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PURSUING NORTH AMERICAN ENERGY

INDEPENDENCE: MEXICO’S ENERGY REFORMS

HEARING

BEFORE THE

SUBCOMMITTEE ON 

THE WESTERN HEMISPHERE

OF THE

COMMITTEE ON FOREIGN AFFAIRS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTEENTH CONGRESS

FIRST SESSION

JULY 23, 2015

Serial No. 114–82

Printed for the use of the Committee on Foreign Affairs

(

Available via the World Wide Web: http://www.foreignaffairs.house.gov/ or

http://www.gpo.gov/fdsys/

(II)

COMMITTEE ON FOREIGN AFFAIRS 

EDWARD R. ROYCE, California, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

DANA ROHRABACHER, California 

STEVE CHABOT, Ohio 

JOE WILSON, South Carolina 

MICHAEL T. MCCAUL, Texas 

TED POE, Texas 

MATT SALMON, Arizona 

DARRELL E. ISSA, California 

TOM MARINO, Pennsylvania 

JEFF DUNCAN, South Carolina 

MO BROOKS, Alabama 

PAUL COOK, California 

RANDY K. WEBER SR., Texas 

SCOTT PERRY, Pennsylvania 

RON DESANTIS, Florida 

MARK MEADOWS, North Carolina 

TED S. YOHO, Florida 

CURT CLAWSON, Florida 

SCOTT DESJARLAIS, Tennessee 

REID J. RIBBLE, Wisconsin 

DAVID A. TROTT, Michigan 

LEE M. ZELDIN, New York 

DANIEL DONOVAN, New York 

ELIOT L. ENGEL, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

ALBIO SIRES, New Jersey 

GERALD E. CONNOLLY, Virginia 

THEODORE E. DEUTCH, Florida 

BRIAN HIGGINS, New York 

KAREN BASS, California 

WILLIAM KEATING, Massachusetts 

DAVID CICILLINE, Rhode Island 

ALAN GRAYSON, Florida 

AMI BERA, California 

ALAN S. LOWENTHAL, California 

GRACE MENG, New York 

LOIS FRANKEL, Florida 

TULSI GABBARD, Hawaii 

JOAQUIN CASTRO, Texas 

ROBIN L. KELLY, Illinois 

BRENDAN F. BOYLE, Pennsylvania

AMY PORTER, Chief of Staff THOMAS SHEEHY, Staff Director

JASON STEINBAUM, Democratic Staff Director 

SUBCOMMITTEE ON THE WESTERN HEMISPHERE

JEFF DUNCAN, South Carolina, Chairman 

CHRISTOPHER H. SMITH, New Jersey 

ILEANA ROS-LEHTINEN, Florida 

MICHAEL T. MCCAUL, Texas 

MATT SALMON, Arizona 

RON DESANTIS, Florida 

TED S. YOHO, Florida 

DANIEL DONOVAN, New York 

ALBIO SIRES, New Jersey 

JOAQUIN CASTRO, Texas 

ROBIN L. KELLY, Illinois 

GREGORY W. MEEKS, New York 

ALAN GRAYSON, Florida 

ALAN S. LOWENTHAL, California 

(III)

C O N T E N T S 

Page

WITNESSES 

The Honorable Carlos Pascual, senior vice president, IHS Inc. (former U.S. 

Ambassador to Mexico) ........................................................................................ 5

Thomas Tunstall, Ph.D., research director, The University of Texas at San 

Antonio Institute for Economic Development .................................................... 16

Tony Payan, Ph.D., director, Mexico Center, Baker Institute for Public Policy, 

Rice University ..................................................................................................... 24

Mr. Eric Farnsworth, vice president, Council of the Americas and Americas 

Society ................................................................................................................... 34

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Carlos Pascual: Prepared statement ............................................ 8

Thomas Tunstall, Ph.D.: Prepared statement ....................................................... 18

Tony Payan, Ph.D.: Prepared statement ............................................................... 27

Mr. Eric Farnsworth: Prepared statement ............................................................ 37

APPENDIX 

Hearing notice .......................................................................................................... 54

Hearing minutes ...................................................................................................... 55

The Honorable Jeff Duncan, a Representative in Congress from the State 

of South Carolina, and chairman, Subcommittee on the Western Hemisphere: Material submitted for the record ......................................................... 56

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PURSUING NORTH AMERICAN ENERGY INDEPENDENCE: MEXICO’S ENERGY REFORMS 

THURSDAY, JULY 23, 2015

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON THE WESTERN HEMISPHERE,

COMMITTEE ON FOREIGN AFFAIRS,

Washington, DC. 

The subcommittee met, pursuant to notice, at 2:26 p.m., in room 

2200, Rayburn House Office Building, Hon. Jeff Duncan (chairman 

of the subcommittee) presiding. 

Mr. DUNCAN. A quorum being present, the subcommittee will 

come to order. I would now like to recognize myself for an opening 

statement. 

I have often talked about, short of American energy independence, why not talk about North American energy independence, 

and I think this is a great hearing to delve into that. Today we 

meet to examine Mexico’s energy reforms, their impact on Mexico’s 

economy and the global energy market, ways these reforms might 

contribute to the North American energy independence. 

This is the second hearing on energy issues that this subcommittee has held this Congress, and I plan to continue the focus 

on energy as we move forward, because I believe the energy opportunities that we have seen occurring in the Western Hemisphere 

have the potential to truly transform our region, lessen our dependence on the Middle East for energy sources, and deepen our partnerships with like-minded countries to pursue greater security and 

prosperity. 

In particular, North America has experienced an incredible 

awakening in the energy sector with the United States’ oil and 

shale gas revolution, Canada’s oil sands, and Mexico’s energy reforms. Unfortunately, the State Department’s long delayed approval of the Keystone XL pipeline, which has languished for nearly 2,500 days, has forced Canada to look toward Asia to meet its 

energy export demands and deny the United States and Canada a 

strong energy partnership. 

Similarly, Mexico’s request in January to swap 100,000 barrels 

a day of U.S. light crude oil and condensate in exchange for the 

heavier sour Mexican oil has also languished, receiving no decision 

yet from the Obama administration. 

While our closest neighbors have been kept in the dark on issues 

that directly impact their needs and our own interest to create 

more U.S. jobs, the Obama administration has foolishly prioritized 

the Iran deal in yet another appeasement to what Director of NaVerDate 0ct 09 2002 15:06 Sep 03, 2015 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 F:\WORK\_WH\072315\95638 SHIRL
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tional Intelligence James Clapper called ‘‘an ongoing threat to U.S. 

national interests.’’

