Mexico's constitutional reforms cast shadow over possible Pemex farm-outs

Far-reaching regulatory reforms may delay a mooted revival of partnerships between Mexico’s highly indebted national oil company Pemex and private oil and gas firms.

Constitutional changes that are expected to be passed by congress in September include energy ministry Sener taking over the regulatory functions of hydrocarbons commission CNH.

Those reforms could set back any attempts by Pemex to sell stakes in oil and gas fields to private operators. In recent weeks there has been speculation that president-elect Claudia Sheinbaum could use these so-called farm-outs to raise cash for Pemex, which has around US$100bn in debt, and attract new investment to the Mexican upstream segment.

“The Mexican administration will be in limbo after the constitutional reforms,” Teresa Gallegos, a former head of oil and gas contracts at Sener and CNH, told BNamericas.

"Following the passage of the constitutional reforms, changes to the federal public administration’s structure will require ratification through secondary legislation and internal regulations. The approval process, involving the finance ministry and the public administration ministry, may take over a year," Gallegos, who helped implement the 2013 energy reforms that facilitated upstream foreign investment, added.

"To prevent legal paralysis and ensure progress in farm-out agreements, a transparent transition framework is essential," she said.

The outgoing administration of Andrés Manuel López Obrador, Sheinbaum’s mentor, has been hostile to private investment in the energy sector and has pursued policies of energy nationalism. His government has canceled previous farm-outs that had been planned by Pemex.

“It looks as if any new farm-outs will be awarded by the board of Pemex, maybe after an internal bidding process,” Gallegos, now an independent energy and sustainability legal adviser, said. “This will be a way for Sheinbaum to show that she is maintaining energy sovereignty but there may not be transparency in the process.”

The first oil and gas field to be farmed out in Mexico was the Trion deepwater field, where Australian energy company Woodside acquired a 60% operating interest with Pemex holding the remaining 40%. This deal has been cited as a model for any future farm-outs.

“Pemex has no money to invest in developing oilfields,” Gallegos said. “It already has a list of more than 20 fields that it has analyzed for possible farm-outs before López Obrador entered office. All they need to do is get on with it.”

“Farm-outs may be the only way ahead for Pemex, but the process needs to be transparent and competitive,” she added. “Companies who are already in Mexico, like Eni and Woodside, will be interested, but I cannot see the oil and gas companies that left Mexico under López Obrador coming back. The main reasons are legal uncertainty and the lack of transparency surrounding these farm-outs.”

International oil companies may also be reluctant to participate in any new farm-outs because of Pemex's high debt burden and its track record of making late payments to suppliers and other partners.

Sheinbaum takes office on October 1.