Mexican Senate impresses with energy reform
Mexico’s Senate has approved an energy reform package that analysts describe as potentially “transformational” for the country’s oil industry.
Mexico's Senate has approved an energy
reform package, which now heads to the country's lower house
for a vote likely by the end of this month. Analysts were
impressed with the bill, saying it
is more aggressive than anticipated.
reform presented in the senate is close to the bull case
scenario, and significantly
more meaningful than the original proposal," Morgan Stanley
analysts said, calling it
potentially "transformational" for the sector and the
Proponents are hoping to move Mexico up
the global oil producer tables, by allowing foreign companies
to drill for oil for the first time since 1938. At present, only Pemex can do
The package is based on a concession
structure, in which the private parties would be licensed. The licenses
maintain the oil reserves as state property, but allow
outsiders to book expected future cash flows from the
A sovereign oil fund would manage the profits. The package also
includes the development of a private electricity market. The bill will
face some opposition this month in the house, but the pace of
other reform packages forming part of the Pacto por
México has encouraged lawmakers.
"We expect the bill to receive broad
bipartisan support," Goldman Sachs analysts said, calling it "comprehensive and
"The bill could attract sizeable foreign
investment from 2015 onwards and help develop the significant
potential of the oil and gas sector in Mexico," Goldman said. "It could therefore make a
visible contribution to Mexico's oil production and overall
real GDP growth, and strengthen the outlook for its fiscal and
Combined with the effects of the labor,
media and financial sector reforms, the energy reform could
pave the way for Mexico to receive a credit upgrade, Goldman
said. Mexico is rated Baa1/BBB/BBB+.
The reform package could help shore up
disappointing GDP growth as well.
"The Mexican economy is in the midst of a
gradual economic recovery, although a new fiscal framework may
negatively affect private investments in H1 14," Barclays said.
However, an aggressive energy reform "could set the stage for
an improved growth outlook in the medium term." The shop
expects 3.7% GDP growth in 2014.LF