Politics was pinpointed as part of the problem for stalling development in Mexico, but the country’s recent monumental work toward opening its energy sector to private investment illustrates what can happen when political parties collaborate.

Speaking during Mayer Brown’s Mexico energy reform forum Jan. 21 in Houston, Gustavo Madero, president of Mexico’s main opposition party Partido Acción Nacional (PAN), spoke about the political forces behind the movement that is expected to change the terrain of the country’s energy sector.

“This reform is part of a broad range of reforms,” Madero said. Other areas targeted for reform by Mexican President Enrique Peña Nieto of the Institutional Revolutionary Party (PRI) include education, transparency, and telecommunications. But “the energy sector will be a driver that will push the country economically.”

Legislators recently approved constitutional changes to allow licenses, production-sharing contracts, and profit-sharing contracts to be initiated by the government, private parties, or Pemex, ending the state-owned oil company’s decades-old monopoly. As part of the revamps, Pemex will be granted rights to certain oil and gas assets. Private companies also will be allowed to book reserves, although the hydrocarbons would remain the property of Mexico. The changes also include forming an oil fund that will allocate and invest energy sector profits.

The move is an attempt to revive the country’s economy while also providing an avenue for Pemex to partner with foreign investors to boost domestic production, including from its deepwater and shale assets.

Considering no party dominates the Congress, passage would not have been possible without support from others to gain the two-thirds majority needed. Now comes the task of approving secondary laws that transform concepts in the energy reform bill into reality. These include establishing political bodies, making changes to the Pemex board, allocating oil and gas areas to Pemex, and establishing economic terms, such as the amount of government take.

The 120-day period required to pass such secondary laws has already begun, but only a majority vote of 50% plus one is needed for approval. So collaboration remains essential to accomplishing the task on time and crafting desirable terms that will attract investors. “We are so concerned that this [effort] not become derailed in the transitory articles and the secondary laws that will come forth,” Madero said. “We want this to be ironclad.”

He added, “When you’re in a political party you are always criticized. They will tell you, ‘Why are you collaborating? Why are you participating with the government when you are the opposition?’ The fundamental thing here is not what PRI did but as an opposition party how PAN decided not to play tit for tat with PRI and to collaborate. This is a strategic decision.” PAN sees parts of the reform as victories because it includes some of the party’s ideas.

“The main economic problem in Mexico is its political system, its lack of capacity to build agreements with the necessary speed … to progress and achieve all the opportunities and overcome its problems,” Madero said. “This, in my judgment, is what explains the success and failures of countries. We have struggled quite a bit in Mexico.”

He pointed out international rankings of countries that showed Mexico ranked near the top in terms of territory and population but lagging in education, GDP capital, and transparency.

“In my opinion it’s because of bad government, bad public policy, and lack of agreements. That’s what we want to change and that is what we are going to change,” Madero said. “What’s happening in Mexico is very profound.” Energy reform will lead to more development, more companies operating in Mexico, better job opportunities, better economics, and better profits in the petroleum sector, he said.

Jesus Reyes Heroles, former director general/CEO of Pemex and former energy secretary for Mexico, believes Pemex will likely form partnerships for deepwater and shale-related projects but will focus on shallow-water developments, where it has expertise, and will concentrate more on its midstream and downstream sectors. The company will aim to be in the most profitable areas, including new ones, he said.

“It will be a stable and reliable partner for private parties in several stages of the production process especially in E&P,” Reyes Heroles said.

But the company’s success will depend on its budgetary flexibility. He pointed out that in the past the country’s treasury department has generated about 40% of its revenue from Pemex.

“The game changer for Mexico was and is energy,” Reyes Heroles said.

The US Energy Information Administration (EIA) estimates Mexico has at least 10 Bbbl of proven oil reserves, mostly heavy crude and mostly offshore, and about 481 Bcm (17 Tcf) of proven natural gas reserves.

Mexico could hold an estimated 16 Tcm (545 Tcf) of technically recoverable shale gas resources – the sixth largest amount in the world. The majority of Mexico’s shale gas resources are located in its northeast and east-central regions, according to the EIA. The Burgos basin, which accounts for two-thirds of the country’s technically recoverable shale gas, includes parts of the Eagle Ford.

Contact the author, Velda Addison, at vaddison@hartenergy.com.