Bloomberg reported today that Petroleos Mexicanos, commonly referred to as Pemex, may award the company’s first external oil production and exploration contract by the end of 2009.  The report said the contracts will focus on deepwater projects or its onshore Chicontepec Field, which are areas that Pemex lacks expertise.  The first tender offer is expected to be released by the middle of 2009, according to Carlos Morales, Pemex’s Director of Exploration and Production.  Stay tuned.

In late August and early September 2008, Mexico spent approximately US$1.5 billion on derivative contracts to protect itself from the oil price remaining below US$70 barrel.  The contracts give Mexico the right to sell oil at prices ranging from US$70 to US$100 per barrel, according to a November 10, 2008 Financial Times report. 

Tomas Lajous, a UBS analyst in Mexico City who was quoted in the report said, “The hedge is very good news . . . a presumed cost of some $1.5bn is immaterial relative to risks.”  Mexico relies on oil exports for up to 40 percent of government revenue. 

On Monday, November 10, 2008, ratings agency Fitch cut the outlook on Mexico’s sovereign debt from stable to negative, citing falling oil prices, among other factors.

Mexican billionaire Carlos Slim Helu’s real estate holding company, Inmobiliaria Carso, S.A. de C.V., has acquired a 7.64% stake in Edmond, Oklahoma-based Bronco Drilling Company, Inc. (NASDAQ: BRNC), which has a contract to drill three wells for Pemex, according to an October 22, 2008 Schedule 13G SEC filing by Bronco.

All of the outstanding voting shares of Inmobiliaria Carso are controlled by a Mexican trust, the beneficiaries of which are Carlos Slim Helu and family members Carlos Slim Domit, Marco Antonio Slim Domit, Patrick Slim Domit, Maria Soumaya Slim Domit, Vanessa Paola Slim Domit and Johanna Monique Slim Domit. 

Inmobiliaria Carso purchased 2.2 million shares of Bronco on October 15, 2008 for approximately US$15 million, based on the company’s share price at the time of acquisition.

Strasburger & Price, LLP attorney Julian Nihill has written an excellent summary of the implications of the Mexican legislature’s recent approval of reforms to Pemex, which is set forth below in its entirety.

Amid much political jockeying and posturing, particularly by the PRD, the party of the narrowly defeated leftist candidate for the Presidency, Andrés Manuel López Obrador, the Mexican Congress, on Tuesday, October 28, passed a series of bills aimed at reforming how Pemex conducts business.  The bills go to President Calderón for his signature.  Although President Calderón has expressed his approval of this legislation, and is likely to sign it, the reforms that he proposed in his original draft of the law have been significantly watered down, and, for U.S. companies interested in participating in drilling and exploration activities in México, the legislation is a disappointment.

 

The good news is that this law marks a move toward a more nimble, market-responsive and accountable Pemex, which may be able to entice much needed foreign drilling and exploration technology into México.  The bad news is that it does not go nearly far enough, and is still mired in the old politics of national sovereignty  that has dogged Pemex since its foundation.

 

The law authorizes Pemex to:

 

- Raise funds in the world market and to issue so called “citizens bonds”, both of which suggest an increasing transparency and willingness to respond to outside financial market process.  But Pemex is not permitted to issue equity interests, a step that was widely anticipated by investors and commentators alike.

 

- Enter into contracts for drilling and exploration which contain incentives for the contractors.  But the incentives fall far short of what was hoped for.  Contractors may have no rights whatsoever to the reserves, and they may not report any such interest on their balance sheets or for financing purposes.  All payments must be in cash, and such payments may not be calculated by reference to a percentage of production or to the value of the sales of hydrocarbons, their derivatives, or the profitability of the Pemex entity that is contracting for services.  Contractors may not be granted preferential purchase rights nor any other rights that could impact the price at which the hydrocarbons (or derivatives) will be sold to third parties.

 

- Include in their contracts clauses permitting contractual modification as a result of technological advances brought by the contracting party, variations in the cost of equipment used in the project, or by other factors which result in increased efficiencies in the project.  These provisions in Article 60 of the Law of Pemex, are all considered advances in the rules governing Pemex’s contractual flexibility, but even these are restricted.  What Article 60 gives, Article 61 takes away.  Article 61 limits additional compensation to those situations in which (i) Pemex obtains economies resulting from early completion of the project, (ii) Pemex benefits from new technologies brought by the contractor, and (iii) “other circumstances attributable to the contractor which redound to the benefit of Pemex… provided that they are not in the form of a percentage of sales or production of hydrocarbons.”

 

Many potential foreign technology and equipment partners will consider these potential limitations too restrictive to warrant the investment of their time, equipment and human resources into the volatile Mexican hydrocarbon market.  Others may see this as a crack in the doorway, in particular the provisions for cash bonuses for benefits to Pemex.  It is expected that bidding for service contracts will begin as early as January 2009, and it may well be that those contractors who are willing to bid a relatively conservative price with the possibility of a contractual bonus, may be the real winners under this legislation.

Macario Schettino, an author, journalist, and Professor of Humanities at Mexico’s highy regarded ITESM (Instituto Tecnologico y de Estudios Superiores de Monterrey), wrote a keen op-ed on the recent energy reforms in the October 27, 2008 edition of El Universal, excerpts of which were aptly translated and posted by Patrick Corcoran on his Gancho Blog and follow below:

Today Pemex is reformed. Not energy nor oil, just the company. That is to say that to resolve a problem its cause is strengthened. Suffice it to say that it is an absurd solution. The believers in the myth will insist that only this way can the nation of the Revolution continue existing. The optimists will see in the reform the success of negotiation, a show of the reliable politicians’ capacity. From outside of the myth of self-satisfaction, the size of the error is evident. We have been caricature of a country for so long, like so many Latin American nations. Once again, only Argentina exceeds our self-destructive enthusiasm: its government has plundered for the second time the savings of its country. And part of the population celebrates it, as here part of the political class celebrates the reform.

