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Interview

Marco Antonio Bernal, President of the Energy Commission, Chamber of Deputies, Mexico

“There are still multiple topics to take care of. The issue of energy security is of high priority as it is essential for us to have the certainty that Mexico will be an important producer of energy over the next 25 years.” Marco Antonio Bernal, President of the Energy Commission, Chamber of Deputies, Mexico.

 

What are the strategic priorities that will enable Mexico to achieve energy security, increase production capacity, and boost the nation’s economy during President Peña Nieto’s term?

We feel that it will be very difficult to realize the results of the Energy Reform within the 6-year administration of the President Peña Nieto. This is a reform that will enable Mexico to grow in the long term. The days of “easy petroleum” are over. We now need to explore deepwater plays and, if all goes well, we can expect the timeframe needed to properly mature the petroleum industry to be at least five or six years. Shale gas is an immediate priority since we believe it could give us prompt results that will, at the very least, let us properly evaluate the growth of the sector and the extent of the country’s resource potential.

There are still multiple topics to take care of. The issue of energy security is of high priority as it is essential for us to have the certainty that Mexico will be an important producer of energy over the next 25 years. Another sensitive topic is the need to reduce the prices of gas as soon as possible; this could be something that will boost the economy over the next six years. The petroleum sector is and will remain relevant for us, but the gas industry is of pressing concern at the moment.

As Chairman of the Energy Commission, what is the role and responsibilities of the commission?

This is actually my third legislature; I have already been both a Senator of the Republic and a Federal Deputy. In 2008, I participated in the creation of the first tranche of energy reforms. Though those reforms didn’t live up to expectations, I was able to learn from the experiences and the shortcomings of that first attempt and some years later I was nominated to chair the Energy Commission in the Chamber of Deputies.

I firmly believe that those initial experiences enabled us in the long run to gain both the capacity and the drive needed to achieve the much better energy reform that we see today. First, we moved away from the concept of service contracts, which did not work well and actually had the adverse effect of inhibiting an open energy sector. Second, we prised open the energy industry by shifting the paradigm through which Mexicans have always perceived this sector: Mexico’s budget has always been dependent on the performance of oil and gas. The development of the energy industry was essentially treated as a collection instrument for state revenue. Now, with a modified paradigm, we view the sector as the engine of the economy that will generate growth, productivity and employment rather than just as a cash fund. This is the vision behind the new reform—we are endeavoring to open the energy market to enable more players within, and simultaneously to boost the rest of the economy.

What, in your opinion, were the most important energy related amendments made to the constitution and what benefits do you expect these to generate?

We previously made a quite broad constitutional reform with many provisional articles. Every provisional article reflects the level of trust the various parliamentary groups participating possess, so it was important for us to be sure about the effect that the different modifications, through provisional articles, have under the secondary laws. More than 20 provisional articles were eventually formulated.

Mexico is a country that has only the constitution and ordinary laws. Other countries tend to possess both constitutional and ordinary laws in addition to the constitution. The result of this is that the transitory articles in Mexico sometimes work like constitutional laws. For instance, our work now consists in lowering the provisional articles that were made into ordinary laws. We are looking for the government to increase its regulation capacity and develop strong regulatory authorities for the energy sector as in other countries such as the UK, Norway, Brazil and the US. We also seek to own a competitive and strong state-owned company like those of Brazil, Norway and Saudi Arabia. This is the    common denominator in most oil and gas producing countries except the US.

Before bringing Pemex to a competitive market, we need to “clean it up” and avoid a most probable failure due to the lack of competitiveness that we are currently being faced with. As well as learning from past mistakes, it is important to have a better Board of Directors in place, as well as budget and financial autonomy in order to encourage better decision making and compliance processes. Another problem that Pemex is facing, like many Mexican public companies, is the one related to employees’ pensions. Pemex shoulders a considerable debt burden stemming from pensions and if we leave this solely up to Pemex to sort out, then we will encounter many problems.

