The Future of Mexican
Oil & Gas
…with or without Pemex
presented by:
Edgar Saldivar
BoyarMiller
832.615.4276
esaldivar@boy...
Mexican Oil & Gas Matters
Top Reasons:
 Stimulate Mexican economy
 Pemex is inefficient
 Mexican Presidential elections...
“Things are always more complex than they appear”
 One of the most restrictive oil industries in the world
 All minerals...
A Brief History of Mexican Oil
 Chapopote – the use of asphalt since the Aztecs
 1917 Constitution – mineral rights belo...
Petróleos Mexicanos (Pemex)… Mexico’s ATM
 3rd largest foreign crude oil supplier to the U.S.
 World’s 2nd largest non-p...
Constitución Política de los Estados Unidos Mexicanos
 “The Nation owns … all the oil and all solid, liquid, and gaseous
...
Ley Reglamentaria del Articulo 27 Constitucional
 “[O]nly the Nation may carry
out the various oil holdings,
which consti...
The Cultural Legacy of Expropriation
 Key role in consolidating
post-revolutionary
government
 Helped drive
industrializ...
Carlos Salinas de Gortari
 President 1988-94; most aggressive reformer
 Negotiated and signed NAFTA
 Did not attempt to...
Ernesto Zedillo
 President from 1994-2000; inherited an economic crisis
 Unable to implement major reforms even if he wa...
Vicente Fox
 President from 2000-06; first non-PRI president in
70 years
 Mexico had increased oil production and prices...
Felipe Calderón
 President from 2006-present
 Politically weak
 Did not want to face opposition from unions
 Busy wagi...
Enrique Peña Nieto
 Declared winner of the July 1, 2012 presidential
election
 Wants partial privatization of Mexico’s p...
Change in Policy is Inevitable
 Arturo Sarukhán, Mexican Ambassador
to the U.S.: a 2nd round of oil reforms is
inevitable...
Petróleo Brasileiro S.A. (Petrobras)
 Semi-public multinational energy corp.
 Founded in 1953; ceased being legal
monopo...
Why Now?
 Output from Cantarell is shrinking
 5 consecutive years of losses
 Huge international interest
 Boost to Mex...
The Phenomenon of Shale Development
 The exploration and production from shale plays is booming
 Hydraulic fracking is k...
What Needs to Change
 Article 27 of the Mexican Constitution
 Mexican tax system and labor laws
 Partial privatization ...
The Future: Mexico with AND without Pemex
 Likely Scenario:
– second round of reforms setting the groundwork for partial
...
Questions?
Edgar Saldivar
BoyarMiller
832.615.4276
esaldivar@boyarmiller.com
http://www.linkedin.com/in/saldivar https://t...
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The Future of Mexican Oil and Gas

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The future of Mexican oil and gas... with or without Pemex. Presented at the Houston Young Lawyers' Association CLE event.

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The Future of Mexican Oil and Gas