Today, the three North American countries collectively produce 

67 percent of the Western Hemisphere’s crude oil production and 

84 percent of the natural gas production. And after the United 

States and Canada, Mexico is the 3rd-largest oil producer in the 

Western Hemisphere and the 10th-largest producer in the world. 

Mexico also ranks fourth in the world in shale gas reserves. Several recent discoveries of oil and gas in Mexico’s northeast, in the 

deep waters of the Gulf of Mexico, and shale gas deposits along the 

U.S.-Mexico border, along with the development of unconventional 

resources in northern Mexico and in the Chicontepec basin—if I 

pronounced that is right—show great promise for Mexico. 

However, Mexico’s oil and gas production have fallen over the 

years, with oil declining by over 1 million barrels a day from 2004 

to 2014 and natural gas production failing to keep up with the demand, requiring Mexico to import liquefied natural gas from the 

Middle East and pay nearly four times the rate in North America 

to meet its demand. 

In addition, Mexico’s state-owned oil company, Pemex, has had 

near complete control over the energy sector in Mexico, preventing 

substantial foreign direct investment and crippling Mexico’s competitiveness, since Pemex’s creation in 1938. According to the Wilson Center, prior to Mexico’s energy reforms, even Cuba and North 

Korea had more open energy systems than Mexico, because Mexico 

has been the only country in the world with one single national oil 

company monopolizing the entire value chain in the oil and gas sectors. 

Changes clearly have been needed for some time in Mexico to address these issues, so I want to publicly commend Mexico’s leadership in taking tough measures to pass energy reforms into law in 

2013 and secondary laws implementing these reforms in 2014. This 

is arguably the most significant economic reform undertaken by 

Mexico since its entry into the North American Free Trade Agreement in 1994, and the U.S. Energy Information Administration has 

estimated that these energy reforms could result in a 75 percent 

higher long-term oil production rate for Mexico than it would have 

had before the reforms. 

This is a wonderful forecast for Mexico, and I want to see Mexico 

succeed above all expectations in these energy reforms. If done 

right, these reforms will allow Mexico’s energy sector to thrive and 

prosper and also enhance U.S. energy security by creating a more 

reliable source of energy from our closest southern neighbor. Nevertheless, there are certain issues that I believe are necessary to 

Mexico achieving sustainable results in these efforts. 

First, it is vital that Mexico not ignore the security situation 

since many organized criminal groups operate in the very areas 

where Mexico’s greatest land, oil, and gas exploration opportunities 

are located. These criminal groups no longer deal only in drugs. 

They now also make billions of dollars in illegal mining, logging, 

extortion, and bunkering, including illegal sale of gas condensate 

and oil products. Pemex has even had lawsuits in U.S. Federal 

courts against companies that allegedly illegally purchased stolen 

gas from the Mexico Los Zetas drug trafficking organization. 

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In addition, I believe it is very important that Mexico ensure 

that it has broad public support for its energy reforms. Addressing 

security, corruption, and impunity concerns, especially in the wake 

of the recent escape of Joaquin ‘‘El Chapo’’ Guzman from a high security prison in Mexico, are vital to shoring up public support and 

tracking international investment. 

Private property and land rights issues are also very important 

and will need resolution in a way that protects individual liberties 

in order to prevent future social conflicts and continue to build 

public support for the energy reforms and enable continued 

progress in those reforms. 

Early results of Mexico’s initial rounds of the historic bidding 

and awards last week have proven to be a mixed bag at best. The 

participation of 9 companies in the process and the eventual 

awards of only 2 of the 14 blocks showed some promise in this new 

chapter for Mexico. However, the experience is also a reminder of 

the need to balance Mexico’s great energy potential with a clear, 

flexible, and transparent bid and award process. 

As author of the legislation in the 113th Congress to approve the 

U.S.-Mexico Transboundary Hydrocarbon Agreement, which became Public Law 113–67, I am personally very excited about Mexico’s energy future and the potential this has for growing the North 

American energy market. It is my hope that by holding this hearing today we may be able to bring more public awareness to the 

exciting changes in Mexico and positive impact these changes will 

have for the United States’ relationship with Mexico and North 

America in general. 

So in conclusion, Mexico’s actions in opening its oil and natural 

gas and power sectors to private investment and participation now 

allow a true energy partnership for the first time of North American countries, with U.S. and Canada sharing technical expertise to 

assist Mexico in building technical and workforce capacity and 

Mexico playing a new and important key role in efforts to achieve 

North American energy independence and prosperity. 

So with that, I will look forward to hearing from our panel. I appreciate the witnesses being here today. 

And I now welcome to the committee, and I turn to Ranking 

Member Sires for his opening statement. 

Mr. SIRES. Thank you, Mr. Chairman. 

Good afternoon. Thank you to our witnesses for being here today. 

The U.S. and Mexico relationship is amongst the most critical for 

our Nation’s economic and public security. It is also one of the most 

promising and positive relationships in our hemisphere. I thank my 

friend and colleague Chairman Duncan for making this relationship a central focus of our subcommittee’s work. 

The United States and Mexico share common democratic values, 

similar desires for peace and economic prosperity, as well as nearly 

a 2,000-mile border. With countries like China working to increase 

influence in the Western Hemisphere, the U.S. cannot fall behind, 

as the Western Hemisphere plays a critical role in our energy security. Unfortunately, China has pledged $250 billion in investments 

in Latin America over the next 10 years, seeking to boost their influence in the resource-rich region. 

4

It is clear that maintaining and strengthening our energy relationship with Canada and Mexico is in the national interest of the 

United States. Mexico’s new administration has committed itself to 

reverse its declining oil production and has opened the possibility 

to pursue joint private ventures with foreign firms in the exploration of its resources. 

The historic December 2013 constitutional reform, combined with 

the new laws implemented in August 2014, allows Mexico’s state 

oil company, Pemex, to partner with international companies to 

boost oil and natural gas production. Held by many as the most 

significant economic reform undertaken by Mexico since its entrance into NAFTA in 1994, the energy reforms are expected to 

produce investment, spur growth, and eventually lead to greater oil 

and gas production in the country. 

With the bidding process off to a slow start, we must remain vigilant that Mexico carries out these reforms in the most efficient and 

productive ways possible, but optimistic about the potential for 

opening up access to Pemex. Additionally, I believe that the proposed Keystone pipeline and the Transboundary Hydrocarbon 

Agreement with Mexico are in the national interests of the United 

States. 

I am sensitive to the environmental concerns associated with the 

development of the Keystone project, but the conversation has stagnated. I am encouraged to see the administration is working with 

our partners in Mexico and in Canada to further our regional energy independence. The North American Energy Ministers meeting 

in May resulting in a new energy partnership with both Mexico 

and Canada aim at integrating our energy strategies and efforts to 

tackle the negative impacts of climate change. 