You publicly called for Pemex to be run independently of government. Can you elaborate more on that?

In Mexico, we have a structure called “parastatal industry”, which is essentially an extension of public administration. With the Energy Reform, we have created a new structure called “state-owned productive enterprises”. Through this, we want Pemex to operate according to the corporate governance regulations like any other company in the world irrespective of whether publicly or privately owned. We would like Pemex to have a Board of Directors that is not appointed by the government or public servants, but comprised of independent technical professionals that do not depend economically on the sector; in other words, a Board fit to govern the interests and the business development of Pemex. We would also like Pemex to adopt the best corporate governance practices that any company in the world can afford to have. In this sense, the company will need to be re-organized.

In accordance with the structure of “state-owned productive enterprise”, the absolute control of the company should be left either to the Treasury or the Energy Secretariat, thus affording the enterprise a relationship of enhanced responsibility, but not of dependence on the government. Pemex will be required to compete with other companies in the market. This means competing to win public bidding rounds, and entering into new ventures with other enterprises that will have the right to ask for information before signing a contract.

What are the challenges that lie ahead for the efficient implementation and completion of the process of the energy reforms in a desired manner?

We have until April 20th to finalize the legislative process as mandated by the constitution. We still face enormous challenges. First of all, only two of the main political parties are working together, the third one is refusing to participate in the energy reforms. Secondly, we need to create a hydrocarbons law to act as the steering law for the development of the oil and gas industry in its entirety; in other words, not just for the reform of Pemex, but the whole industry ecosystem.

The ‘round zero’ bidding process for Pemex must also be completed by the end of the current year so as to allow an opening up of the market to private entities in early 2015. This will involve active participation from the Energy Secretariat and the Treasury, which must assist in the design of contract types. The bidding rounds will be organized by a further regulatory body, the Hydrocarbons National Commission, which is expected to structure bidding rounds in the form of packages that make exploring and production activities attractive across different grades of oil field. During each bidding round, the Treasury will be responsible for deciding what is best for Mexico’s public finances in terms of budget and taxation for the agreement contracts. Through the Energy Regulatory Commission, we also intend to have a scheme of vigilance and supervision of the E&P workload development.

In short, we have been working hard on a legal framework underpinning all the factors previously mentioned. I expect that we will finish on time, and if not we will need to resort to an “extraordinary period” deadline extension. There are four fundamental laws that we are currently working on: The New Hydrocarbons Law, the Regulatory Law for Pemex, the Law for Regulatory Bodies and the State-owned Productive Enterprises Law.

With the continuous development of Canadian tar sands and US Shale, some analysts are predicting that North America could very well rival the Middle East in terms of production capacity. With the progression of the energy reforms, what role do you see Mexico playing in this North American Energy revolution?

We are fully committed and believe that Mexico will become an energy superpower. Besides our close relationship with the US, we have all Central America and multiple possibilities in the Pacific Region and South America. We want to be a first-class energy power and we have the resources to be so. We believe that, with the Energy Reform, we can attract enough investments in order to become the energy matrix supplier in Central and South America, at least within the Pacific region. We understand that accomplishing this is not immediate and requires time, so this will only be possible in the long term. Just like Mexico’s FTA (Free Trade Agreement) in the 90’s, leveraging the Energy industry today should become a critical driver of successful development over the forthcoming 15 to 20 year period.

Nowadays, there is a geostrategic dimension that stems from the relationships with US and Canada, but there are also many other sectors that we want to develop through that relationship.

Mexico is living a magnificent moment; the President, Peña Nieto, is working responsibly, especially with a change of mindset about the relationships of Mexico with foreign countries. I believe that there is a new vision for our role in the world today and that is why the legislation is being made with a greater sense of responsibility. We are establishing new regulatory bodies and laws that will ultimately provide legal security, working possibilities and a qualified and trained labor force for the Energy sector in order to make Mexico a land of opportunities for new investments.

 

To read more interviews and articles on Mexico, and to download the latest free report on the country, click here.

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