By Jess Davis
Law360, Dallas (September 19, 2014, 7:38 PM ET) — The denationalization of the Mexican energy market after 75 years of government control will give Texas industry enormous opportunities for growth, with Mexico expected to spend more than $10 billion to import Texas goods and services in early stages of the overhaul, experts told a Texas Senate panel Friday.
Speaking to a Senate subcommittee formed to study the impact of Mexico’s landmark 2013 energy reforms, policy experts, economists and lawyers outlined the massive changes Mexico adopted and the opportunities the change provides for Texas companies and universities, not just in the energy sector but in manufacturing and technological research. Committee chair Sen. Juan “Chuy” Hinojosa, D-McAllen, said the restructuring “will be a tremendous benefit not only to Mexico but also to the state’s economy.”
Primary and secondary impacts will give Texas $10.5 billion in additional economic activity, with 132,000 new jobs and more than $2 billion in tax revenue headed to the state, said Nathaniel Karp, executive vice president and chief economist of BBVA Compass. A tertiary effect, coming from increased regional trade as Mexico grows and improves its living standards and income, will generate $34.9 billion in incremental economic activity in Texas, Karp said.
“Texas stands to be the major beneficiary from the reform due to deep economic ties, geographic proximity and expertise in energy exploration, production and distribution,” Karp said.
Karp said Mexico will need Texas firms to provide physical resources, cutting edge technologies and human capital and expertise, particularly because more than half of Mexico’s resources are considered unconventional and needing horizontal drilling and fracking to be productive and with its two largest basins near the Texas border and the Eagle Ford Shale.
The Mexican government in August finalized legislative measures that open up its oil industry to private and foreign investment. It also laid out a road map for energy firms to grab a piece of Mexico’s vast oil and gas reserves: Model forms of contracts will be unveiled later this year, with bidding on reserves not held by state-owned Petroleos Mexicanos — also known as Pemex — and the awarding of contracts in 2015.
Jose Maria Lujambio Irazabal of the Texas and Mexico law firm Cacheaux Cavazos & Newton LLP, the former general legal counsel of the Mexican Energy Regulatory Commission, described the new model as free market, with regulation where needed. Among the options for contracts to develop oil and resources will be service contracts like those already used by Pemex, along with alternatives that could be more profitable, he said.
“The novelty here is we’re going to have licensing contracts, which will be almost like concessions, and production sharing contracts, which are the ones that will give the best incentives for private companies to invest in Mexico,” Lujambio said.
He said while Texas may not need to make any legislative changes to best take advantage of the reforms, the U.S. may need to change its process for granting permits for cross-border infrastructure like gas and fuel pipelines and electricity transmission lines.
Mexico’s energy reforms have gotten significant attention, but they’re just part of a broad reform agenda that includes changes to its labor, education, economic competition, telecommunications, finances and tax, as well as updates in social areas like the justice and penal systems, electoral changes and transparency.
Cesar Martinez, a vice president at consulting firm Vianovo, called the reforms in Mexico a paradigm shift equivalent to the signing of the North American Free Trade Agreement.
Within the energy sector, Martinez said, the first area likely to see growth is in the midstream sector, with pipeline infrastructure one of the key areas for partnerships between Texas and Mexican companies. And as the reforms continue to be implemented, opportunities will arise in actual drilling for shale oil and gas, in improving the Mexican energy grid and power generation capacity and in human capital, with educational exchanges between Texas and Mexico universities, he said.
Sen. Kel Seliger, R-Amarillo, asked whether the opportunity for American companies would be mainly in an advisory and support role, providing guidance, technology and workers. Martinez pointed out American companies will be able to directly invest and operate in all sectors except for nuclear energy, which will remain operated by the Mexican government.
–Editing by Jeremy Barker.