These trilateral efforts to improve energy efficiency and develop 

clean energy technologies bring greater cooperation with our neighbors and help ensure that our energy policies are sustainable and 

not just short term. We must remember that no one single project 

initiative is a cure-all for our energy security needs, and no proposal will satisfy everyone’s need to alleviate every doubt. But we 

must continue to work with our neighbors to develop a beneficial 

energy policy for the region. 

I look forward to hearing from our panelists on how we can address these critical issues. Thank you. 

Mr. DUNCAN. I want to thank the ranking member. 

Members of the committee are reminded that the biographies of 

all the witnesses are provided beforehand. But I do want to recognize the gentleman from Texas, Mr. Hurd, for an introduction of 

one of his constituents. 

Mr. HURD. I thank Chairman Duncan and appreciate him allowing me to speak today. 

Today’s hearing is on a critical topic that I believe is often overlooked. Mexican energy reforms would not only greatly benefit 

their national economy, but would greatly benefit ours as well. My 

district, Texas 23, shares over 800 miles of border with Mexico and 

is home to the Eagle Ford and Permian Basin. I have always maintained that our energy policies are not just important to the economy, but they are also an issue of national security as well. 

5

Today, I am pleased to welcome a witness who has a profound 

understanding of this issue, Dr. Thomas Tunstall, the director of 

the Center for Community and Business Research at the University of Texas at San Antonio. 

Welcome, sir. 

And I yield back. 

Mr. DUNCAN. Okay. So Mr. Castro is recognized for a brief opening statement. 

Mr. CASTRO. Sure. Just to echo the welcome that my colleagues 

have extended, and also the two Texans that are here, Dr. 

Tunstall, welcome, from San Antonio, UT San Antonio; and Dr. 

Payan from Rice, welcome. Thank you. And welcome to the other 

panelists as well. 

Mr. DUNCAN. Okay. Before I recognize you, there is a lighting 

system in front of you. I don’t need to explain it, I hope, but it will 

be green while you have a chance to talk; when you get to 1 minute 

remaining, it will go to yellow; and when it is red, we will need to 

wrap up your thought process. So I will go ahead and get started. 

And the first witness I would like to recognize is Ambassador 

Carlos Pascual. 

You are recognized for 5 minutes. 

STATEMENT OF THE HONORABLE CARLOS PASCUAL, SENIOR 

VICE PRESIDENT, IHS INC. (FORMER U.S. AMBASSADOR TO 

MEXICO) 

Mr. PASCUAL. Chairman Duncan, Ranking Member Sires, and 

members of the committee, I appreciate this opportunity to testify 

on Mexico’s energy reforms. 

I appear in my capacity as senior vice president for IHS, a global 

consultancy that specializes in energy. I previously served as the 

Coordinator for International Energy Affairs at the State Department. I was the American Ambassador in Mexico from 2009 to 

2011 and had the opportunity to work with you on the 

transboundary treaty, an agreement which this committee was so 

critical in moving forward. 

Since 2012, Mexico has embarked on a historic opening of its energy sector to allow private investment and competition in oil, gas, 

and electricity. On July 15, Mexico completed the first tender since 

1938 for the sale of hydrocarbon assets. Even though the results 

did not meet expectations, it formalized a process of opening the 

energy sector to private investment, and with that, the benefits 

that will eventually ensue from infusions of capital and technology. 

In the energy field, no other region today has what North America can offer: Energy abundance and technology leadership across 

three democratic states and market economies with huge consumer 

markets, financing potential, and a global reach and influence. The 

successful implementation of Mexico’s reforms is critical to realize 

these opportunities. 

As you have indicated, Mr. Chairman, the nationalization of 

Mexico’s hydrocarbon sector in 1938 deprived Mexico of revolutionary progress in energy technologies. Production has declined 

from a peak of 3.6 million barrels a day in 2004 to about 2.34 million barrels a day today. This decline clashes sharply with the global revolution and private energy production. It influenced President 

6

Enrique Pena Nieto to make energy reform a pillar of his policy 

agenda in December 2012. 

The pace, breadth, and depth of implementing these energy reforms has been unprecedented. In December 2013, within a year of 

taking office, Mexico passed a constitutional reform that allow private investment and competition in every aspect of its energy sector. On August 12, 2014, Mexico passed the secondary legislation 

needed to implement reforms related to oil and gas production, 

pipelines, private competition in the power sector, and competitive 

retail sales. 

In December 2014, just 2 years after taking office, the Mexican 

Government announced its first round of international tenders, 

with five phases offering 160 fields. 

In the power sector, by the end of August 2014, Mexico created 

an independent systems operator for a new electricity market. 

Under the new market, independent power producers will bid 

against the national power company, CFE, to supply electricity, 

breaking the government’s monopoly control over the electricity 

sector. 

By February 2015, Mexico published the draft market rules for 

the power sector. For all of you familiar with the situation in your 

own States, you understand how quickly that is. In January 2016, 

the new power market will go live. 

Still, reform has not been without challenges. Since Mexico 

amended its constitution to allow private investments in energy, 

the price of the benchmark for crude oil has dropped for a range 

of $105 and $110 a barrel to somewhere between $50 and $60 a 

barrel in recent months. 

These lower prices are forcing oil companies to reduce capital expenditures, financial institutions to cut investments, oil-producing 

countries to demonstrate that their fiscal terms compete with the 

best international alternatives. Simply put, to compete effectively, 

Mexico has to show that its assets, contracts, fiscal terms, and local 

and business and security environments offer investment returns 

that attract technology and capital to Mexico at a time when the 

industry is cutting expenditures and costs. 

On July 15, Mexico saw the impact of this difficult business climate. Thirty-nine companies paid for data to investigate the blocks 

offered in phase one. Thirty-four companies qualified to compete. 

But on July 15, there were only 7 real bids, only 2 out of 14 blocks 

were awarded. The consortium formed by Sierra Oil & Gas, a 

newly formed Mexican company, Talos Energy, a Houston-based 

energy, and Premier Oil won both bids. 

Mexican officials will spend time investigating and applying the 

lessons from phase one. Some of the kinds of things that they will 

see are that the field offerings were small in phase one and perhaps not of high interest to large companies. The contracts that 

were offered were for short periods of time, and not necessarily 

complying with some of the potentially complex formations that 

were available. The fiscal terms may not have met investor requirements given increased pressure to cut costs and capital expenditures. 

But the important point is that all of these kinds of issues can 

be addressed. And indeed, these difficult first moments could help 

7

consolidate the profound need for sensitivity to international competitiveness that Mexico needs to fully fulfill its aspirations. 

