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Present, Past and Future of Energy in Mexico
Investors' source of insight on Mexico's oil and power industries since 1996.
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DRILL INTO MEXICO'S ENERGY INDUSTRIES, POLITICS AND INSTITUTIONS

 * ANNUAL CATALOGS GROUPED BY SEXENIO
   
   In this section, we group our annual catalogs by presidential term, starting
   with Ernesto Zedillo (1994-2000) and continuing to Andrés Manuel López
   Obrador (2018-24). Reports may be purchased individually (US $50), by year
   (US $1,000), or by presidential term (US $2,500). For many of these reports,
   sample pages are available on request: info@energia-mx.com. To be redirected
   to our Annual Catalogs page, click here.

 * TOPICAL CATALOGS
   
   In this section, we create catalogs on selected topics. Reports may be
   purchased individually (US $50) or by topic (US $1,000). For many of these
   reports, sample pages are available on request: info@energia-mx.com. For each
   topic, we offer an overview.

 * OFFSHORE SAFETY
   
   PEMEX'S two-billion dollar platform losses in recent years (Nohoch Alfa in
   2023 and Abkatún Alfa in 2015) point to a faulty safety regime and a lack of
   engagement with U.S. and European safety authorities. Such accidents
   represent failures of leadership, procedures (recruitment, training,
   maintenance, supervision), regulation, and public oversight. The
   billion-dollar fire that consumed a Pemex platform on July 7, 2023 should be
   a warning. Offshore safety in the Gulf of Mexico (GOM), which is shared by
   Cuba, Mexico and the United States, lacks coordination and a common framework
   for training, evaluation, and risk mitigation. Data made available to the
   public is misleading or non-existent. In the United States, authorities
   publish statistics on safety incidents in oilfield operations in federal
   waters, but not specifically for those in the GOM. Data on safety incidents
   in waters of state jurisdiction, if published at all, are not aggregated with
   federal data to give a comprehensive picture. On Mexico’s side, Pemex
   publishes data on safety incidents measured by frequency and gravity scaled
   to the number of hours in “at risk” operations. As the total number of such
   hours is not published, the reader cannot discern if the rate of safety
   incidents is increasing or decreasing from one reporting period to the next.
   Worse, Pemex’s safety data is aggregated. There is no separate reporting for
   offshore accidents. As for the safety performance of private operators, there
   seems to be no obligation to report them to the public. The hydrocarbon
   safety agency (ASEA), created in 2014, has a minuscule budget and staff. It
   has earned the nickname “PowerPoint Safety Agency.” In Houston, the Center
   for Offshore Safety (COS), founded soon after the Macondo mega-oil spill by
   the American Petroleum Institute (API) to calm public anxiety. Since then, it
   has promoted safety dialogues between GOM operators, contractors, and
   regulators. What it hasn’t done is engage with Mexico. “Our mission stops at
   the U.S.-Mexico maritime boundary,” COS director Russell Holms told us.
   Several years ago, expressive of their U.S. GOM focus, API and COS
   discontinued their subscription to Mexico Energy Intelligence™. These facts
   and considerations come together in a worrisome outlook for GOM offshore
   safety. For a selected list of reports on Offshore Safety, click here.

 * DEER PARK REFINERY
   
   In opinion pieces in The Houston Chronicle and Mexico City’s Reforma, we
   opposed the sale by Shell Oil Company of its controlling share in the Deer
   Park Refinery to a twice-removed affiliate of Pemex. Instead of buying
   Shell’s interest, in 2017, we had discerned that it would be better for Pemex
   to find a buyer for its minority share. The Houston-area public has a
   legitimate concern about how responsibility for environmental liability and
   decommissioning was negotiated in the sales agreement. The new legal owners
   are holding companies without a balance sheet that could cover the cost of a
   major accident or a billion-dollar decommissioning cost. The terms regarding
   Shell’s residual liability for environmental remediation are confidential.
   For a selected list of reports on Deer Park Refinery, click here.

 * ENERGY REFORM
   
   The starting point for Mexico’s Energy Reform of 2013-18 is an appreciation
   of the false cognate relationship between “reform” in English and “reforma”
   in Spanish. The first refers to the correction of a harmful pattern (as
   “prison reform”), while the second has no connotation of error-correction
   whatsoever. “Reformar” means to edit or amend as of an article of the
   constitution. In this way, the new market designs for oil and electricity
   were edits to the status quo, not the long-overdue corrections of an
   investment-stiffling regime. Space was opened in law and regulation in oil
   production and transportation and in the retail sales of refined products. In
   the electricity market, investors were allowed only to participate in
   generation. What was allowed to stay the same—unedited—was the looming figure
   and vast discretionary authority of the president of Mexico in both the oil
   and power markets. The reversals of fortune of investors in both markets
   under President López Obrador point to faulty market designs and an
   unwillingness of political elites in Mexico to commit to sustainable energy
   markets. For a selected list of reports on Energy Reform, click here.



