Mexico pitches energy reform

This news story first appeared on January 24, 2014. For more information click here.

By James Osborne, The Dallas Morning News; January 24, 2014

Mexican congressman Javier Trevino Cantu is in Texas trying to sell his country’s energy reforms to U.S. oil companies. On Friday, he visited with attendees before speaking to a group at SMU. (Mona Reeder/Staff Photographer)

Javier Treviño Cantu, a Mexican congressman and close ally of President Enrique Peña Nieto, has spent much of the last month traveling Texas to tout the historic nature of his country’s decision to open up its oil sector. But he admits Mexico has a ways to go yet.

“There are many opportunities in the world, between South America and Africa and the Arctic,” he said. “So how are we able to attract the oil companies? That’s going to be the key challenge.”

More than a month after Mexico’s Congress passed a series of historic constitutional amendments to open up its energy sector to foreign investment, the country is trying to sell the changes to U.S. companies that remain both eager and skeptical of their prospects south of the border.

Earlier this week, Gustavo Madero, president of the National Action Party, and Jesús Reyes Heroles, former CEO of the national oil company Pemex, appeared before oil executives and attorneys in Houston to explain the developments expected in the months ahead.

Treviño, a leading force within the Institutional Revolutionary Party, has been to Texas three times since the vote. He mixes private meetings with industry insiders with public events like a speech at SMU on Friday. The message is Mexico is open for business and committed to creating a legal structure that will be attractive to foreign oil companies.

So far, the message has been getting a good reaction from U.S. oil companies, according to analysts and attorneys. But with the structure of the changes still being drawn up, how terms will compare with countries like Brazil and Peru also seeking investment is unclear, said Carlos Solé, an attorney with Baker Botts.

“That’s the $20,000 question,” he said. “When they do the first bids they want the who’s who of the energy industry. And that’s why you have guys coming up to Dallas and Houston, making the rounds. I’m not sure what the phrase is, road show maybe.”

For Mexico, the stakes are high. Discussions on overhauling the energy sector stretch back more than two decades. But standing in the way was the deep national passion around Mexico’s decision in the 1930s to declare its oil reserves off-limits to foreign companies.

But since the North American Free Trade Agreement opened up cross-border trade in the 1990s, that way of thinking has started to diminish, Treviño said.

Perhaps more important, while oil and gas drilling has soared in the U.S. through the hydraulic fracturing revolution, production in Mexico has fallen off a cliff.

“It’s interesting. That sort of rhetorical nationalism seems the domain of a political class, the left,” said Tony Garza, the former U.S. ambassador to Mexico and now an attorney in Mexico City with White & Case.

“When you get out and see some of the polls that have been done of the middle class and lower middle class, you recognize that they are looking for opportunity. It’s less of that visceral nationalism and more, ‘How can we compete, why are we leaving our nation’s patrimony in the ground, buried?’”

But considerable questions remain.

What will happen to Pemex, the vast sprawling state agency, which up until now has held a monopoly over oil production in Mexico?

Mexico is eager to develop deep offshore projects and unconventional shale plays that Pemex is considered ill-equipped to manage. But handing them off to an Exxon Mobil or a Shell outright could prove politically difficult in Mexico City, analysts say.

Dallas Parker, a partner with Houston law firm Mayer Brown, which has advised Pemex in the past, said the company was ready to move on from its current role.

“At the upper levels they feel like the shackles have been taken off. They won’t be run solely as a revenue-generating source for the Mexican government,” he said. “Pemex does not have the capabilities to be involved in every oil and gas opportunity in Mexico. The resources are vast. If Mexico wants to reform, they have to go all the way.”

The fine print of the changes remains a subject of considerable speculation.

Attorneys and analysts gather intelligence through government sources in Mexico. And each has a different interpretation of how things will shape up when the government is scheduled to present legislation on the energy reforms April 20.

As he traveled around Texas this month, Treviño said he has heard the skepticism.

“There are reactions. There are concerns. There are viewpoints, which is good. It’s a very good learning process,” he said.