Less attention has been focused on electricity than on oil production, but the transformation of the power sector could be the 

linchpin that sustains political support for energy reform. By the 

end of President Pena Nieto’s administration, successful implementation of its oil tenders could allow Mexico to secure contracts for 

tens of billions of dollars in new investments, but those investments will take time to reverse production declines. 

In the power sector, the vast expansion of U.S. natural gas imports has already allowed CFE to lower Mexican electricity prices 

by 27 percent for industry and between 2 to 11 percent for households. 

Polls suggest that the next Mexican Government and Parliament 

after 2018 will still support energy reform. But the best way to secure that support is if the Mexican people and Mexican industry 

benefit tangibly from the results. And already that transformation 

is underway in the electricity sector. 

The completion——

Mr. DUNCAN. Ambassador, we have about 6 minutes, so if you 

could wrap up and we will begin the questions. 

Mr. PASCUAL. Okay. I apologize. 

The completion of these reforms, let me just say, gives a strategic 

opportunity for the United States, Canada, and Mexico. And if one 

looks at this from the perspective contrasting to OPEC, North 

America is never going to be an energy cartel. But we have an opportunity to do several things. 

First, we have an opportunity to export. And by executing the 

kinds of oil swaps between Mexico and the United States, it is a 

potential to open that market. 

Secondly, we have an opportunity to work together in the Caribbean, where Petrocaribe is under stress, especially as a result of 

the low prices. We have an opportunity to work together in Central 

America in extending gas and power. We have an opportunity to 

really transform this region of North America as an influence for 

change in the Western Hemisphere. 

These price changes in Mexico have made these opening steps 

difficult, but at the same time, the correct thing to learn from this 

is the opportunity to learn. The steps that you are taking with this 

committee have been essential to allowing that process to move forward. I thank you for that and look forward to answering your 

questions. 

[The prepared statement of Mr. Pascual follows:]

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Mr. DUNCAN. Thank you. 

Dr. Tunstall. 

STATEMENT OF THOMAS TUNSTALL, PH.D., RESEARCH DIRECTOR, THE UNIVERSITY OF TEXAS AT SAN ANTONIO INSTITUTE FOR ECONOMIC DEVELOPMENT 

Mr. TUNSTALL. Thank you. Good afternoon. 

I would like to thank Chairman Duncan and the members of the 

subcommittee for extending the privilege for me to testify here 

today. 

My name is Thomas Tunstall. I am the research director at the 

University of Texas at San Antonio’s Institute for Economic Development. We have undertaken extensive research to date on Eagle 

Ford in south Texas, specifically addressing issues dealing with the 

economic impact and sustainable community development issues. 

In September of last year, we completed our fourth economic report on the Eagle Ford Shale in Texas, the formation which extends well into Mexico. In that report for calendar year 2013, we 

estimated the Eagle Ford Shale generated $87 billion in economic 

impact supporting over 150,000 full-time jobs. This unexpected 

windfall has given communities in the area an opportunity to build 

a foundation for long-term sustainable economic and community 

development. 

It is worthwhile to note that Mexico’s oil production peaked in 

2004 and has been declining steadily since then. In fact, were it not 

for energy reform in Mexico, the country would likely have been 

facing the prospect of becoming an oil importer in the next few 

years. As it is, Mexico already imports substantial quantities of 

natural gas from the United States, over 650 billion cubic feet annually in 2013 and 2014, with even greater quantities expected in 

the next few years. Yet, shale gas reserves alone in Mexico are estimated to be over 500 trillion cubic feet. 

Mexico’s energy reform consists of several blocks that include 

deep-water fields, shallow-water fields, onshore conventional fields, 

and shale fields. Our research at the University of Texas at San 

Antonio has focused primarily on the shale field opportunities in 

the Mexican states of Coahuila, Nuevo Leon, Tamaulipas, and Vera 

Cruz. 

The first recommendation in terms of policy prescriptions that I 

have for the committee is to expedite the proposed oil swap with 

Mexico. Most of the refineries along the Gulf Coast in the U.S. 

were optimized to process heavier crude oil that the U.S. expected 

to be importing from OPEC countries or from Canada. At the same 

time, the U.S. is awash in light crude oil from shale formations. 

Much of Mexico’s oil production tends to be the heavier crude 

blends, therefore it makes sense for the Commerce Department to 

approve the oil swap arrangements as soon as possible. 

Second, Mexican nationals sponsored by exploration and production companies will make several training visits to the U.S. over 

the course of the next few years, sometimes daily. Experienced U.S. 

workers will also be making trips to Mexico to supervise operations. 

While such border crossings would be expected to be a routine 

procedure, experience to date suggests that significant delays of 

17

hours at a time are not uncommon, which burden operators with 

unnecessary costs and delays. Developing a streamlined process for 

worker knowledge transfer from the U.S. to Mexico will be an important step to ensure the ultimate success of Mexico’s energy reform implementation. 

Thirdly, the logistical infrastructure in northern Mexico in terms 

of roads, housing, workforce, medical facilities, rail, telecommunications, and pipelines is relatively undeveloped. The Federal and 

state governments in Mexico, and perhaps even in a coordinated effort with the U.S., should make a commitment to invest in the infrastructure that will be necessary to support economic development. 

And finally, U.S. hydrocarbon policy is highly inconsistent. For 

example, U.S. law allows for unlimited, unrestricted export of refined products, such as jet fuel, gasoline, and diesel fuel. Further, 

natural gas can be readily exported to any country with which the 

U.S. maintains a free trade agreement, such as Mexico and Canada. Even condensate, an ultra-light crude oil, has been approved 

for export from the U.S. 

In essence, the United States now exports most classes of hydrocarbon products. The existing ban on crude oil export that dates 

back to the 1970s is arbitrary and penalizes both exploration and 

production companies, as well as landowners. 

Again, I would like to thank the members of the committee for 

their kind attention. We brought copies of our most recent economic report on Mexico with us and we would be happy to share 

those with the committee. 

[The prepared statement of Mr. Tunstall follows:]

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Mr. DUNCAN. Thank you so much. 

Dr. Payan. 

STATEMENT OF TONY PAYAN, PH.D., DIRECTOR, MEXICO CENTER, BAKER INSTITUTE FOR PUBLIC POLICY, RICE UNIVERSITY 

Mr. PAYAN. Thank you very much, Chairman Duncan, and thank 

you very much to the committee for the invitation to be here before 

you. 

I am going to focus on what threatens the successful implementation of energy reform in Mexico. I think that we know the potential that is there. We know that the Mexican Government has to 

be commended for opening the sector. It is an unprecedented opening that reverses 76 years of a state monopoly. And, of course, it 

is also, I think, an enormous step since NAFTA. So in that sense, 

the Mexican Government has to be commended. 

