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Mexico Energy Talks: Congressman Javier Treviño

Vianovo | May 29, 2014

Shannon O’Neil & James S. Taylor


 

Vianovo’s Mexico Energy Strategic Advisory (MESA) practice is pleased to present our second installment of the Mexico Energy Talks, a conversation with Congressman Javier Treviño.

Congressman Treviño (State of Nuevo León, PRI) is one of the key leaders of Mexico’s energy reforms.  He currently serves as senior member of the Energy Committee and the Finance Committee in the Federal House of Representatives. Before being elected to the House, he was Secretary of Government (Lieutenant Governor) of Nuevo León and previously held several high-ranking positions in the Federal Government. He also served as Senior Vice President for Corporate Communications and Public Affairs of CEMEX, a global cement company. Congressman Treviño holds a BA in International Relations from El Colegio de México, and a Master's degree in Public Policy from Harvard University. 

In our conversation, Congressman Treviño highlights Mexico’s energy reform and its expected benefits to its economy and increased competitiveness. He explains the drivers behind the reform and the guidelines of the secondary legislation. Congressman Treviño also discusses the national content rules, the role of state and local authorities, and the importance of creating a unique energy model for Mexico.

 

1.  If you could list the key elements present in the secondary legislation that international companies and investors should know about, what would they be? Why?

Mexico’s energy reform is historic, real, and transformational. We are defining an innovative Mexican model for energy viability in the 21st Century. There are several key elements:

a)  Transforming Pemex and CFE (Mexico’s public utility company) into true productive enterprises, not bureaucratic agencies, but efficient and competitive companies.

b)  Opening the energy sector to private domestic and international investment, to benefit the whole Mexican economy and the Mexican people by providing certainty for investors with clear rules for the types of contracts considered: production sharing, profit sharing, licenses, and the existing services contracts.

c)  Strengthening the regulatory framework of the Mexican government and giving new enforcement responsibilities to the Secretary of Energy, the National Hydrocarbons Commission (CNH), and the Energy Regulatory Commission (CRE) to oversee and manage the energy sector.

d)  Ensuring the benefits of the reform for present and future generations of Mexicans by creating the Mexican Petroleum Fund for Stabilization and Development, to be managed by the Central Bank (Banco de México), including a mechanism to channel resources for long-term savings and investments.

e)  Safeguarding environmental protection, by creating a new Industrial Safety and Environmental Protection Agency, which will design and implement specific public policies.

f)  A firm commitment to transparency, accountability, and the rule of law.

These are the most important elements of the reform. It isn’t only about oil, gas, and electricity, but also about developing a Mexican model for industrial competitiveness in the 21st century. A model that takes into account the energy revolution we are witnessing in North America and that Mexico will now be able to join. It is about a reindustrialization process that relates to competitiveness and job creation in all of North America and about lowering costs to make Mexico more competitive. Ultimately, the energy reform is about increasing competitiveness and creating more jobs.

 

2.  Could you elaborate a little about the Mexican model?

In drafting the reform proposal, we studied all models worldwide. We recognized the importance of establishing a model of our own; one that would provide a high degree of legal certainty for private investors, clear rules (because we realize they are essential for company decision-making), and a strong regulatory model with clearly defined responsibilities.

We sought a model that would also allow us to evolve the former system, in order to allow and attract private investments in the energy sector, while aiming at creating public value. The model ultimately is about achieving our goal of strengthening the industrial competitiveness of Mexico and benefiting the whole of Mexican society.

 

3.  Some outlets have raised questions about the regulatory framework, specifically about what this newly-created Industrial Safety and Environmental Protection Agency will do and the extent of its powers. How do you respond to those concerns?

The new agency is going to have full responsibility for defining policies and enforcing environmental protection measures. It is important to underscore that in this area, as in all other aspects of the reform, we are drafting the secondary laws based on best international practices. We want the reform to be comprehensive, so we are including the best and most advanced practices in every area.

 

4.  The secondary legislation currently being considered in the Congress spells out many of the details investors and analysts were eagerly awaiting; however, there are additional details, which need to be sorted out through the rule making process. In your opinion, what are the critical rules that require greater definition through federal regulation?

The main point here is that we were able to achieve a transformative constitutional reform in December 2013, which included adjusting three key articles and detailing 21 transitory articles. Now, in order to fully implement the constitutional reform, we are drafting specific secondary legislation in six areas: hydrocarbons, electricity, institutional design, productive enterprises, tax and budget, sustainability, and transparency.

The secondary legislation will be very specific. We are providing clear rules, but also enough administrative flexibility to implement the reform in a way that it fully achieves the goal of strengthening Mexico’s competitiveness and benefiting Mexican society. Some of this flexibility will be shown in each bidding round and in the different contracts, as fees and royalties will be determined on a case-by-case basis.

 

5.  One component of the energy reform is the need to have a certain percentage of national content. Could you talk to us about that? For example, what is the threshold? And how will this provision be implemented and regulated?

