Interview with Mexico’s Secretary of Energy, Pedro Joaquín Coldwell

October 5, 2017

How is your Secretariat implementing Mexico’s historic energy reform?

Secretary Coldwell: The Mexican energy reform is a transformation of the hydrocarbon and electricity sectors so we are implementing it on two fronts. On the hydrocarbon side we are holding tenders to award exploration and production contracts, with the aim being that we can create a private oil and gas industry that coexists with Pemex. At the same time we are also trying to create wholesale markets for electricity and gas. Really we are 30 years behind the rest of the world in terms of electricity markets. But we are busy creating the conditions for a vibrant and competitive market.

Many Mexicans feared the reform would be waylaid by corruption; how have you ensured that the process is transparent?

SC: One of our main objectives, both in the legislation of the reform and in its implementation, was to reassure the Mexican people that the assignation of the contracts would be carried out under the best international standards. Really there were two messages that we wanted to convey. We wanted to make it clear to the public in Mexico that the natural wealth of the country was not being sold off on the cheap in some opaque garage sale. The other message was to international investors – we wanted them to know they were entering a fair market that wasn’t biased by favouritism.

That meant that it was crucial that we built a robust and transparent tender system. There is a series of checks and counterbalances in the oil and gas auction process with the involvement of four separate Mexican institutions. That means that no single institution can take a discretional decision and unilaterally decide to give hydrocarbon assets to a particular company. The Secretary of Energy helps to design the blocks, with the technical help of the CNH. Then the Secretary of Finance calculated the formula used to award the blocks, with 90% weighting given to the best economic offer and 10% according to the amount of investment pledged. The use of the formula means that there is no discretion used in appointing a winner. As for the CNH it is composed of seven commissioners that have to be approved by the Senate. All of this makes it impossible for a single rogue player to corrupt the system.

We wanted to make it clear to the public in Mexico that the natural wealth of the country was not being sold off on the cheap in some opaque garage sale…

The process of running the auctions is also very transparent. Any dialogue between the oil companies and the CNH must be put in writing and it is kept on public record so that the Mexican people themselves can see it. The awarding of the contracts is broadcast live on the internet to the public so that there is no doubt about the selection process. So far the system of tenders has been very successful, with 38 contracts awarded and one farmout with Pemex. We have achieved good conditions for the Mexican state with an average profit share of 70% across the deals. There has not been a single complaint of corruption and no cases are pending in local or international courts; which shows that nobody doubts the integrity of the auctions. The detail of the electricity auctions is different but they are just as transparent and efficient.

The oil price tanked just as Mexico opened up its energy sector to international investors; how have low prices impacted the reform?

SC: As you say it was unfortunate that just as we opened the door for tenders the oil price fell. Nonetheless, the best companies from around the world came to take part in the auctions. There were many here in Mexico who said that we should delay the oil and gas auctions until the oil price recovered but we resisted that. If we had held back the auctions we’d still be waiting now and the energy reform would have been delayed. The fact is that the auctions have been a success regardless of the oil price. We have managed to award 39 contracts, with 48 new international companies and 21 Mexican players. Approximately 70% of the concessions put up for auction were successfully awarded, showing that there is a lot of demand to take part in our reform. Ultimately Mexico is attractive for investors because we have judicial stability, we are well positioned to access major markets, we offer competitive contracts managed under a fair regulatory system and, most importantly of all, we have a wealth of hydrocarbon resources.

How are the state-owned giants, the CFE and Pemex, being transformed by the reform?

SC: When the energy reform was being debated in Congress the fate of Pemex and the CFE was one of the most controversial points. The critics claimed that the reform was part of a covert plan to privatise these companies, which have an important place in Mexico’s modern industrial history. That was never the case. This reform gives these companies an opportunity to modernise and become world class. To empower that transition we have installed modern CEOs and board members at the head of these companies. Over time these leaders will effect the change throughout the whole company. The change is most dramatic with the CFE, because of part of the reform it has been restructured into nine subsidiaries, four affiliates and four business units that are divided by strict Chinese walls.

With Pemex the transformation is more subtle but just as important. For example, we have just seen Pemex enter into its first E&P partnership with a deepwater farmout. For 78 years Pemex has been unable to enter in to these types of deals, which are vital if Mexico is to get the most out of its resources.

Will the energy reform be undermined if López Obrador, an outspoken critic of the reform, becomes elected as Mexican president in 2018?

SC: I don’t want to politicise my answer, so let’s just say that whichever candidate wins in the next election would face two huge obstacles if they wanted to stop the reform. The first is judicial. The reform is written into the Mexican constitution, which means that it would require two-thirds of the votes in Congress to overturn it. Moreover, the constitution limits the number seats of any one party to 300, which means that it would require a coalition. And it is extremely unlikely that two parties, proposing a reverse of the reform, could even win that many seats.

The old system was changed because it didn’t work anymore…

The other hurdle is reality – stubborn reality. To go back to the old system is virtually impossible because it would be like turning back time. The old system was changed because it didn’t work anymore. Consider this: if all of the concessions that have been awarded so far are explored and exploited successfully they could reach a peak production of 900,000 barrels per day. However, to do that would require $48billion of capital and lots of cutting-edge technology. That is to say it’s impossible to reverse the decline in Mexico’s historic oil production without capital and technology. If a new president wants to reverse the reform they will not have the capital and technology to boost production.  Is the state going to indebt itself and take the financial and geological risk when Pemex already has high debt levels? Again, without wanting to get involved in the specifics of Mexican politics, you can see that around the world politicians always promise a lot on the election campaign, that they can’t actually deliver once they come to power. Anyone proposing to reverse the reform is promising the impossible.