But we cannot forget that Mexico is sometimes its own worst 

enemy. And there are some in-built structural issues within Mexico 

that may threaten yet the success of energy reform and may actually be the answer to Chairman Duncan’s question over whether 

Mexico is truly a like-minded partner and whether it can truly engage North America as an equal and certainly constitute a single 

energy North American market with the United States and Canada. 

And so I think that there are some steps that we have to take 

to be able to get Mexico to that step. And I want to point out various things that I think are threatening energy reform in Mexico. 

Number one is the fact that the regulatory—well, first of all, the 

intentionality or the intent behind reform continue to be in Mexico 

not truly a conversion to a belief in market forces, but rather an 

understanding that the country was headed for a situation by 

about 2020 in which it would become a net importer of oil and it 

would actually lose valuable national wealth having to import energy and also having to slash its Federal budget by about 35 percent, because that is how much Mexico depends on oil revenue. 

So with this in mind, these impending circumstances made Mexico essentially turn to opening. But it is clear that this is a managed opening, and the basis for this opening is really about revenue 

maintenance and revenue enhancement. Some of the contractual 

terms that were offered in the beginning that try to cap revenue 

for foreign and private investors show this, as well as some of the 

terms that are being offered. 

And I think many of these companies, IOCs and other companies, decided to wait and see what is going to happen and try to 

learn from the experience of those who might venture into Mexico 

in the future first. And I think that is what kept a lot of these companies from round one. There is still a lot of learning to be done. 

And they also have a number of other questions that are important, and I mentioned a few of them. 

First of all, the rule of law in Mexico. Mexico has insisted so far, 

even though the government is listening very closely to the industry and seems to be very responsive to the industry, I think the 

government has insisted that any disputes have to be resolved in 

Mexican courts. They are kind of resistant to the possibility of 

25

international arbitration of any disputes in the contracts, and companies are pushing back on this as well. 

So the Mexican Government wants to reserve itself based on a 

particular clause that calls for administrative rescission of a contract if there is any failure by these investors in Mexico, and so the 

Mexican Government still reserves itself the right to rescind any 

contracts. And so there is a lot of trepidation by the industry in 

this regard. 

So the Mexican Government continues to play around with some 

of these concepts, not really truly trying to open and allow the markets to determine investment, exploration, sales, and profits, but 

rather try to manage this opening. And I think the Mexican Government ought to be commended for opening, but at the same time 

pushed to truly let the market decide what the future of this energy reform is going to be. 

The second concern that companies for the most part have expressed is security issues. Now, it varies by sector. The international oil companies, the large corporations that are going to be 

operating in the Gulf, are considerably less worried about the situation on the ground, because, obviously, in the Gulf there will not 

be the 60 to 80 criminal organizations that currently operate in 

Mexico threatening their investments. 

Although, many of them will have to have operations on ports 

along the Mexican Gulf, and there is a lot of interest in trying to 

explore the security situation in the Campeche, Vera Cruz, and especially in the Tamaulipas region, where there is a lot of concern 

regarding the operations of these criminal groups. 

The shale sector is frozen for now, but eventually it will roll 

down from Texas across the border into northeastern Mexico. And 

these companies are smaller, and they have less experience in dealing with security issues, and they will be much more vulnerable to 

these problems that are quite, quite severe in States like 

Tamaulipas and Coahuila, as well as Chihuahua. So this is another 

concern that the industry has obviously expressed quite a bit. 

I think the Merida Initiative support for Mexico has had its successes. But at the same time, during the last 10 years, the 

Calderon administration and the almost 3 years of the Pena administration have essentially resulted in an unintended consequence, 

which is the fragmentation of organized crime. And instead of having four large groups operating within Mexico controlling different 

activities within the country, we now have 60 to 80 different groups 

that control towns and corridors and roads and cities, and I think 

that this needs to be paid attention. 

In that sense, I think the Merida Initiative needs to be reviewed 

to look at the police forces much more closely, and they need to be 

looking at the institutional development of the police system, of the 

judicial system. Because we cannot guarantee the success of energy 

reform if there isn’t a strong police, a strong judiciary, but at the 

same time strong democratic and accountable institutions. 

There is another issue that also has been a concern of the energy 

industry—and I will conclude with that final point—and that is 

corruption. Look, the 15 July round one was an important round, 

and it kind of ended with a thud. However, this doesn’t mean that 

this will be a midterm and long-term failure. 

26

Clearly, the development of the energy sector in Mexico will happen. But there is already strong opposition in Mexico because the 

company that obtained those two lots, those two plays, appears to 

be a company that has some strings to Mexican politicians, some 

of them kind of hidden strings, but it shows that in Mexico the political class is beginning to position itself to profit enormously from 

this. 

They clearly benefitted from the privatization of Telmex, they 

clearly benefitted from the privatization of other companies, and 

created enormous monopolies in Mexico. The worst scenario that 

can happen is that the political class in Mexico take advantage of 

this opening and themselves monopolize their ability to use this 

opening to enrich themselves. 

And that, by the way, is a great concern of the energy sector, 

that they will be vulnerable to these extortions and these corruption schemes. And I suggest that maybe we ought to be finding 

ways to ensure that these companies can be open when corruption 

comes to their doormat and that they can deal with it effectively 

without ourselves having to penalize them for trying to do business 

in Mexico. 

And I am open to your questions. 

[The prepared statement of Mr. Payan follows:]

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Mr. DUNCAN. I am sure we will delve into some of that in the 

question session. 

Now I recognize Mr. Farnsworth for 5 minutes. 

STATEMENT OF MR. ERIC FARNSWORTH, VICE PRESIDENT, 

COUNCIL OF THE AMERICAS AND AMERICAS SOCIETY 

Mr. FARNSWORTH. Thank you, Mr. Chairman. Good afternoon, 

Mr. Ranking Member, members of the subcommittee. It is a privilege to have the opportunity to appear before you again, and it is 

also a privilege to join this important and timely hearing with such 

distinguished panelists as well. So thank you for the opportunity. 

Access to affordable, stable energy supplies has been a driver of 

strategic U.S. policy on a bipartisan basis for many years. Actions 

that the three North American governments take to increase regional energy production and integration contribute meaningfully 

to support and expand our own competitiveness in a manner consistent with U.S. interests. 

Mexico’s decision to open its energy markets and link them more 

closely to its North American neighbors is therefore a historic and 

meaningful action for Mexico itself, as well as a strategically important step for the entire community of North America. It would 

be difficult, in my opinion, to overestimate the importance of Mexico’s energy reforms once they are fully implemented. They are potentially transformational. 

