Wednesday, December 7, 2022

Large reserves, stable legal framework crucial to oil investments – energy expert

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Countries with large oil and gas reserves and a stable legal environment are best positioned to benefit from major investments. Sheky Espejo, a contributor at S&P Global Platts, said in a recent podcast that companies operating in Latin America have set their eyes on nascent opportunities in the region like Guyana and Brazil, as Mexico has put the liberalization of its upstream sector on hold.

“But the attractiveness of the 25 billion barrels of oil equivalent found in the deep-water Gulf of Mexico has not been lost because of politics,” Espejo said in a discussion with Sergio Pimentel, a partner at Mexico City consultancy Agon and a former official at CNH, Mexico’s energy regulator.

According to the Baker Institute, the Mexican government relies on the oil industry for 40 percent of total government revenues, including taxes and direct payments from Petróleos Mexicanos (Pemex), the state oil company.

But the energy sector faces serious challenges. Oil production has fallen from 3.5 million b/d in 2007 to 1.9 million b/d in 2020 and could decline further in the coming years.

While the López Obrador Administration has indicated that it will respect the current legal framework of the energy reform, it has enacted a series of regulatory changes that have negatively impacted private sector participants, particularly in the midstream and downstream sector, to the benefit of parastatal Mexican Petroleum (Petróleos Mexicanos or Pemex). In April 2021, the Mexican Congress modified the Hydrocarbons Law to give the Mexican Government broader powers to review and suspend existing import, commercialization, and distribution permits for all hydrocarbons. Moreover, the Congress removed from the Energy Regulatory Commission (Comisión Reguladora de Energía or CRE) the power to enforce asymmetric regulation in the market, including the regulation of “Firsthand Sales” of Pemex products to competitors. Following the publication of the revised Law in Mexico’s Official Gazette in early May, a federal judge granted a provisional suspension of the Law, in response to multiple injunctions filed.

Espejo said there has been a lot of talk about the way that the Mexican government has handled the energy sector recently, although no one has left.

“There have been no major changes in the upstream sector at least. How does Mexico look when competing for investments with places like Guyana or Brazil?” Espejo asked.

In response, Pimentel said Mexico has to take into account that it is competing with other countries in the region and the world and companies will ultimately take their money and risk to places where they are most confident of the best returns.

In this regard, Pimentel said companies are looking at two key factors when making a decision on where to invest. “The first one is that the country has enough oil and gas in their subsoil. That is a basic thing to say but that is number one. Number two for me is that the legal framework assures them that the rules of the game are not going to change in the middle of the game.”

He said Guyana is having a very important activity in the upstream with over 22 discoveries made to date and major exploration potential remaining. “They have announced some very major discoveries…and they are moving forward. Brazil is also a very important country. And not only in the Americas, but you also have the North Sea in Europe, you have Asia, you have Africa. I mean, the companies are willing to take their money and their risk wherever they are welcome to do so.”

The Guyana government has come under significant pressure to renegotiate the deal for its largest and so far, most prolific block where operator ExxonMobil has found over 9 billion barrels of oil equivalent since 2015. But the government has said while it agrees the terms should be more favourable to Guyana, it respects the sanctity of contracts and will look to ensure future agreements bring more benefits to the country.


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