The Future of Mexican Oil and Gas
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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.

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 The Future of Mexican Oil and Gas Presentation Transcript

    • 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
    • Mexican Oil & Gas Matters Top Reasons:  Stimulate Mexican economy  Pemex is inefficient  Mexican Presidential elections  Shale oil & gas  Brazil model  U.S. energy security
    • “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?
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • Questions? Edgar Saldivar BoyarMiller 832.615.4276 esaldivar@boyarmiller.com http://www.linkedin.com/in/saldivar https://twitter.com/edgar_saldivar