The Mexican energy sector is historically quite sensitive politically; it was closed to foreign investors for over 57 years. The sector 

would benefit from additional technology, management expertise, 

and capital to address production declines and high costs—we have 

already heard about that—which are a drag on competitiveness 

and economic performance. 

Since 2013, the Pena Nieto administration has been working to 

address this, passing and now beginning to implement legislation 

allowing for private participation in both the oil and gas and also 

power generation sectors. 

Since the launch of the reform effort, of course, the price of crude 

has fallen approximately 50 percent, which impacts investment decisions. Investors become more selective, and the quality of investment opportunities becomes paramount. 

There have also been recent setbacks regarding the rule of law 

in Mexico, notably the mid-July escape from prison of Joaquin ‘‘El 

Chapo’’ Guzman. While not directly related to the energy sector, 

this does play into a narrative concerning the risks of doing business in Mexico, with a particular focus on corruption and the rule 

of law. 

Some of these issues may have been indeed in play on July 15 

for Mexico’s first round of investor bidding, in which only 2 of 14 

blocks offered to investors were awarded. And, again, we have 

heard about that. But in my view, this isn’t the whole story. 

The first bidding round featured marginal shallow-water blocks 

with prices arbitrarily set by the government. Future auctions will 

feature more attractive deep-water and onshore unconventional 

shale gas blocks. Lessens learned from the first auction on pricing 

and other matters will be applied to later rounds. 

35

As well, on a comparative basis globally, additional investment 

blocks are larger and potentially more significant in Mexico than 

those that may be available elsewhere in the world. So there are 

some real advantages coming up. 

Nonetheless, while most attention has been on the oil and gas 

sector, power generation is also being liberalized, and this may 

prove to be an even bigger story because the cost of electricity in 

Mexico is well above global rates. 

While previously only the Federal Electricity Commission, or 

CFE, was allowed to generate electricity, the sector is now opening 

to private investors. This will support overall needs. Energy infrastructure must be upgraded, including pipelines, rail, waterways, 

and transmission lines, among others. And CFE recently announced that it would tender projects for close to $10 billion. As investment increases and prices of electricity go down, Mexico will 

become more competitive as resources are directed toward more efficient and productive uses. 

Power generation reforms also directly impact broader issues, in 

particular the environment and global climate change. Updating infrastructure allows for more efficient power generation utilizing 

cleaner and more renewable fuel inputs. Conservation is certainly 

the cleanest and most cost-effective fuel available, but beyond this, 

Mexico’s reforms promote renewable energy development as well 

and investors have shown a keen interest in accessing this market, 

especially wind, solar, and geothermal. 

More broadly, the success of Mexico’s energy reforms is important for the United States and North America, not just Mexico. The 

North American production platform is already integrating content 

produced across borders. Some 40 percent of the content of goods 

exported to the United States from Mexico is originally U.S. content. From Canada, the figure is 25 percent. From China, the 

equivalent number is merely 4 percent. 

Actions which contribute to Mexican competitiveness can therefore help to increase our own economic wellbeing. In particular, investment restrictions to date mean that natural gas is more expensive in Mexico than in the United States, increasing production 

costs in sectors that use gas as a feed stock, such as chemicals, as 

well as in all sectors that draw from the power grid—in other 

words, everybody. 

This reduces manufacturing competitiveness. Gas imports from 

the United States have helped, although inbound pipelines are 

functioning already at capacity. More pipelines could be constructed, but a better solution would be to develop Mexico’s own energy resources, which the reforms that we are talking about today 

are intended to do. Substituting cleaner fuel, such as gas for diesel, 

would also support national and regional environmental targets. 

Once fully implemented, prices would fall and the North American manufacturing platform would become much more competitive 

vis-a`-vis others, including China and Europe. 

In support of Mexico’s reforms, therefore, the United States has 

an important role to play. In the first instance—we have already 

heard this—I would support as well that Congress can strengthen 

U.S.-Mexico energy relations by lifting crude oil export restrictions 

toward a proposed swap between Mexico and the United States, 

36

which is, by the way, a procedure that is already allowed with Canada. 

The bottom line, however, is that regional energy integration 

broadly must be a priority, not an afterthought, underlining an intentional drive for economic expansion. Within this construct, regulatory alignment is critical. Infrastructure must be upgraded, investment climate issues, including an emphasis on workforce development, should be addressed, and joint research and development 

projects expeditiously pursued. 

Finally, in the runup to the Paris meetings in December, a regional approach to climate change issues would be useful and 

should be pursued as a means to engage the global dialogue. More 

can be done. The key to this overall agenda, however, is the successful implementation of Mexico’s liberalizing reforms. It is manifestly in our own interest that the Mexican people succeed. As a 

result, I believe that we should assist the process where appropriate and wherever we can. 

I look forward to your questions. Thank you very much. 

[The prepared statement of Mr. Farnsworth follows:]

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Mr. DUNCAN. I want to thank the panelists. Great testimony. 

Very informative. 

In looking at the Financial Times blog, it says that in the press 

conference following the 15 July lease sale auction,

‘‘In the press conference after the ceremony, government officials blamed the results on the current low price of oil and on 

the fact that many companies were ‘learning the process.’ But 

it was clear that officials were deeply disheartened by the outcome.’’

So I am going to ask each one of you, how would you interpret 

the results of the first public bidding event? You all touched on 

that again, but just elaborate a little bit. I will start with Ambassador Pascual. 

Mr. PASCUAL. Chairman, one of the critical issues is for Mexico 

to put its offerings on the international market on a competitive 

basis. The fields that they were offering were relatively small. The 

contract length and period of time was relatively limited, 4 years 

plus 2 years. Companies had given them some input that they 

needed a longer period of time. 

There are questions about the fiscal terms. And one of the challenges for Mexico is that historically they have operated on the 

basis of Pemex estimates of production costs, which generally have 

been lower than international perceptions of what costs would be. 

When you begin with that as a basis and you put a tax structure 

on top of that and you get the base wrong, then you have a real 

impact on the fiscal terms. 

And so in the end, when companies had to come back and make 

an assessment of what was competitive in a Mexican environment, 

the relatively small fields and shallow-water exploration didn’t 

make the kind of threshold for them to be able to bid in the current 

kind of price environment. 

This is an issue that we have begun discussing with the Mexican 

Government. I think they are aware of many of the factors. They 

are looking carefully at what the lessons are that they could apply 

to the future, including the contract terms, the field sizes, the fiscal 

competitiveness. 

It is not a situation that can’t be reversed. It can be dealt with. 