 * LAW
   
   We evaluate energy laws, regulations, and policy choices by the measure to
   which they promote an increased supply of natural resources—to include oil,
   geothermal, lithium, and renewables—and their respective transformation into
   energy resources for businesses and households. By this measure, choices made
   in Mexico in 1917, 1938, 1958, 2018, 2021, and 2022 have the common feature
   of restricting energy supply. We put most of the blame for these outcomes on
   the language, philosophy, and popular appeal of energy socialism in Mexico,
   as seen in the preference for state control over private investments and
   markets and as memorably expressed in Article 17 of the constitution of 1917.
   <span>For a selected list of reports on law, click here.</span>

 * ROUND 1.1
   
   At an industry conference held in Houston in late 2014, Lourdes Melgar,
   Mexico’s Under-Secretary for Hydrocarbons, told the audience that one of
   Mexico’s advantages in being the last to open its petroleum estate to private
   investors was that it benefits from the experience of other jurisdictions. By
   the end of the day on July 15, 2015, however, when the design and execution
   of the first oil lease auction had been completed and the results were known,
   investors realized that Dr. Melgar had been far off the mark. True, Round 1.1
   was the first oil auction in Mexico’s history, but—as we document in our
   reports—the details of design and execution flaunted international practices
   and investor expectations. For selected reports on Round 1.1, click here.

 * USTR COMPLAINTS
   
   On July 20, 2022, the U.S. Trade Representative (USTR) published a request
   for an Investor-Dispute Consultation with Mexico, alleging a pattern of
   possible violations of the U.S.-Mexico-Canada trade and investment agreement
   of 2020 (USMCA). Bizarrely, there was no reference to the history of
   irregularities since 2018 in the upstream, which could easily have been
   construed as possible USMCA violations. Again bizarrely, at the 2022 annual
   meeting of the U.S.-Mexico Chamber of Commerce (USMCOC), held in Washington,
   D.C., on September 21, during the public remarks of the USTR’s Deputy
   Director Jaime White, there was no mention of a trade dispute. As of July
   2023, eight months beyond the date on which the USMCA allows for the
   convening of an arbitration panel, USTR has not pulled the trigger. For a
   selected list of reports on USTR Complaints, click here.

 * ZAMA CONTROVERSY
   
   Mexico’s reputation as an investment designation for international oil
   companies has been tarnished—for at least a generation—by the official
   mistreatment of private investors in Block 7 of Round 1.1.
 A consortium, led
   by Houston’s Talos Energy, LLC in 2017, discovered a near-giant offshore oil
   reservoir in Pemex’s backyard. Had subsequent events followed global
   expectations, the reservoir named Zama in 2023 would produce 150,000 barrels
   of oil daily. Instead, work on the reservoir has been hamstrung by a history
   of dissimulations and irregularities. First oil production is still years
   away. In an article published in The Houston Chronicle on August 7, 2020, we
   warned the oil industry of this scenario—which would take another two years
   to unfold. In May 2023, the news that presidential insider Carlos Slim had
   offered to buy 49% of the working interest of Talos served to transform the
   attitude and narrative of President López Obrador from hostility to
   enthusiasm. For a selected list of reports on Zama Controversy, click here.

 * BILINGUAL PROFICIENCY
   
   The Mexican government under President Andrés Manuel López Obrador is the
   least bilingual administration since 1976. In 2019, the director-general of
   Pemex was invited as a keynote speaker at the Offshore Technology Conference,
   but the invitation was withdrawn when it was learned that he would not be
   able to present in English. Despite the importance of English proficiency in
   all areas of science, technology and commerce, Pemex has not yet developed
   English-language proficiency training for its employees. In our reports and
   workshops on bilingual proficiency, we emphasize the sequence MIND →
   EAR→TONGUE. There is little point in learning vocabulary terms if the student
   cannot hear the languages spoken to him or her by a native speaker. To hear
   requires an understanding of of the phonetic system of the target language,
   particularly the subsystem of vowels. Where Spanish has precisely five
   vowels, English—depending on who’s doing the counting—has between 15 and 20
   vowels, only two of which are found in Spanish (/a/ and /e/). We regard the
   study of the vowel trapezoid and the symbols of the International Phonetic
   Alphabet (IPA) as essential tools for learning to hear another language.
   Finally, we insist that learning the fine points of pronunciation creates a
   trust credential in the mind of the native speaker, who, to himself or
   herself, says “You have listened carefully to my language. Perhaps you’ll
   also listen carefully to what I’m now telling you.” For a selected list of
   report titles on Bilingual Proficiency, click here.


