Essay
Mexico’s New Energy
­Landscape
In August, the Mexican government opened up the energy
­market to foreign investments. Luis Miguel Labardini, an energy
­consultant and former PEMEX official, analyzes the chances
and possibilities this move offers.
Text: Luis Miguel Labardini Illustration: Pascal Staub
A
u
66 Living Energy · No. 11 | December 2014
n entirely new era in Mexican energy
­exploration and development is about to
dawn. Closed to foreign and domestic
private investment since 1938, Mexico’s oil patch
was reopened to outsiders last December when
its constitution was changed to break the decades-long monopoly of state-owned PetrÓleos
Mexicanos or PEMEX. Then, in August 2014,
the energy ministry published a set of “secondary laws” that laid out attractive ground rules
for how those private investments are to be
structured.
The response of foreign oil companies has been
enthusiastic, and the influx of foreign management and technical personnel to Mexico has begun. Attracted by favorable government terms
and oil field geology, dozens of global firms including Exxon, Shell, Total, and Sinopec have
announced plans to invest billions of US dollars
in Mexico once the nation begins auctioning off
exploration and development on-land and offshore tracts called “blocks” early next year.
Not only foreign firms are preparing to make
the plunge. Mexican conglomerates such as
Grupo Alfa have said they may form partnerships with outside companies to explore for oil.
The once almighty PEMEX is expected to take on
partners to develop oil and gas reserves it has
already identified.
A New Investment Climate
Mexico’s government aims to attract no less than
US$50 billion in exploration and development
capital from outside firms over a four-year period ending 2018. Its goals are to add at least
1 million barrels a day (b/d) of production by
2020 to the current average of 2.4 million b/d,
and to dramatically reduce the cost of natural
gas by replacing imports, on which the country
relies for roughly half of what it consumes,
with domestically produced natural gas sources.
Over the longer term, the new investment
­climate is designed to generate a surge in investment in offshore reserves of crude as well
as in so-called nonconventional hydrocarbons
associated with coal and shale deposits that
have been the source of North America’s energy
­bonanza over the last decade.
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Living Energy · No. 11 | December 2014 67
Essay
Essay
If successful, the Mexican government would
reverse an alarming decade-long decline in
Mexican oil production that has seen the average of barrels produced per day fall by 40 percent since 2004. It wants companies to develop
cheaper domestic sources of natural gas to
make Mexico’s electric power grid more efficient
and less dependent on highly pollutive fuel oil
to generate electricity. Mexican electricity is
significantly costlier than US electric power,
making the Mexican industry less competitive.
Moreover, Mexico is hoping to restore the fat
energy trade surpluses that it enjoyed during
the 1990s, when it was generating billions in
foreign energy trade surpluses with crude sales
to the USA and other countries, helping to
“Mexican electricity is significantly
costlier than US electric power,
making the Mexican industry less
competitive.”
finance growth in public works and spending
on social programs. Those surpluses have
shrunk as Mexican crude export sales fall to an
expected US$39 billion this year, or 20 percent
less than in 2011.
Opening Not without Risks
Many observers say Mexico should have opened
its energy industry long ago. After all, countries
such as Angola, Brazil, Colombia, and Kazakhstan, where hydrocarbons once were monopolized by national oil companies like PEMEX,
­adjusted to the new global realities a decade ago
by opening their doors to foreign companies.
As a result of keener competition and the entry
of aggressive wildcatters, some of those countries reaped enormous windfalls as their crude
output rose by as much as 100 percent.
But Mexico’s initiatives are not without risks.
­ ureaucracy and corruption could stall compaB
nies’ efforts to find and commercialize new
sources of oil and gas. Violent criminal gangs
are in control of some areas where crude and
gas potential is highest. The National Hydrocarbons Commission, a quasi-independent agency
set up as part of the reform to administer bid
rounds, is not as politically insulated as some
observers hoped.
