What can Nigeria learn from Mexico’s oil reform?

While Nigeria’s oil sector reform is taking eternity to happen, Mexico is beginning to reap the fruits of her own reform which it embarked in 2013, almost a decade after the Petroleum Industry Bill (PIB) was muted.

Just like Nigeria, Mexico has large and potentially accessible oil and gas resources, and is also known for one of the largest, yet currently untapped reserves. However, Mexico’s oil production declined 25 percent to 2.5 million barrels per day (bbl/d) from a peak of 3.3 million bbl/d in 2004. Its oil exports also dwindled, and the country became a significant importer of natural gas and petroleum products.

Mexican government has attempted incremental reforms to its energy market with modest changes as overall oil production continued to decline.

However, in December 2013, Mexico embarked on a historic energy reform legislation which ended the now 75-year monopoly of state-owned Petroleos Mexicanos (Pemex), and a follow-up legislation in 2014 which provided an unprecedented opportunity for oil companies looking to tap into Mexico’s huge energy potential.

The reform was meant to attract private capital and technical expertise to build the Mexican energy industry, maximize oil and gas revenue, and boost economic growth through 2025. This prompted the US Energy Information Administration (EIA) to revise its 2040 forecast for Mexican oil and gas production upwards by a whopping 76 percent.

The reform of Mexico’s energy sector, which has allowed state-owned energy company Pemex to form partnerships upstream, downstream and in the midstream, has been a catalyst for the company to put its financial house in order, Jose Antonio Gonzalez, Pemex CEO said.

“Today we can say Pemex’s finances are stable,” Gonzalez said in a speech at Houston’s Rice University’s Baker Institute. “We couldn’t say this a year ago.”

“We are still running a deficit, but there is some degree of stability today,” he added. Pemex’s finances still need to improve, he said, but he predicted that “Pemex can return to overall profitability by 2020.”

Departure from the past

According to Gonzalez, PEMEX will run a “primary surplus,” working off a “conservative” crude oil price projection of $42/b, hedging crude oil, something it never did in the past. The hedge, he said, covers Pemex if the price of oil drops below $42/b all the way down to $37/b.

In the upstream area, Gonzalez said that Pemex was going to focus only on “profitable fields” adding that it was not how Pemex worked in the past, focusing instead only on production numbers and not profitability.

“My hope is that 2017 can be an inflection point,” he said, such that the company can “increase production profitably by 2018.”

Gonzalez said Pemex was now undertaking one of the largest investments in refinery maintenance for many years. Mexican refinery production has fallen in recent years, reaching a 25-year low in 2016, increasing the country’s dependence on imports. Official data for the first two months of 2017, however, showed a notable uptick in refinery output.

In the midstream area, Gonzalez noted that Mexico is extremely underinvested in pipelines and storage, and he said one domestic study estimated the midstream sector requires $15 billion in investment. Mexico has plans to double its natural gas pipelines over the next six years, he said, linking that effort directly to “the power of the energy reform.”

“The opportunity is huge,” he said of the midstream market, and he noted significant partnership opportunities for Pemex because it owns valuable midstream assess such as real estate and port terminals.

It is instructive that Mexico’s energy reform was made through constitutional amendment which took significant federal and state legislative effort to get it done. Thus, the fear of reversing the change in case of political change would be difficult.

Back on the block

With genuine reform comes belief. In December 2016, Mexico’s Energy Ministry (SENER) and the National Hydrocarbons Commission (CNH) held the country’s first deepwater bid round, with international oil companies and Mexico’s state-led Pemex participating. Eight of 10 blocks offered were awarded, won largely in consortia.

At the moment, Mexico is inviting domestic and international oil companies to submit nominations from among the 119 deepwater blocks available on its side of the Gulf of Mexico, some of which may be included in a bid round this December.

Nigeria can unlock its energy by creating the much needed stability in the oil industry through the quick resolution of the legal and regulatory frameworks.

“Regulation is not negotiable. It is time we had a Petroleum Industry Act (PIA) and no longer a Petroleum Industry Bill (PIB). Once the Bill becomes an Act of the parliament, it would send a signal of stability”, Dapo Ayoola, Chief Executive Officer of the Sub-Saharan African Oil and Gas Conference and Exhibition told BusinessDay.

FRANK UZUEGBUNAM