But it is an issue that points to one very fundamental point, that 

if you are going to succeed in this current environment, that investors are going to have to find a return on investment that is comparable or competitive with other parts of the world at a point in 

time when prices are low and capital expenditures are being cut. 

Mr. DUNCAN. So what I am hearing you say—and I will follow 

up with something Eric said as well—so the Mexican Government 

really may have been disappointed in the price, but they didn’t 

think about the factors that a private company would factor into 

their bid on what their production costs would be and exploration 

costs. And on the other side is, these weren’t real attractive pieces 

of the puzzle. You have small areas and onshore, shallow water, 

onshore. 

But as Eric was saying, there are some more attractive leases 

and properties in the future coming down the pipe. So that provides me with optimism. And that kind of sums it up. 

42

Dr. Tunstall, I will give you a chance. 

Mr. TUNSTALL. Just briefly, I agree with the Ambassador’s remarks. I have to say, though, that this first round was very much 

of a disappointment. Half of the blocks didn’t even receive a bid at 

all. 

Now, I think part of the problem is that the Mexican Government is stuck in the mindset when the legislation was passed, oil 

was selling for $100 a barrel. It is not anymore. And the cost structures associated with development in Mexico are even more critical 

than ever because the energy companies are going to be reluctant 

to make an investment if they don’t feel good about their ability 

to make money. And they have really got to push their costs down 

at $50 a barrel to make that happen. 

Mr. DUNCAN. Right. 

Doctor. 

Mr. PAYAN. Yeah. I think this points to the—although I agree 

with those remarks in terms of the financial structure of incentives 

in this particular bidding—however, I think it shows, again, the argument that I made that the Mexican Government intends to carefully manage this to its advantage. It wants to limit profits, it 

wants to carefully manage the opening, it wants to direct investment in certain ways, and I think it will prove true in the next 

rounds as well. They are going to try to very carefully manage that 

to improve and increase their revenue. 

Mr. DUNCAN. Right. 

Mr. Farnsworth. 

Mr. FARNSWORTH. Well, very quickly, just to add a couple things. 

If you are going to have a failure, it is best to have it on marginal 

properties that are relatively small and not the most attractive 

ones in the deep water later on. So some of this is kind of working 

out the kinks in a process. And I think there is a lot of learning 

that has to occur and is occurring already, number one. 

Number two, I think, according to all observers, this was a process that was run openly, transparently, fairly. It was done in a way 

that it was intended to do. So that is a real success because it is 

the first time, somebody was mentioning, since 1938. So there is 

not a lot of track record here. That is an important point, I believe. 

And I think the final thing that I would say is that as the auctions are going forward some of the terms could very well be adjusted. And this is a global marketplace, and companies that they 

are dealing with are global operators, and there is a constant dialogue back and forth. 

So, again, it is a bit of a learning process. And to the extent that 

some of these fields do come online and do begin to produce and 

do begin to return benefits to the Mexican people, that will then 

play into the idea too that there are real benefits to this in terms 

of the deep water, in terms of some of the other plays. Those are 

longer-dispersing fields, and therefore the benefits to the Mexican 

people wouldn’t accrue until later down the road, several years. 

And so it may have been a tactical decision to try to have the 

success, even knowing that not all of the fields would be purchased 

in the way that they wanted them to be. But nonetheless, they had 

the opportunity to bring some of those benefits back to the Mexican 

43

people in a relatively quick timeframe, compared to what some of 

the other fields might yield. 

Mr. DUNCAN. Thank you all. 

I am out of time. I will say this. Before Congress, I was an auctioneer and that was my business, and maybe we will go down to 

Mexico and teach them a little bit about the auction business. 

With that, I will turn to the ranking member. 

Mr. SIRES. I don’t know about that. 

You know, as I sit here and listen to you, all of your comments, 

I was struck by what you said, Dr. Payan. I mean, you worry about 

security, you worry about the government, you worry about corruption, you worry about the courts. Why would I invest, you know, 

if the situation is so bad? And if I have a dispute, I have got to 

go to the courts in Mexico to resolve it? I mean, to me that doesn’t 

sound very attractive, especially when there is such a glut of oil 

throughout the world and capital investment, it is not there. 

So I think that by all accounts this July 15 bidding was basically 

a failure. I mean, they put out some oil fields that weren’t very 

good, but nobody seemed to be really interested. I can’t imagine if 

you are going to put a real productive piece of property out there 

for people to invest that friends of the government, if there is so 

much corruption, are not going to suck it up. 

So if I am looking from the outside in, I would be very wary. I 

would wait 10, 15 years to see where this whole thing goes, especially now that there is such a glut of oil and prices are low basically. Maybe my observation is wrong, but——

Mr. PAYAN. I personally think that there is a lot of money to be 

made in Mexico. Obviously, this is a historic opening. There will be 

opportunities there. Mexico needs both capital and the technology 

to develop, and so there will be money to go around for everybody. 

I think in the long term this will happen. But I do think that the 

Mexican Government has tried to cap the profits on top of a very 

difficult situation. 

And we also have to think about different players in the sector. 

The IOCs who will be operating in the Gulf will have a lot less 

trouble in the next rounds. They will probably be very successful. 

They don’t have to deal with the situation on the ground. 

The worry is that if the shale, the more unconventional investors 

eventually roll into Mexico, they are going to face a more difficult 

situation on these onshore projects. They are going to have to face 

a country where 51 percent of the property is still communally 

owned, either indigenous lands or farmers and ranchers that own 

the land communally. They are going to face organized crime 

groups that are not under the control of the government. They are 

going to face a government that is going to essentially want to hold 

them to the Mexican court system. 

So those definitely will stay away unless the terms are really 

very, very good, commensurate with the risk. So it depends on the 

kinds of companies and the kinds of onshore, offshore types of investments. But it is a worrisome scenario. 

Mr. SIRES. Ambassador, am I wrong? 

Mr. PASCUAL. I think, Congressman, one of the points that you 

are making is critically important, that for Mexico to succeed it has 

to understand what it looks like from the outside looking in. And 

44

in that sense, one has to ask, what looks competitive? What does 

my business climate look like? What does the security environment 

look like? 

I think it is also important to put it in the context that Mexico 

is one of the G20 countries. It is a member of the OECD. It is part 

of North America. It has a market economy. It has a democratic 

system. It is next to one of the largest consumer markets in the 

world. 

And when you look at the willingness of energy companies to invest in places like Iraq and Nigeria, this is a night-and-day difference. There is no other country in the world that is offering new 

hydrocarbon resources that has the fundamental positive aspects 

that Mexico has to put on the table. So if it can create the right 

kind of business and security climate around it, it can succeed. 