Mexico has never been an oil-producing power, but rather only because of Cantarell, which is running out irremissibly. We never managed to construct a national oil industry, despite our production and our being neighbors of the country that has produced the most oil in history. Pemex is an inefficient company that occupies at least three times more staff than required, a sinkhole of corruption, and that now will reduce its payments to the government, appropriating more oil-based profits. But even if it kept all the profits, it wouldn’t be enough to explore deep water, which is the type of investment that must be made. Where did Mexico come out ahead?

Following seven months of intense debate and surrounded by protesters gathered outside the Congress, Mexico’s Chamber of Deputies (Camara de Diputados) yesterday approved certain changes to Mexico’s energy law regime, according to a report in El Economista. The changes, which were approved by the Senate last week, must be signed by President Felipe Calderon before they will become law, but receipt of his imprimatur is all but certain.

Nearly all analysts agree that the amendments, which could have been a great opportunity for Mexico to enact expansive reform to its energy sector and root out inefficiencies at Pemex, are a major disappointment.

The following is a summary of a few of the significant aspects of the new energy law regime, as set forth in the report:

Laws Under Article 27 of the Constitution

• Blanket prohibition on private sector participation in strategic areas of the hidrocarbons sector, such as refining of oil and gas and construction of pipelines and storage plants.
• Allows Pemex to enter into contracts with private sector participants for projects or services provided Pemex does not grant any rights to such participants relating to ownership of hidrocarbons.
• Prohibits Pemex from entering into contracts with private sector participants that permit or require Pemex to share a percentage of production or the profits of Pemex or which include rights of preference or shared production (i.e., risk-sharing arrangements).
• Prohibits Pemex from agreeing to submit itself to the jurisdiction of foreign courts in project or services contracts performed in Mexico and entered into with foreign contracting parties, but allows Pemex to submit itself to the jurisdiction of arbitral tribunals pursuant to international agreements to which Mexico is a party.

Amendments to the Law of the Energy Regulatory Commission (Comision Reguladora de Energia – CRE)

• Grants the Energy Regulatory Commission (CRE) technical, operative, and management control over regulation of the gas and electricity sectors.
• Allows for the CRE’s participation in the generation and cogeneration of electricity through renewable energy sources, as well as the establishment of financing the same, including electricity generation by wind, solar, geothermal, and water sources.

Law for the Sustainable Exploitation of Energy (Ley para el Aprovechamiento Sustentable de la Energia)

• Provides for sanctions by fine for those who import, distribute, or sell electrial equipment or devices that provide false or incomplete information to consumers.
• Creates the National Program for the Sustainable Exploitation of Energy and the National Commission for Energy Efficiency.

Amendments to the Law of the National Hidrocarbons Commission (Ley de la Comision Nacional de Hidrocarburos)

• Approves the Law of the Energy Regulatory Commission (CRE), which expands and increases the regulatory and oversight activities of the CRE.

Law for the Exploitation of Renewable Energy

• Establishes the System of Energy Sustainability.

Pemex Law

• Prohibits the privatization of Pemex.

George Baker, the author of the Energia.com and a management consultant who advises companies in the oil and gas, power, and chemical industries, has commented extensively on Mexico’s recent energy reforms. 

His insightful comments regarding the Pemex Administration Act of 2008, which include the recent reforms to Mexico’s oil and gas laws, are available here.

Mexico’s upper house of Congress approved the following amendments to laws governing the country’s oil sector on Thursday, October 23, 2008, according to a Financial Times report:

• Four independent members added to Pemex’s 11-person board of directors;
• Pemex may hire private sector oil/gas exploration and production companies; and
• Pemex may pay oil/gas production bonuses to private sector companies (i.e., incentivized services agreements).

Regretably, the amendments do not permit private sector involvement in the building or ownership of refineries or in areas of oil transportation nor do they permit Pemex to enter into oil/gas production-sharing contracts with private sector.

Although the addition of independent directors to Pemex’s board and the allowance of payment of production bonuses to private sector companies is a positive development, the reforms fall well short of what was hoped for by the Calderon administration and foreign investors.

Legislators in Mexico blocked President Felipe Calderon’s plan to allow private companies to refine oil for state-owned Petroleos Mexicanos (Pemex), according to a Bloomberg.com report.  The report said: “The defeat for Calderon follows draft legislation he sent to Congress in April seeking to allow private and foreign companies to operate oil refineries in Mexico, and to explore for and produce oil for Petroleos Mexicanos, or Pemex. Under current law Pemex can hire private companies to upgrade plants but can’t contract with them to refine oil.”

Pemex Exploracion y Produccion awarded ICA Fluor Daniel, S. de R.L. de C.V., a joint venture between Fluor Corporation and Mexican construction company Empresas ICA, S.A. de S.V., a US$45 million contract for the engineering and construction of a crude oil dehydration system for Mexican Maya crude oil, according to a September 24, 2008 report in El Financiero.

The report said that the project ICA Fluor Daniel will be responsible for converting the Maya crude held in two 500,000 barrel oil storage tanks at the Dos Bocas marine terminal in Tabasco into deydrated crude oil.