News Commentary: How to reinvent the legal figure of a private mineral interest in oil and gas?

The hermetic and heavy silence of the Peña Nieto administration regarding their ideas for an energy reform for the fall of 2013 leaves everyone guessing about what’s on their minds.

How to reinvent the legal figure of a private mineral interest in oil and gas?

Recently, I’ve been asking myself the question about what minimal changes would be needed in the legal, regulatory and constitutional frameworks in order for the legal figure of a private mineral interest in oil and gas might be reinvented in Mexico.

By “private mineral right in oil and gas,” I don’t mean as is found in the US Lower 48 where a grandson inherits mineral rights that had been acquired by a grandfather who had died before he was even born (as occurred in my case with my Oklahoma grandfather Harry Bell); but a mineral right that is bound by time and performance conditions, as in federal leases in the US GOM.

It is clear that the MSCs and the new EP Incentive Contracts try to finesse this requirement for IOC investment; and, in the default case, Pemex will have no choice but to try to do so again in any new scheme for deepwater projects.

My concern is that the absence of such a legal figure will doom two high-priority goals of Pemex and the government: 1) IOC involvement in shale gas development and 2) IOC involvement in deepwater ventures.

As for the first matter, Mexico supposedly has the 4th largest shale gas resource base worldwide, yet currently Pemex is paying US$20 for LNG that has been imported from Nigeria. And Pemex is scrambling to build a 1 Bcfd pipeline, but only when—too late—it becomes embarrassingly obvious that this pipeline should have been built by the private sector ten years before.

Here’s the rub: No Mexican public figure in government, law, academia or even the media—and certainly not in industry—is likely to risk his or her career by suggesting in public that the half-century experiment in living without a private mineral interest in oil and gas should be brought to a dignified close. No one in Mexico is going to want to go on record saying that the concepts of the Petroleum Laws of 1925, 1940 and 1941 will better serve the Nation than those of the Petroleum Law of 1958, which effectively erased the notion of a private, petroleum mineral right.

Although we are speaking of laws, the underlying matter is economics. Oil companies whose expertise is in virgin, or greenfield, acreage will pay attention to opportunities that offer a mineral interest in both discoveries and production. Si no, no.

So I see a very binary world ahead: Either the EPN leadership team comes up with a plan to reintroduce a private mineral interest in oil and gas (scored as 1), or it doesn’t (scored as 0).

A score of 0 will have opportunity costs spread all over the oil and gas value chain: shale gas will not be developed, private pipelines will not be laid, Pemex Gas (PGPB) will continue to cause distortions in the gas market, and Pemex E&P (PEP) will not supply the natural gas and NGLs needed for industry and power generation.

Written by

Mexico Energy Intelligence

Baker & Associates offers niche-market business and policy intelligence related to Mexico's oil and gas, power and chemical industries. Over 1,000 reports have been issued in the last 20 years. Subject matter expert and publisher George Baker, who directs the firm, has carried out consulting assignments starting in the late 1970s at the height of the Oil Boom in Mexico. He brings bilingual and bicultural skill-sets to understanding and responding to challenges of business and public policy, coupled with a deep familiarity with the history and idiosyncrasies of the Mexican operating environment.