  1. 1. The Future of Mexican Oil & Gas …with or without Pemex presented by: Edgar Saldivar BoyarMiller 832.615.4276 esaldivar@boyarmiller.com HYLA - CLE July 26, 2012
  2. 2. Mexican Oil & Gas Matters Top Reasons:  Stimulate Mexican economy  Pemex is inefficient  Mexican Presidential elections  Shale oil & gas  Brazil model  U.S. energy security
  3. 3. “Things are always more complex than they appear”  One of the most restrictive oil industries in the world  All minerals belong to the Nation per the Constitution  Constitutional change is necessary  Major changes have occurred, but not in oil policy WHY?  History & culture  The Mexican Constitution  Presidential politics WHAT’S NEXT?  Peña Nieto’s promises  Shale oil & gas potential  Petrobras model?
  4. 4. A Brief History of Mexican Oil  Chapopote – the use of asphalt since the Aztecs  1917 Constitution – mineral rights belong to state  March 18, 1938 – Expropriation by Cardenas  That same year – creation of Pemex  1973 – OPEC created  1976 – Cantarell discovered  1979 – Iranian Revolution  1982 – Economic crisis  Reform not a priority afterward
  5. 5. Petróleos Mexicanos (Pemex)… Mexico’s ATM  3rd largest foreign crude oil supplier to the U.S.  World’s 2nd largest non-publicly listed company  Total assets worth $415.75 billion  Provides approx. 35% of total government revenues  Sustains a costly public administration  Both a cash cow and a political tool for the government
  6. 6. Constitución Política de los Estados Unidos Mexicanos  “The Nation owns … all the oil and all solid, liquid, and gaseous hydrocarbons.” Article 27 of the Mexican Constitution  “[T]he Nation’s domain shall not be transferred to others and will be, therefore, permanent.” Id.  “[O]il and other hydrocarbons; basic petrochemical industry,” among other industries, will not be considered monopolies  Amendment requires at least 2/3rd of the national legislatures and more than 1/2 of state chambers
  7. 7. Ley Reglamentaria del Articulo 27 Constitucional  “[O]nly the Nation may carry out the various oil holdings, which constitute the oil industry”  Article 6: payment of a contract will always be in cash and the property of reserves cannot be used to pay any contract
  8. 8. The Cultural Legacy of Expropriation  Key role in consolidating post-revolutionary government  Helped drive industrialization  Symbol of national pride and independence  Visible legacy of the Mexican Revolution  Lázaro Cárdenas is a national hero
  9. 9. Carlos Salinas de Gortari  President 1988-94; most aggressive reformer  Negotiated and signed NAFTA  Did not attempt to open Pemex  Oil reform was not popular  Change Constitution to end ejidos  In retrospect, important 1st step if opening up oil industry
  10. 10. Ernesto Zedillo  President from 1994-2000; inherited an economic crisis  Unable to implement major reforms even if he wanted  There were no incentives  Minor reform in oil policy in 1996
  11. 11. Vicente Fox  President from 2000-06; first non-PRI president in 70 years  Mexico had increased oil production and prices  Few incentives for oil reforms  Focused on making Pemex more efficient and modern through management
  12. 12. Felipe Calderón  President from 2006-present  Politically weak  Did not want to face opposition from unions  Busy waging war against drug cartels  Though he wanted to make major reforms, he could not  2008 regulations – authorized new type of risk contracts  Created National Hydrocarbons Commission
  13. 13. Enrique Peña Nieto  Declared winner of the July 1, 2012 presidential election  Wants partial privatization of Mexico’s petroleum and electricity industries  “Signature issue”  Contested election and lack of control of congress may be a hindrance  Takes office December 1, 2012
  14. 14. Change in Policy is Inevitable  Arturo Sarukhán, Mexican Ambassador to the U.S.: a 2nd round of oil reforms is inevitable  President Fox in Houston: – need to emulate the Petrobras model – all political parties announced platforms with promises of opening up Mexico’s oil industry to stimulate the economy
  15. 15. Petróleo Brasileiro S.A. (Petrobras)  Semi-public multinational energy corp.  Founded in 1953; ceased being legal monopoly in 1997  Brazilian government now owns 54% of common shares with voting rights  Private shares are publicly traded  Largest company in the Southern Hemisphere  Largest company in Latin America  4th largest company in the world
  16. 16. Why Now?  Output from Cantarell is shrinking  5 consecutive years of losses  Huge international interest  Boost to Mexican economy  Cross-party and union support  Continued drops in production by Pemex could hamper energy security in U.S.  The Eagle Ford Shale Play  U.S. oil & gas industry (i.e., Houston) positioned to supply services, resources and expertise
  17. 17. The Phenomenon of Shale Development  The exploration and production from shale plays is booming  Hydraulic fracking is key  Houston has been a bailout for the U.S.  Texas’ Eagle Ford Shale formation extends across much of South Texas, into Mexico  Eagle Ford Shale has created boon in Texas: – Housing, retail, industrial, roads, finance, legal services, etc.  550 wells using fracturing are producing oil in the U.S.  Pemex has drilled only 5 exploratory wells  Potentially 4th largest reserves of non-conventional fuel
  18. 18. What Needs to Change  Article 27 of the Mexican Constitution  Mexican tax system and labor laws  Partial privatization of Pemex using Petrobras model  Ability for foreign companies to obtain mineral rights from Mexican government  Consensus among the public and multiple interested parties  Drug violence in Mexico  Public morale about 2012 election  President willing to take political risks and challenge opposing interests
  19. 19. The Future: Mexico with AND without Pemex  Likely Scenario: – second round of reforms setting the groundwork for partial privatization – “real” opening of Mexico’s oil sector may come slowly  Pemex will remain the “pride of Mexico and oil workers” if it embraces the need for partial privatization to improve efficiency, earnings and production  Obvious benefits for Houston and, thus, the American economy
  20. 20. Questions? Edgar Saldivar BoyarMiller 832.615.4276 esaldivar@boyarmiller.com http://www.linkedin.com/in/saldivar https://twitter.com/edgar_saldivar
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