Ms. Valdez is a Partner at Dentons Lopez Velarde based in Mexico City, where she focuses on energy, mergers and acquisitions, and project finance.
For the past 70 years since nationalization, the exploration and production of oil and gas in Mexico has been subject to a state monopoly and entrusted to Pemex, the national oil company. Pemex historic significance and economic weight as a contributor to public revenues has been unique in Mexico.
When, in 2013, the Mexican Federal Constitution was amended to open the energy sector (oil, gas, and electricity) to private investment, domestic and international private sector interest in the Mexican energy sector erupted.
Thus far, upstream oil exploration and production (“E&P”) has been the main focus for investment and is fully open to domestic and international private investors and operators. Indeed, more than 35 blocks— both onshore and offshore—have been awarded to private consortiums, a change that was difficult to imagine only a decade ago. But not only is there focus on the upstream sector; the entirety of the oil and gas sector is undergoing dramatic changes and is ripe for opportunity.
For example, “midstream”—the transportation of refined energy products—is also of great interest to foreign companies due to Mexico’s continued decrease of oil production since 2005 and the country’s inability to finance the modernization of its refining and logistics infrastructure. As a result, and ironically, Mexico has for decades been a net importer of refined petroleum products and natural gas. More than 50 percent of the gasoline and 25 percent of the natural gas sold in Mexico is imported—mostly from the United States—and demand for these products outpaces short-term domestic production. Consequently, the midstream sector has drawn the attention of many commodity companies, particularly those from the U.S. based on their interest in exporting refined products to the Mexican market.
In order to develop its midstream sector, the market in Mexico will need to implement profound changes such that refined products can be transported and stored. Major natural gas pipelines to import gas from the U.S. have recently begun operating or are under construction and Pemex has been forced to give private companies access to its existing pipelines and terminals. At the same time, the Mexican Energy Regulatory Commission (“CRE”)—which is responsible for regulating and supervising the midstream and downstream sector of the oil and gas industry, as well as the electricity industry—is issuing regulations that guarantee open access and non-discrimination, rules that are intended to contain Pemex market power.
The natural gas market is where some of the most important changes in the Mexican energy sector are materializing. Pemex has already transferred all of its natural gas pipelines to the National Center for Natural Gas Control (“CENAGAS”), created in 2014 to operate the National Storage and Transportation Integrated System (“Sistrangas”). Comprised of 6,300 miles of natural gas pipelines extending across 20 Mexican states, Sistrangas was previously owned and operated by Pemex and other private owners. It now operates as the largest integrated system in the country.
As a result, access to Sistrangas is essential for the participation of private natural gas companies. Currently, CENAGAS is carrying out the first open season for firms to reserve transportation capacity in these pipelines. The process is scheduled to conclude in June 2017, with the execution of gas transportation agreements between CENAGAS and private companies.
Mexico has also developed other incentives to promote a competitive natural gas market. Last year, the CRE issued a series of resolutions for the implementation of the so-called “Pemex Gas Release Program,” requiring Pemex to make 70 percent of its gas supply contracts available to private gas companies over the space of four years. Private companies may then improve on Pemex’s terms and conditions and customers can select from offers in a competitive environment, terminating their gas supply agreements with Pemex without any liabilities.
While Sistrangas’ open season and the Gas Release Program are two of the most important steps that the Mexican government is taking to reorganize its energy sector at all levels, they are only one part of broader energy reform in the country. The liberalization of prices for gasoline and other fuels and the complete revamping of Mexico’s electricity industry are other important pieces in the metamorphosis of the Mexican energy sector.
In this environment and despite global uncertainties and challenges, existing stakeholders and newcomers are taking positions and redefining strategies to seize the opportunities that a competitive Mexican market is creating. Their commitment and successes are needed to materialize the expected benefits of Mexico’s energy reform for both the private sector and for Mexican consumers.