzi: And thanks for watching. We’ll see you back here tomorrow.