Landmark Energy Reform To Reverse O&G Sector's Fortunes
BMI View: We see the recently passed Mexican energy sector reform as the start of a fundamental paradigm shift for the country's hydrocarbon sector. While it does not challenge the national narrative that hydrocarbons belong to the State, working within these constraints the landmark bill takes majors steps to incentivise private sector involvement through the creation of a flexible contract system. Over the long term, we believe this will bolster investment and begin to revive the sector, reversing a nearly decade long decline in oil production.
On December 12th, the Mexican Congress pushed through energy reform, with the Chamber of Deputies (lower house) voting to pass the landmark bill just two days after it cleared the Senate. While the exact magnitude of the reform will be difficult to judge until secondary legislation is enacted in early 2014, we believe this bill is a game changer for the Latin American country's hydrocarbon sector. Indeed, after nearly a decade of plunging oil production, the reform could finally begin to draw the necessary foreign investment to bolster output.
As such, while we stress that it will take a number of years before results are felt in the country's production and reserves data, over the long term this is likely to be highly significant for the Mexican energy sector. The bill now will need to be ratified by a majority of the 32 local legislatures in order to pass. That said, given that the ruling Partido Revolucionario Institucional (PRI) and centre-right opposition Partido Acción Nacional (PAN) (both of which supported the bill) dominate the local level electorates, this is likely to be no major obstacle.
|Mexico - Chamber of Deputies, Vote on Energy Reform, %|