If results don’t come quickly, the political costs
will be high for President Enrique Peña Nieto
and his colleagues in the Institutional Revolutionary Party, known by its Spanish initials PRI,
who have championed energy liberalization.
Conceivably, future presidents could re-close
investment doors if the reforms don’t produce
results expeditiously.
Peña Nieto, who took office in late 2012, knows
the risks. In persuading his Congress to change
the constitution in December 2013, he overcame
the resistance of many who were brought up to
consider Mexico’s energy resources as a national patrimony that shouldn’t be exploited by outsiders. In fact, some opinion polls even today
indicate a majority of Mexicans still oppose the
apertura, or opening. History books teach
school children that prior to the 1938 nationalization, foreign oil companies were rapacious
plunderers of Mexican resources and its workers.
President Lázaro Cárdenas, who served from
1934 to 1940, is considered by some historians
to be Mexico’s greatest leader, in part because
he made the nationalization happen despite
fears the USA might invade in reprisal.
Faced with declining energy production and
mounting inefficiencies, all Mexican presidents
since Ernesto Zedillo, who took office in 1994,
have pushed for opening up Mexican energy.
Why then was Peña Nieto successful where his
predecessors fell short? The reasons have much
to do with his success in communicating the
­urgency of Mexico’s present energy situation,
with declining outputs, dire inefficiencies, and
fuel thefts that some estimate at 10 percent of
refined products. It also has to do with a changing technology and shifting landscape in the
Mexican Electricity Statistics
Power generation (TWh) (2013)
Total:
296.1 TWh
Nuclear
RES (w/o hydro)
10.1 TWh
10.7 TWh
Coal
Hydro
33.6 TWh
36.3 TWh
Oil
48.4 TWh
Gas
157 TWh
Electricity
consumption (2013)
233.1
TWh
Population
(2013)
114.8
million
PG/capita
Cons/capita
(2013)
(2013)
2,579
2,030
kWh/cap
kWh/cap
CO2 emissions
CO2 emissions
(2013)
(2013)
134
418
Mt, CO2 in total
Mt, CO2 in PG
CO2 emissions
CO2 emissions
(2013)
(2013)
3.6
1.2
Mt/cap, CO2 in total
Mt/cap, CO2 in PG
Electricity price for residential consumer
(1st quarter 2013)
90.2
USA, Mexico’s neighbor and main customer,
which has embarked on an energy renaissance
of its own with the development of oil and gas
linked to shale and coal deposits, lessening US
demand for Mexican imports.
The Weight of History
To succeed, Peña Nieto had to overcome the
weight of history dating back to early last century, when Mexico was the world’s secondlargest oil producer behind the USA. During the
first oil boom in the 1920s and 1930s, companies
like Standard Oil and Shell that produced oil in
the so-called Golden Belt from Tampico to Poza
Rica were like states unto themselves, even to
the point of maintaining standing armies. They
paid pittances in royalties and taxes and simply
ignored the Mexican presidents who demanded
they pay more.
President Cárdenas used a labor dispute to build
the case for nationalization and went through
with it despite fears that the USA would invade
to take back the oil fields. As the founding father of PEMEX, Cárdenas shrewdly calculated
that with Nazi Germany on the march in Europe
and World War II approaching, the USA, from
a geopolitical standpoint, wasn’t likely to attack
a needed ally.
Although Mexico’s petroleum industry suffered
after nationalization because of a US embargo
on exports of spare parts and other equipment,
PEMEX was able to maintain production at a level
of around 500,000 b/d until the 1970s, partly because many foreign oil field services personnel
stayed in Mexico and joined P
­ EMEX after the nationalization. The company became known for
innovation and exploration prowess.
Mexico was barely self-sufficient in oil until the
mid 1970s, when a series of astounding discoveries by PEMEX changed everything. First, it
­began drilling in the so-called Reforma field
in the southeastern basin on the border between ­Tabasco and Chiapas states, and production quickly doubled to 1 million b/d. Then it
­began making strikes in the offshore Campeche
Basin in shallow Caribbean waters with wells
that, from a technology standpoint, became
­feasible after the success of US explorers in
US Gulf Coast.
u
(ca.)
