BUENOS AIRES, Argentina--(BUSINESS WIRE)--
Fitch Ratings views the Mexican energy reform bill as a long-term positive for the sector and country, although, if approved, tangible benefits not be visible in the medium term. This is because the reform requires a constitutional amendment and subsequent implementing regulation before contracts can be signed, and the related private investment can begin to flow. The proposed energy reforms are in line with the type of reform anticipated by Fitch in its special report 'Latin American Oil and Gas Frequently Asked Questions', dated July 29, 2013. Mexican energy reform has been attempted by the prior two administrations with muted success. However, the political consensus established by the current administration, between it and the three major Mexican political parties, called the Pacto por Mexico, offers some renewed hope of continued positive movement on reform.
On August 12, President Pena Nieto presented to the Mexican Congress a proposal to reform the energy sector, driven, at least in part, by the need to replace/replenish diminishing existing oil reserves. Contrary to other reforms approved in 2013, this reform was not presented by the Pacto but by President Pena Nieto and backed by Institutional Revolutionary Party (PRI). The proposed reform bill is designed to open the energy sector to private participants through revenue- or profit-sharing mechanisms. The specific type and nature of the agreements between the government and the private parties would be defined when the secondary laws are implemented after the bill is passed, and the constitutional changes ratified by the states. The proposed regulations specifically rule out the possibility to grant concessions in the oil and gas sector, as oil and gas resources would remain the exclusive property of the Mexican state. The government would be allowed to enter into agreements with the private sector for the exploration and production of such resources.
The attractiveness of the proposed regime will largely depend on the percentage of revenue or profit sharing, as well as the ability of these agreements to mirror the economics of production-sharing agreements, in absence of the private sector being able to formally own and book oil and gas reserves and production volumes. Conceptually, the proposed reforms are more attractive than existing service contracts that pay a fixed-fee per barrel of oil produced versus the sharing agreements that link revenue and profit to the market price of oil, which allow investors to share risk and profits.
At this point, it is too early to assess the full impact of the proposed energy reform bill, as the mechanisms and procedures to implement the new scheme are yet unknown. Further, the areas in which the private sector could participate have not been identified, although Fitch continues to believe that the government might consider including the private sector in the off-shore deep-water areas and unconventional resources areas, where Pemex lacks the technology and expertise, while it maintains the shallow water sector within Pemex's exclusive reach.
The amendment of the Mexican constitution will require the acceptance of two-thirds in Congress and the approval of more than half of the 31 state congresses. Achieving a majority in Congress will be challenging as the main opposition parties, the National Action Party (PAN) and the Democratic Revolution Party (PRD), have different visions as to the type of energy reform that should be pursued. In fact, on July 31 PAN presented its own energy reform bill, including changes in the constitution to promote renewable energy, private participation in hydrocarbons and energy generation, and the creation of an oil fund. PRD opposes any constitutional changes but is in favor of reducing Pemex's tax burden. To put the energy bill through Congress will be a true test for the Pacto por Mexico, and might lead to changes in the final legislation.
If approved in 2013, Fitch does not expect energy reform to result in a material change in the energy sector over the next 18-24 months. Once Congress approves the amendment to the constitution, and the changes are ratified by the states, it will take time for the federal government to implementing the new energy regulations. Significant foreign investment in the sector will most likely remain on hold until all uncertainties are clarified.
The rationale behind the proposed energy reform is to attract private investment to increase the country's oil and gas production. While Pemex has successfully stabilized oil production at approximately 2.5 million barrels of oil per day (bpd), as of June 2013, such a level is dramatically below the peak production of 3.4 million bpd in 2004. In addition, the greatest potential for a significant boost to production lies in tapping offshore deepwater and unconventional potential - Shale gas- as Pemex's huge tax burden has limited the internal cash generation necessary to develop such areas.
President Pena Nieto also indicated that tax reform will be pursued to reduce the burden to Pemex of its contributions to the government. Fitch believes that it will be extremely difficult for the government to rapidly replace Pemex's contributions with other sources, as they represent approximately 1/3 of the government's revenues. Fitch does not anticipate any material change in Pemex's tax burden over the next 18-24 months. However, any long-term material reduction in the magnitude of Pemex's contributions to the government would be positively viewed as it would free up the company's cash flow for additional investments.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
Latin American Oil and Gas Frequently Asked Questions', dated July 29, 2013.
Applicable Criteria and Related Research:
Latin American Oil and Gas Frequently Asked Questions
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- Fitch Ratings
- private sector
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