President Andres Manuel Lopez Obrador is pursuing his monopolistic vision for Mexico’s energy sector by seeking to disband the two main regulators, as well as restricting private competition in the electricity market.
In the upstream sector, he has already called a halt to new licensing rounds and ended the joint ventures that state-run Pemex had been forging with experienced deep-water operators, but his latest move sent alarm bells ringing around the sector.
Lopez Obrador, who mixes his nationalism with a left-leaning brand of populist rhetoric, has drafted constitutional reforms that would eliminate the National Hydrocarbons Commission (CNH).
The regulator may have lacked teeth, but it has performed an important role in holding up a light to the sector and expressing considered opinions about compliance with regulations, good governance and responsible development of the oil and gas industry.
Before Lopez Obrador came along, the CNH was not afraid to be outspoken when it came to questioning matters such as the low return on investments that Pemex was lavishing on multiple service contracts in the Chicontepec palaeochannel region, where results never lived up to expectations.
In recent times, the commissioners have been more circumspect in their scrutiny of Pemex, but their weekly meetings, which are open to online viewing, have offered a valuable window of transparency in a sector where corruption and malpractice were rampant in the long years of the Pemex monopoly.
The Mexican Association of Hydrocarbons Companies issued a statement describing independent regulators as fundamental for the “successful execution” of exploration and production contracts awarded in the years after Mexico’s landmark 2013 energy reform.
The Business Coordinating Council, a Mexican business group, said the proposal risks “profoundly damaging the country in environmental and economic terms”, in a reference to Lopez Obrador’s interference in the power sector to secure more generation from heavier Pemex crudes.
International oil companies have bowed their collective heads over the folly of forcing Pemex to go it alone in the highly prospective deep-water plays.
The company is throwing money at refineries and mature carbon-intensive shallow-water plays and doing little in the offshore.
But those with big offshore projects — most notably Eni, BHP and Repsol — have remained quietly confident that they will be allowed to get on with developing discoveries in blocks awarded under those reforms.
This sense of security was somewhat undermined by the case of Talos Energy, the private equity-backed company that was deprived of the right to operate the Zama field, because the discovery overlapped Pemex acreage. The case has led to a filing for international arbitration.
The latest moves will cause concern in boardrooms, and may give some companies second thoughts about a play that was supposed to be the next big thing.
Premier Oil, now merged with Chrysaor as private equity giant Harbour, was already looking for an exit from the Zama project even before the Pemex debacle.
It will be interesting to see whether BHP Petroleum — currently in a merger process with Woodside — will retain its appetite for the $5 billion Trion development, being pursued under a joint venture with Pemex.
The answer is probably yes. A front-end engineering and design contract was awarded quite recently and BHP knew what it was getting into, including a heavy financial carry for Pemex.
But for most upstream investors there can be little doubt: the lights are going out in Mexico’s oil sector.