One of our key goals is to foster the growth of Mexican energy companies, while attracting significant international investment. We have to allow for flexibility, so we decided on a gradual approach, with a minimum national content of 25% by the year 2025. The Ministry of Economy (SE) and the CNH will oversee the progress of Mexican energy companies to achieve this percentage, which will be reached gradually over several years.

A public fund will be created to promote the development of local suppliers. There will be flexibility to make sure a growing number of companies enter the energy sector, throughout the entire value chain. There are some areas where international companies certainly have greater experience. Mexican companies will only be given preference when and IF they offer similar conditions, price, quality, and delivery. They must achieve the ability to compete with international firms.

The Ministry of Economy will also set a fund to support these companies. SE will have an advisory body to help medium-sized companies join the sector. This advisory board will be formed by officials from departments with direct responsibilities in the energy sector, experts from universities and think tanks, and NGO representatives. The board will assist in developing sound policies that encourage Mexican companies to participate in the sector.

 

6.  When President Peña Nieto presented the secondary legislation, he mentioned that Pemex will have a mandatory presence in ‘border projects'. Could you clarify his meaning? Would there be a difference between deep-sea border and on-shore border projects and, if so, what? Moreover, are there are any other types of projects in which there will be mandatory participation of Pemex in particular or the Mexican State in general?

The idea is that Pemex should participate with at least at 20% in projects involving trans-boundary formations. Again, we are aiming to be flexible, and Pemex could be a “passive partner” in some cases. The CNH will define the conditions of each project. Decisions will be made on a case-by-case or contract-by-contract basis, within the larger framework of certainty established under the reform.

 

7.  Energy reform clearly opens many new opportunities and will create demand for industries, services and capabilities that presently are not fully developed in Mexico. Human capital formation will be critical. What are your thoughts about the roles government, universities, and technical colleges should play in ensuring the country has a sufficient supply of graduates and trained professionals?

One of the biggest challenges of the reform has precisely to do with attracting and developing talent. Mexico’s universities are on board and are starting to work on designing new academic programs. They are working to strengthen engineering programs and training programs—jointly with the private sector—to ensure technicians in the field have the required skills and abilities. Pemex is also working on new training initiatives to help increase the number of technicians. It is a shared priority, a shared commitment, and a joint effort by public and private universities and companies. Funding will come through collaborative efforts. There may be some short-term requirements for greater participation of foreign talent, especially in areas like deep-water and shale, so I am sure there will be a good deal of collaboration even as Mexico ramps up its training efforts.

 

8.  What role do you see state and local governments playing in this new energy world?

Most of the reform will be implemented by the federal government. In the case of shale, there will be more of a role for state governments in terms of logistics and facilitating industrial processes. This is a crucial role, particularly in rural areas where municipal governments will play a supporting role. There will most definitely be increased coordination between the federal, state, and municipal governments to make sure the new energy model is implemented correctly.

 

9.  Are states already doing something to prepare for these new activities?

Yes. Several state governments are establishing new departments to focus on energy development. Some are also working through their current economic development departments. For example, the government of the state of Coahuila is creating a cluster to attract investments, while the government of the state of Nuevo Leon is tasking its economic development department with a comprehensive energy development plan.

These and other states are forming specialized offices, so that when business decisions happen, they can be prepared to facilitate investments and supply chain management. The states will be responsible for roads, housing, railways, and other logistics of the industry.

 

10.  About the security situation in Mexico: are you concerned it will be a deterrent?

I don’t think it will be a significant deterrent, but it is an issue that must be addressed. It will be essential for governments at the federal, state, and municipal levels to continue making public safety a top, coordinated priority. International oil companies operate in challenging locations around the world and are aware that there are different degrees of complexity. I think they realize that we are making significant progress, and that we will continue working to effectively address security issues.

 

11.  As you look ahead, say 10 years from now, what does the energy sector in Mexico look like in comparison to other leading sectors of the national economy? Will it be more like the automotive sector, with deep integration within industry and across the NAFTA countries, or will it be more like the telecomm sector, with very few dominant players?

What I see happening is an evolving process to create new energy markets, a much more competitive hydrocarbons and electricity sector, and a strengthened manufacturing sector. I see Monterrey, and the whole state of Nuevo Leon, as the energy capital of Mexico, with strong ties to Houston and Dallas. There will be a faster-growing economy, more job creation, and overall improved industrial competitiveness. Ultimately, we will see a strengthening of North America as an integrated energy region, playing a crucial role in the world economy.

 

12.  What is the current timeline for the approval of the secondary legislation?

The Senate Energy Committee is already holding regional meetings, where the private sector, members of Congress, NGO representatives, academics, and the public are discussing the reform and what it will mean for Mexico, North America, and the world economy. The first two were held in Queretaro and Guadalajara. On June 2nd, it will be held in Monterey, then Campeche, and finally in Veracruz.

The House will also be holding Joint Committee Hearings (Energy-Finance-Budget) from May 29th through June 19th, inviting high-level federal officials from CNH, Bank of Mexico, and the departments of Treasury, Energy, and Economy to testify. By the end of June a vote will most likely be held both in the Senate and in the House. The whole legislative package will be voted on by the end of June. I think we will see a solid majority voting for it.