Mexican Senate impresses with energy reform

Mexican Senate impresses with energy reform

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.

The 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 country.

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 so.

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 reserves.

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 market-friendly”.

“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 external accounts.”

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