Mexico energy reform: Lifting barriers to a new market

We analyse the implications of the proposed secondary legislation that could open up the country's oil and gas sectors

The Mexican Congress has started the final approval of secondary legislation that sets guidelines for the energy sector. Political opposition to the reform has been negligible and no major modifications are expected as the reform passes through the lower chamber.

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.

This overhaul has the potential to revitalise the country's oil and gas sectors and effective secondary legislation, including competitive fiscal terms to attract investment, are essential to its success.

Fiscal Benchmarking

One of the key laws impacting the upstream sector is that all entry opportunities will be awarded through competitive tender licensing rounds and not through direct negotiation.

We believe initial licensing rounds should address two main topics – increasing short-term production and ramping up activity in deepwater. The government has set an aggressive production target of 3 million b/d of oil by 2018, compared to current production which stands at 2.4 b/d.

Our research shows that to boost production, the focus should be on increasing horizontal drilling in Chicontepec, developing the heavy shallow water oil fields near Ku-Maloob-Zaap and applying Enhanced Oil Recovery (EOR) technologies on marginal assets.

There will be two main types of entry opportunities, both to be offered through licensing rounds in H1 2015. The first ones are joint ventures with Pemex that we expect in select Chicontepec fields, the extra-heavy shallow water fields and the discoveries in the deepwater Perdido Area.

The second are opportunities to participate independently from Pemex in the relinquished Round Zero assets. This could include exploration acreage in deepwater and unconventionals, as well as mature and under-invested onshore fields. The proposed secondary legislation states that all licensing rounds will have a single economic variable to decide the winning bid. 

Overall, the secondary legislation proposes a simple, transparent and progressive fiscal regime, with a sliding scale royalty that could apply to profit-sharing, production-sharing and license contracts.

There are many options for the government to consider but specific fiscal terms will be set on a round-by-round basis, allowing the regulators to have the greatest flexibility while balancing the risk-to-reward ratio for each project.

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As well as our integrated asset, company and country analysis for clients, Wood Mackenzie experts produced several reports this year examining the impact of the Mexican energy reform and the opportunities that will be available, not just in upstream, but midstream, downstream and power generation. [Subscriptions required]
Latin America Renaissance: Mexico and Argentina drive shift to resource maximisation
Mexico: Impact of energy reform on the downstream industry
Secondary legislation sets the new rules of the energy sector in Mexico
US pipe gas to Mexico - LNG alchemy
Pemex portfolio after Round Zero: Entry opportunities into Mexico
Mexican Energy Reform: Impact on petrochemicals 

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