Mexican energy reform proposals may include made-in-Mexico rules

Proposed energy reform in Mexico may likely include increased requirements for international companies to use locally produced products and services, experts said Friday morning during a Houston-based conference sponsored by Mayer Brown.

The requirement, known as local content, would mandate that energy companies to get a certain portion of supplies and services from Mexican companies.

The requirements would be an important way to ensure that the Mexican oil and gas sector will benefit from the investment, said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson International Centre in Washington, who spoke at the conference.

Argentina: YPF eyes vast potential of Vaca Muerta Shale

Wood said Mexican President Enrique Pena Nieto, who has proposed the constitutional changes to open its energy sector to international investors, has studied other countries to determine whether local content requirements encouraged local growth without stifling international investment.

Mexican policymakers have studied the results of local content requirements in other countries around the world, and recognize that they can help drive development, if they are high enough to foster new companies and technologies, but low enough that they do not paralyze projects or investments that cannot meet the requirements on a reasonable time schedule.

Some officials from Mexico’s national oil company, Petroleos Mexicanos, or Pemex, have suggested that the local content requirements could be as high as 45 percent, and that Pemex may help foster new companies as part of ensuring that the needed suppliers would be available, Wood said.

“They said the plan is to develop a development corporation to cities where Pemex has a presence,” Wood said. “It would be an incubator of new oil services companies, to spur the development of these providers, to help create industry clusters, with a possible spillover to local communities.”

Minimum local content requirements would not be unique to Mexico: They are in place in several oil producing countries that compete internationally, such as Norway and Brazil, ensuring that an international contract will also increase demand for local products and services.

Oil royalties: Mexico seeks tax similar to Brazil for private oil producers

Norway, which requires 50 percent of its research and development for field developments be conducted domestically, provides an especially compelling example for building a sustainable domestic oil and gas sector, Wood said.

“They are looking at the Norwegian model,” Wood said. “It is an oil and gas nation, even though its reserves are running out. It is not just Statoil that is around the world, it is Norwegian technology and service companies and they are providing good jobs.”

Brazil requires between 37 to 85 percent local goods and services in the exploration phase, while those in the development phase will have to use between 55 and 80 percent.

For example, an upcoming auction for Brazil’s Libra field in October requires all bidders to include plans to use Brazilian shipyards to meet its local content requirements for drilling platforms, rigs and supply boats.

Pena Nieto’s proposal comes as Mexico looks for ways to reverse declining oil production in Mexico.