The future of Mexican oil and gas... with or without Pemex. Presented at the Houston Young Lawyers' Association CLE event.

1. The Future of Mexican
Oil & Gas
…with or without Pemex
presented by:
Edgar Saldivar
BoyarMiller
832.615.4276
esaldivar@boyarmiller.com
HYLA - CLE July 26, 2012

2. Mexican Oil & Gas Matters
Top Reasons:
 Stimulate Mexican economy
 Pemex is inefficient
 Mexican Presidential elections
 Shale oil & gas
 Brazil model
 U.S. energy security

3. “Things are always more complex than they appear”
 One of the most restrictive oil industries in the world
 All minerals belong to the Nation per the Constitution
 Constitutional change is necessary
 Major changes have occurred, but not in oil policy
WHY?
 History & culture
 The Mexican Constitution
 Presidential politics
WHAT’S NEXT?
 Peña Nieto’s promises
 Shale oil & gas potential
 Petrobras model?

4. A Brief History of Mexican Oil
 Chapopote – the use of asphalt since the Aztecs
 1917 Constitution – mineral rights belong to state
 March 18, 1938 – Expropriation by Cardenas
 That same year – creation of Pemex
 1973 – OPEC created
 1976 – Cantarell discovered
 1979 – Iranian Revolution
 1982 – Economic crisis
 Reform not a priority afterward

5. Petróleos Mexicanos (Pemex)… Mexico’s ATM
 3rd largest foreign crude oil supplier to the U.S.
 World’s 2nd largest non-publicly listed company
 Total assets worth $415.75 billion
 Provides approx. 35% of total government revenues
 Sustains a costly public administration
 Both a cash cow and a political tool for the government

6. Constitución Política de los Estados Unidos Mexicanos
 “The Nation owns … all the oil and all solid, liquid, and gaseous
hydrocarbons.” Article 27 of the Mexican Constitution
 “[T]he Nation’s domain shall not be transferred to others and will
be, therefore, permanent.” Id.
 “[O]il and other hydrocarbons; basic petrochemical
industry,” among other industries, will not be
considered monopolies
 Amendment requires at least 2/3rd
of the national legislatures and
more than 1/2 of state chambers

7. Ley Reglamentaria del Articulo 27 Constitucional
 “[O]nly the Nation may carry
out the various oil holdings,
which constitute the oil industry”
 Article 6: payment of a contract
will always be in cash and the
property of reserves cannot be
used to pay any contract

8. The Cultural Legacy of Expropriation
 Key role in consolidating
post-revolutionary
government
 Helped drive
industrialization
 Symbol of national pride
and independence
 Visible legacy of the
Mexican Revolution
 Lázaro Cárdenas is a
national hero

9. Carlos Salinas de Gortari
 President 1988-94; most aggressive reformer
 Negotiated and signed NAFTA
 Did not attempt to open Pemex
 Oil reform was not popular
 Change Constitution to end ejidos
 In retrospect, important 1st step if
opening up oil industry

10. Ernesto Zedillo
 President from 1994-2000; inherited an economic crisis
 Unable to implement major reforms even if he wanted
 There were no incentives
 Minor reform in oil policy in 1996

11. Vicente Fox
 President from 2000-06; first non-PRI president in
70 years
 Mexico had increased oil production and prices
 Few incentives for oil reforms
 Focused on making Pemex more efficient
and modern through management

12. Felipe Calderón
 President from 2006-present
 Politically weak
 Did not want to face opposition from unions
 Busy waging war against drug cartels
 Though he wanted to make major reforms, he
could not
 2008 regulations – authorized new type
of risk contracts
 Created National Hydrocarbons
Commission

13. Enrique Peña Nieto
 Declared winner of the July 1, 2012 presidential
election
 Wants partial privatization of Mexico’s petroleum and
electricity industries
 “Signature issue”
 Contested election and lack of control
of congress may be a hindrance
 Takes office December 1, 2012

14. Change in Policy is Inevitable
 Arturo Sarukhán, Mexican Ambassador
to the U.S.: a 2nd round of oil reforms is
inevitable
 President Fox in Houston:
– need to emulate the Petrobras
model
– all political parties announced
platforms with promises of opening
up Mexico’s oil industry to stimulate
the economy

15. Petróleo Brasileiro S.A. (Petrobras)
 Semi-public multinational energy corp.
 Founded in 1953; ceased being legal
monopoly in 1997
 Brazilian government now owns 54%
of common shares with voting rights
 Private shares are publicly traded
 Largest company in the Southern
Hemisphere
 Largest company in Latin America
 4th largest company in the world

16. Why Now?
 Output from Cantarell is shrinking
 5 consecutive years of losses
 Huge international interest
 Boost to Mexican economy
 Cross-party and union support
 Continued drops in production by
Pemex could hamper energy
security in U.S.
 The Eagle Ford Shale Play
 U.S. oil & gas industry (i.e., Houston) positioned to supply services,
resources and expertise

17. The Phenomenon of Shale Development
 The exploration and production from shale plays is booming
 Hydraulic fracking is key
 Houston has been a bailout for the U.S.
 Texas’ Eagle Ford Shale formation
extends across much of South Texas,
into Mexico
 Eagle Ford Shale has created boon
in Texas:
– Housing, retail, industrial, roads,
finance, legal services, etc.
 550 wells using fracturing are producing
oil in the U.S.
 Pemex has drilled only 5 exploratory wells
 Potentially 4th largest reserves of non-conventional fuel

18. What Needs to Change
 Article 27 of the Mexican Constitution
 Mexican tax system and labor laws
 Partial privatization of Pemex using Petrobras model
 Ability for foreign companies to obtain mineral rights from Mexican
government
 Consensus among the public and multiple interested parties
 Drug violence in Mexico
 Public morale about 2012 election
 President willing to take political risks
and challenge opposing interests

19. The Future: Mexico with AND without Pemex
 Likely Scenario:
– second round of reforms setting the groundwork for partial
privatization
– “real” opening of Mexico’s oil sector may come slowly
 Pemex will remain the “pride of Mexico and oil workers” if
it embraces the need for partial privatization to improve
efficiency, earnings and production
 Obvious benefits for Houston and, thus, the American
economy

20. Questions?
Edgar Saldivar
BoyarMiller
832.615.4276
esaldivar@boyarmiller.com
http://www.linkedin.com/in/saldivar https://twitter.com/edgar_saldivar