US$/MWh (ca. 7€ct/kWh)
Source: IEA 2013, Electricity Information, Energy Balances of OECD Countries
68 Living Energy · No. 11 | December 2014
Living Energy · No. 11 | December 2014 69
Essay
Essay
An Expert on Investment in Mexico –
Luis Miguel Labardini
Background
Government Work
A native of Orizaba, Mexico, the
author has been a partner at
Marcos y Asociados, Infra­
estructura y Energía in Mexico
City since 1995. He has been in
charge of multiple transactions
involving financing and development for the oil and gas sector, particularly drilling projects. Luis Miguel Labardini has
cofounded and is an ongoing
director of many oil field service companies, including
Seamar Mexico, a vessel chartering concern, and SEICO, an
in-line pipeline inspection company. He received his undergraduate degree at Iberoamericana University in Mexico City
and holds a Master of Science
degree from the Massachusetts
Institute of Technology, where
his thesis was titled “Investment Decisions in the Mexican
Petroleum Industry.” He also
earned a Master of Arts degree
from Yale University. Labardini
has been a Fulbright scholar
and an ­Albert P. Sloan Fellow.
Before joining Marcos y Aso­
ciados, Labardini was technical
­subdirector for foreign investment at Mexico’s finance and
public credit ministry, where he
participated in the creation of
so-called Brady Bonds, which
converted Mexico’s public debt
to capital. He then moved to
Mexico’s state-owned Petróleos
Mexicanos (PEMEX), where he
served as advisor to the corporate director of finance, specializing in financial planning and
risk analysis. He also played a
central role in negotiations with
the US Export-Import Bank for a
line of credit to develop PEMEX’s
Campeche Basin oil fields.
70 Living Energy · No. 11 | December 2014
In Writing
As a specialist on Mexico’s oil
and gas sector, his opinions
have been quoted by publications such as The Economist,
the Financial Times, The New
York Times, the Los Angeles
Times, Platts, Forbes, Expansión, Reforma, El Financiero,
and CNN Ex­pansión.
What made Mexico a force to be reckoned with
on the global energy scene was the discovery
in 1974 of the offshore field known as Cantarell,
one of the two largest strikes of recent decades.
Cantarell’s proven reserves totaled 17 billion
barrels – seven times the total current crude reserves of Colombia, for example – and 8 trillion
cubic feet (over 226.5 billion cubic meters) of
natural gas. The strike was instrumental in
boosting Mexico’s output to its peak of 3.5 million b/d in 2004. Cantarell at one point accounted for nearly two thirds of Mexico’s output.
“Administer Abundance”
The problem was that the Cantarell bonanza
ushered in a spending orgy by the government,
financing state purchases of hundreds of companies from paper mills and bakeries to bicycle
factories. Then-president José López Portillo
made the famous comment in the late 1970s that
from then on the country would have to “learn
to administer abundance.”
But the age of abundance didn’t last long. After
oil prices plunged and Mexico in 1982 was forced
to default on its foreign debt, the country had to
learn to administer austerity. President Miguel
de la Madrid (1982–1988) tried to impose rationality on the country’s budget. Although oil prices remained relatively low throughout the 1980s
and 1990s, a government accustomed to its energy windfall bled PEMEX dry of its profits to
finance its budgets, leaving less and less to invest in technology and exploration.
Improved oil field recovery at Cantarell extended its life, so not only were necessary reforms
deferred, but President Vicente Fox (2000–2006)
increased the share of oil royalties received by
the states, making each governor a king with no
accountability. Too much money was spent on
football stadiums instead of social programs,
and corruption was rampant.