WE ARE ON X(FORMERLY TWITTER)

George Baker @energia_com ·
12 Jan


In this report (MEI 976) we speculate on some of the legal and constitutional
issues to be resolved in connection with the government's decree of December 29,
2023.
https://emailmarketing.secureserver.net/p/5c6f881



Reply on Twitter 1745926466817192080 Retweet on Twitter 1745926466817192080 1
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George Baker @energia_com ·
10 Jan


The Quinazo of 1989 was the first abuse of presidential power during the
presidency of Carlos Salinas. (Today is the 35th anniversary. My later
involvement in the case helped get La Quina out of jail.)

Reply on Twitter 1745131278997881284 Retweet on Twitter 1745131278997881284 1
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George Baker @energia_com ·
10 Jan


Press release (Spanish) that updates MEI 975 regarding the Dec. 29 decree that
orders the temporary occupation of the hydrogen plant at the Tula refinery of
@Pemex


Reply on Twitter 1745128281295270233 Retweet on Twitter 1745128281295270233 Like
on Twitter 1745128281295270233 Twitter 1745128281295270233
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Carlos Salinas, a son of a former cabinet minister, was elected president on
July 3, 1988 but with the broadly held suspicion of electoral fraud. His chief
opponent, Cuauhtémoc Cárdenas, had been ahead in the voting returns earlier in
the day when the government announced a computer system crash. When the
computers came back up, Salinas had won. The Interior Ministry which oversaw the
elections, was led by Manuel Bartlett (the current director-general of CFE).

Inspired by the success of the European Economic Union, a Canadian-U.S.
free-trade agreement was negotiated under President Ronald Reagan and concluded
in 1988. President Salinas and President George H. W. Bush on June 10, 1990,
endorsed a bilateral trade agreement. Canada joined in 1991.

To promote its cause before a skeptical American public, Mexico’s finance
ministry reclassified Mexico’s national trade accounts for exports to include
what, previously, had been “border transactions” (of maquiladora assembly
plants). By the reclassification, Mexico’s trade with the United States surged
after 1991, making Mexico its “2nd largest” trade partner (after Canada). By our
analysis, both rankings reflected intra-company trade (Ford-Canada exporting to
Ford-U.S.), not true exports

A preliminary agreement was reached in August 1992, and signed by the three
leaders on December 17. It was ratified by the three legislatures in late 1993
and came into force on January 1, 1994.

Throughout the negotiations, President Salinas insisted that “oil was off the
table.”

At some point between August 1992 and December 1993, Mexico introduced a
ten-year, declining tariff on natural gas, starting at 10%. “The tariff,” in the
words of Pemex Director General Adrián Lajous, “would give Pemex time to prepare
to compete.”

Based on conversations we have had with members of the three delegations that
negotiated the terms of NAFTA, a Mexican tariff on natural gas imports was never
discussed.

But as MidCon Gas pipeline developers would soon discern, the intent of the
tariff was to serve as a barrier against private competition in natural gas
transportation pipelines. Pemex threatened the prospective anchor customers in
Monterrey with retaliation if they were to support the Texas-Monterrey pipeline
that Midcon was proposing. “If you import gas from MidCon, you’ll pay an extra
10%; but if you continue to buy it from Pemex, we’ll absorb the cost.”

Lacking an anchor customer, the project was about to be canceled when Pemex
offered to contract for long-term capacity on the future pipeline (currently
operated by Kinder Morgan, Inc. Since then, no other pipeline developer has
sought anchor customers in the private sector.

x

Ernesto Zedillo came to the presidency as the last-minute substitute-candidate
of the PRI, owing to the assassination of Luis Donald Colosio ten weeks before
the scheduled elections on July 3. Three weeks into his presidency, on December
21, 1994, Mexico abandoned the exchange rate band and allowed the peso to float
freely. (We were told by a former official in the Finance Ministry at the time
that this publication of this article on December 19 aggravated the capital
flight that led to the devaluation of the peso two days later).

