Mexican oil and gas companies want more room to maneuver as government pushes through reforms

Mexico is making a major overhaul of its legal system, which observers say will undermine the independence of the judiciary.

The move, the latest by President Andrés Manuel López Obrador, who leaves office on Sept. 30, will be a turning point in the country’s democracy, experts say, and could jeopardize the trade deal with the U.S. And yet companies in the country’s oil and gas markets are again calling for greater cooperation to participate in the business and reduce the country’s dependence on foreign fuels and tap into the country’s untapped reserves.

López Obrador’s decree to reform the judiciary, which was signed on September 15 and will go into effect on September 16, follows a majority of the country’s local congresses ratifying a Senate decision on September 12. The reform was one of 20 constitutional changes López Obrador pledged to implement before leaving office.

“The reform is aimed at improving the judiciary so that justice is accessible to all and corruption is ended,” he said during a live message to the nation on September 15 ahead of Independence Day celebrations. “Judges and judges must ensure that nothing and no one is above the law,” he said in the message accompanied by President-elect Claudia Sheinbaum Pardo.

Turning point
Experts widely criticized the decision to reform the judiciary during a series of forums organized to discuss it, saying the reform could harm bilateral relations with the U.S. The decision also sparked protests, including demonstrations and strikes, in major cities across the country for more than two weeks.

Experts said recently at a meeting organized by the Wilson Center in Washington that the changes to the constitution will have consequences for the rule of law in the country and could mark a turning point for democracy.

“The reform will destroy the independence and capacity of the judiciary and undermine much of the progress made in the sector (over the years),” said Francisca Pou Giménez, senior researcher at the Institute for Legal Research at the National Autonomous University of Mexico. “In addition to being radical, because it seeks to replace all judges at all levels in a short period of time, it does not address the real problems within the judiciary,” Pou said.

The reform will result in a high concentration of power in the executive branch, which will leave some groups in the country unprotected, Carlos Ugalde, head of the consulting firm Integralia Consultores, said at the event. However, the reform itself is not the worst thing for the bilateral relationship with the US. “The worst thing is the lack of interest and the inability (of) Mexico to deal with the interference of organized crime in the elections, which will ultimately result in a narco-state.”

In the long run, he said, this will be the main issue affecting the bilateral relationship. “If it becomes a degraded democracy, it will be difficult to deal with. Many are already starting to wonder whether the country can be trusted as a counterparty, not only … because of the reform, but also because of the drug cartels and migration,” he said.

More private involvement
However, private companies operating in the country are calling for more cooperation to reduce the country’s dependence on foreign fuels and tap into the country’s untapped reserves.

At a national oil and gas conference on September 12, market participants stressed the need for cooperation to develop the country’s vast oil and gas reserves.

Participants noted that other countries in the region, such as Guyana, Brazil and Argentina, have managed to attract investment in the sector in recent years. They said Mexico could still attract new investment.

“In the case of Guyana, the most important thing the government did was provide stability,” said Craig Kelly, senior director of international government affairs at ExxonMobil Corp., one of the main developers of the Guyana fields. The company has committed more than $50 billion to the project.

In Mexico, many of the opportunities are in challenging locations such as deep water, requiring huge investments that no company can afford alone, said Stephane Drouaud, vice president of Woodside Energy’s Trion project. “We need to identify the key drivers and work together,” Drouaud said. “We can’t do it alone.”

Trion is the only deepwater crude oil project in the country.

In the Sureste Basin, in the shallow waters of the Gulf of Mexico, a number of discoveries need to be connected to make them economically viable. A handful of companies will need to work together to make that happen, said Gustavo Baquero, CEO of Harbour Energy, which recently became one of the largest operators in the country after acquiring the portfolio of Wintershall DEA.

Representatives from BP and Talos Energy shared that view and indicated they want to do more.

Focus on gas
Market participants at the conference also urged the government to analyze the possibilities for developing unconventional reserves, particularly gas.

According to data from the National Hydrocarbon Commission, there are approximately 110 billion barrels of oil equivalent of potential oil reserves in Mexico, of which 65 billion barrels of oil equivalent are in unconventional deposits.
Marco Vera, GE Vernova’s head of Latin America and the Caribbean, said Mexico should explore all available options, such as unconventional and deepwater resources. He pointed out that the industry has limited access to gas.

“The gas in the country may not be a business for Pemex, given the price and the volumes, but it could be a business for someone else,” Vera said, adding that large-scale cogeneration at Pemex facilities would be of great interest to the market.

Pemex produces about 2 Bcf/d of natural gas, but uses most of it in its upstream operations, CNH data show. Industry uses about 1.2 Bcf/d, while the country needs about 6 Bcf/d to produce the electricity it needs.

According to S&P Global Commodity Insights, Mexico’s total gas demand is expected to grow at a compound annual growth rate of 1.6%/year through 2050. In 2024, average gas demand is expected to reach 8.8 Bcf/d, rising to 10.5 Bcf/d in 2030 and 13.4 Bcf/d in 2050. Growth will be driven primarily by energy sector demand, which is expected to rise to 8.2 Bcf/d in 2050 from 5.2 Bcf/d in 2024. From 2024 to 2047, U.S. gas pipeline imports will be Mexico’s largest source of supply, expected to account for 73%-80% of total supply. However, as domestic production declines and demand rises, pipeline imports are expected to rise to 83% of total supply from 2048 to 2050.

This dependence on natural gas outside Mexico is dangerous, Carlos Pascual, senior vice president of Global Energy and International Affairs at Commodity Insights, said at the convention. He added that more cooperation is needed to develop the nation’s resources.

“There is no country in the world, except North Korea, that develops its energy sector solely with government funding,” he said.
Source: Platts