As production at Cantarell and in Mexico in general began its rapid slide in 2004, the need to
open up the Mexican energy sector to outside
investors took on added urgency. The problem
was that President Felipe Calderón, who followed Fox from 2006 to 2012, got no help from
the opposition PRI party on a reform bill because
the PRI, out of power at the time, figured it
The Crude Realities in Mexico
Photo: Luis Miguel Labardini
“Going solo is too
expensive;
hence the need to
bring in ­outside
investors.”
would be returning to power soon and that the
big reforms could wait until then.
Meanwhile, PEMEX was not making the technological advances it needed to. Unlike Brazil’s
Petrobras, which became adept at exploring in
deep waters, PEMEX stuck to shallow waters, hoping for another Cantarell. Although it did make
a significant discovery in the offshore Ku-MaloobZaap field, it came nowhere near to replacing the
output of the depleting Cantarell field.
With the government taking all the cash flow it
could from PEMEX, the state-owned company
couldn’t invest adequately in the oil industry’s
“law of probability,” which dictates that more
drilling produces more strikes. Since 2004, for
example, PEMEX has drilled 25 wells in deep
water at a cost of US$150 million per well. Three
of those wells have been successful, which is
about the industry average. So the company’s
exploration record is not that bad. The company
should have been drilling more of them, but
could not afford to. This neglect of the law of
probability, in my opinion, has been more of
a factor in Mexico’s production decline than bureaucracy or poor technological development.
While some Mexican politicians on the left believe PEMEX can go it alone if only it is given the
resources it needs, there has been a slow realization that, for extraction in areas like deep
water and nonconventional hydrocarbons, where
many believe the nation’s energy future lies,
going solo is too expensive; hence the need to
bring in outside investors.
Declining output has finally brought home the
crude realities of Mexico’s situation. A decade
ago, Mexico was exporting a net 500,000 b/d to
the USA and other foreign customers. Now
those net exports are down to 300,000 b/d and
falling fast. The USA, which once imported 70
percent of all the crude that Mexico produced,
needs less and less because of the shale-oil
boom. Mexico realizes it must reorient itself toward Asian markets, and to that end is building
a new pipeline to connect the Coatzacoalcos oil
hub on the Caribbean with the Salina Cruz port
on the Pacific coast.
“Developing new sources of
natural gas is as important
to ­Mexico’s ­future as the need
to ­develop sources of crude.”
Another rude, but perhaps healthful shock to
Mexico in recent years has been its loss of manufacturing competitiveness versus the USA because of the latter’s cheaper electricity fueled by
natural gas. Because of the shale oil and gas
boom, US natural gas prices have fallen to one
third of the price of fuel oil, which Mexico uses to
generate 14 percent of its electric power. Although
Mexico’s automotive sector has grown dramatically in recent years, it owes the growth to relatively
cheap labor. In more energy-sensitive manufacturing sectors, Mexico is losing competitive ground
vis-à-vis its northern neighbor.
Thus, developing new sources of natural gas is as
important to Mexico’s future as the need to develop sources of crude. Currently, the trend is
discouraging: Mexican imports of natural gas
have reached an average of 1.48 billion cubic feet
(41 million cubic meters) per day, three times the
422 million cubic feet (almost 12 million cubic
meters) averaged in 2009. The rising energy imports are one reason why the Mexican economy is
growing more slowly than it should. Growth in
2014 will be around 2.4 percent, but it should be
expanding at twice that rate just to create enough
jobs to keep up with the expanding population.
The wild card in the reform is the impact it will
have on PEMEX. I think it should go the way
of other former state monopolies like Petrobras of
Brazil and Ecopetrol of Colombia, and be at least
partially privatized. It would then be more viable
in the long term financially and operationally,
benefit from proper corporate governance, and
be less torn between the government’s dual role
as tax authority and as owner of an oil company.
I disagree with the notion prevalent in Mexico
that a national oil company is needed to protect
and advance the interests of the country. What
we need is a PEMEX that makes sound decisions
made to the benefit of investors. For that, it needs
to be truly independent from the government
and not be constrained in ways that its competitors are not. p
Living Energy · No. 11 | December 2014 71