In 1999, the Zedillo administration reduced the 1994 declining tariff on natural
gas to zero, three years in advance of the ten-year term. In the Energy
Ministry, led by economist Luis Téllez and political scientist Lourdes Melgar
(both with Ph.D.’s from MIT), unveiled an ambitious plan to restructure the
electric sector. “The table was set” (it was said) for his successor to
implement the plan. Some of the ideas were implemented but not until the
Electric Industry Act of 2014.

On election night, July 2, President Zedillo made an unscheduled appearance on
national television and–before all the votes had been counted–declared that
Vicente Fox had been elected president.

x

On December 20, 2013, the Diario Oficial, the government’s federal register of
acts of State, included amendments to constitutional articles 25, 27 and 28,
with a lengthy transitional article that delineated the responsibilities of
existing and new federal agencies. On August 11, 2014, some twenty laws were
promulgated, which, taken together, amounted to hundreds of pages. The laws
permitted private gasoline branding and private equity investments in oil and
gas properties.

The National Hydrocarbon Commission (CNH) was restructured as the agency that
would conduct international auctions of oil leases. The first lease auction was
held on July 15, 2015. In the most contested block, Area 7, a near-giant oil
reserver, named Zama, would be discovered.

Responding to a complaint voiced for two decades by natural gas pipeline
companies and exporters, Pemex divested its natural gas pipeline system, which
had been suspected of collusion with its gas marketing division. The ownership
of the pipelines was transferred to a new system operator for natural gas
(called CENAGAS). Pipelines workers remained Pemex employees.

A Hydrocarbon Safety Agency (ASEA) was created with the mandate to provide
public oversight from the well tip to the gasoline pump. (The Macondo-1
oil-spill had happened only four years earlier.) The agency’s budget was not
sufficient to hire and train safety inspectors; so, consultants were recruited.
A National Hydrocarbon Fund was also established to provide transparent
accounting of revenues and payments.

The market design for electricity underwent a major change in the generation
segment. First, the system operator (named CENACE), which had been a department
within CFE, was made into an independent agency. Second, the dispatching rules
were based on “economic merit,” meaning the generator with the lowest cost was
dispatched to the grid first, a rule that favored renewable power sources and
penalized CFE’s coal and diesel plants. The transmission and distribution market
segments remained closed to investors.

x

Having defeated a PRI presidential candidate for the first time in 70 years,
Vicente Fox came to the presidency with the political capital sufficient to make
major changes in the energy sector. On December 6, 2001, Pemex hosted a
breakfast in the Hotel Nikko for 600 guests. Energy Minister Ignacio Pichardo
spoke, as did one or two constitutional experts who opened on the scope of
Article 27 in matters related to hydrocarbon. Luis Ramírez Corso and other Pemex
brass presented the new, and eagerly awaited market opening. Instead of a market
design in which companies would be rewarded according to the volumes of oil and
gas discovered and produced, they would be paid according to a price list for
specific tasks ($/foot drilled, for example) associated only with natural gas
production. A company would be paid, however, only if there were sufficient
funds in escrow account from the sale of the natural gas for which the
contractor is accredited. Oil was not included in the contract. No major
American or European company discerned an investment opportunity in the
so-called “Multiple Service Contract” (MSC).

Despite its commercial unattractiveness, the MSC model was the first to
introduce a commercial framework by which a private party could be paid,
contingently and proportionately, on its success in natural gas production. That
said, it was arguably in violation of the sixth article of the Petroleum Act of
1958, which prohibited contracts payable according to the results obtained (and
which would not be abrogated until 2014).

In the electric industry, the Fox administration published regulations that
would be challenged in the Supreme Court, which issued what may have been its
first (and only) ruling against a presidential decree.

x

The Energy Reform of 2013-14 was supposed to have happened in 2008, Early in the
year, the government urged the exploration of “Our treasure,” in deepwater
reservoirs, and for which partnerships with companies that had the “new
technologies” were needed. Most of the markets for equity investors stayed
closed on account of opposition by PRI and PRD; but by inserting a dubious
notion into the Pemex law, contractors in mature fields could be paid in
proportion to their achieved level of production above a projected decline. The
bidding rules included a technical tie, declared when two or more bids with
within 2% of each other.

A consolation prize was the creation of the five-member National Hydrocarbon
Commission (CNH) to provide public oversight of Pemex. Renewable energy
generation was also promoted.

×

President López Obrador speaks of the “so-called ‘Energy Reform'” as an
ill-conceived attempt to diminish the market presence and finances of the state
energy companies. He suspended the oil lease auctions and the long-term power
auctions, among many other measures to reset the oil and power markets.

x