There are challenges. There are important issues to work 

through. But I think that the foundation that is there is one that 

we can build on, that Mexico can build on, and that it is in our selfinterest. Because if you look at it from the perspective, and it really 

is at the foundation of this hearing, if you ask the question, what 

does North America get out of this, what are the security and the 

strategic stakes, If you think about the difference of having a foundation for global energy security coming out of a base of North 

America with Mexico as part of that, it is a question of fundamental strategic importance. 

So in that sense, I think it just reinforces the importance of 

maintaining that perspective of what can be done and working 

with Mexico to act on the very concrete and specific measures that 

it can take to actually make it attractive to come and invest. 

Mr. SIRES. Doctor. 

Mr. TUNSTALL. I think it is important to note that the landscape 

in Mexico is different than the U.S. And one thing that is often not 

well understood is that the U.S. is a little unique in terms of landownership rights. This is one of the few, perhaps not the only, but 

very few countries in the world allow private individuals to own 

the mineral rights as well as the surface rights. 

So the communal farms, the ejidos that were alluded to earlier, 

are definitely going to be an issue. The energy companies and the 

government are going to have to be sure that they provide incentives for the landowners for the onshore development so that they 

are receptive to the prospect of oil exploration. 

But I think it is also an opportunity. As I said, there are a lot 

of infrastructure issues in northern Mexico and northeast Mexico 

where the shale is, and if this can be used much as the way it has 

been in south Texas as an opportunity to provide a foundation of 

various types of infrastructure to support not only the oil and gas 

industry but other types of economic development, then it could 

transform the country significantly. And the upside, the prize on 

the other side, if you will, is very substantial. 

Mr. SIRES. Mr. Farnsworth. 

Mr. FARNSWORTH. Well, much has already been said, so I won’t 

reprise that. I would simply say that the companies will have to 

make their own individual determinations. 

But the positive I think that we can take out of this is that the 

Mexican Government understands this is the crown jewel of their 

45

reform effort. They know that this has to go well. They know that 

it has to succeed. 

They have qualified, talented managers in the leadership role. 

They are aware of the outside perceptions in terms of the previous 

attempts. Telmex was mentioned, some of these other attempts in 

previous governments. But they are aware of the importance of 

this, and I think they are dedicated to trying to make sure that it 

succeeds. 

The question is, do they have the capacity then to build from 

what was clearly a learning experience in this first round to take 

that and integrate it into future rounds? And that just remains to 

be seen. And based on what actually occurs, then, as I mentioned, 

companies will make their own individual determinations if they 

want to participate. 

Mr. SIRES. Thank you very much. 

Thank you, Mr. Chairman. 

Mr. DUNCAN. You are welcome. 

The chair will now go to the chairman of the Homeland Security 

Committee, Mr. McCaul from Texas. 

Mr. MCCAUL. I thank the chairman for holding this hearing. I 

live in Texas. Very important issue. 

Dr. Payan, good to see you again. 

And, Mr. Farnsworth, I think the last time I saw you was at the 

IPG. 

I am also the chair of U.S.-Mexico Interparliamentary Group, so 

this was kind of one of the central issues of the discussion between 

the Mexican Congress and the United States Congress. We also invited the Canadians on the third day to talk about a northern 

American energy alliance to get off of this Middle East dependency, 

which drives our foreign policy in a bad way. 

And there is a lot of optimism. And, quite frankly, the Pemex reform itself, I think, was one of the biggest, most monumental political achievements I have seen in recent times in Mexico, to be able 

to achieve that. And so there was great optimism. They are bringing all three parties together, although at the last minute the PRD 

had some dissension. But we had great optimism. 

Then the price of oil kind of dropped. I had Chevron in my district lay off employees just today, I found out. And, I guess, there 

are multiple factors here, but I think, as all the witnesses have 

talked about, Mexico is sitting on a major natural resource, both 

offshore and onshore. 

But, Dr. Payan, I think as you mentioned, I think with respect—

and the Ambassador made a good point—they are not looking outside in. How do the outside energy companies view this from a 

profit margin standpoint? 

And given the way they have implemented this, it sounds like, 

with more uncertainty, not certainty, given the corruption that you 

have talked about, Dr. Payan, which we know has always been an 

issue in Mexico, and many other countries for that matter, I would 

rather see us develop resources in Mexico than in Yemen where it 

is a lot more hostile with the terrorists, with the Houthis and the 

AQAP. 

But I think the rule of law, Tony Garza wrote a good piece on 

this, Ambassador Garza, the other day. We got El Chapo Guzman 

46

escaping out of prison and that doesn’t comfort companies as well. 

But I will say, these energy companies know how to do business 

in pretty rough spots, Algeria, Yemen, and others. So it can be 

done. 

Frankly, I knew that northern Mexico would be more difficult on 

land because that is where the drug cartels are, and we talked 

about this, but honestly, I really thought the offshore would be 

kind of easy, low-hanging fruit. And what we saw were that it has 

got the six largest offshore reserves in the world, and yet just 2 of 

the 14 blocks even received bids. 

What would be your recommendation to, when we meet with the 

Mexican Congress, as to what they need to be doing a little differently to change that dynamic? Because that number, I figured 

the shale—and Dr. Tunstall, you know that we have been blessed 

in Texas with the amount of shale discovery, but with the price 

dropping that has been an issue. But what advice would you give 

them to turn particularly the offshore one around from just receiving 2 of the 14 blocks receiving bids? 

Maybe I will just go through each of the witnesses. 

Mr. PASCUAL. Congressman, I was in the 2010 parliamentary exchange with Mexico, and at that point in time the word ‘‘energy’’ 

couldn’t have been mentioned. And the fact that we are at a point 

in time when so much has changed, legally, constitutionally in 

Mexico and creating the foundation for that, I think sometimes it 

is important to recognize how quickly this has happened in a price 

environment that has been harsher and more intense than anybody 

anywhere in the world could have imagined beforehand. And I 

think that is just a key factor to keep in mind. 

And so when talking with Mexican parliamentarians, I do think 

it is a critical issue to keep bringing back to the table, as Congressman Sires said. You have to understand what the global context 

and environment is and what does it look like to the rest of the 

world. And so reinforcing that point, I think, is absolutely key because the global market has become a lot more challenging. 

The second thing I think that is important is to recognize that 

selling assets at a competitive basis internationally is not giving 

away a national resource. It is actually building the national resource. There is still a latent concern that that national patrimony 

will be given away. 

And what needs to be factored into the equation, and it builds 

on to what Dr. Payan said, is that through that investment you are 

creating and expanding an asset. You are creating the ability to 

produce something which is going to create economic growth and 

which you are going to be able to export. 

And so in this context, we actually have the opportunity to work 

together. American companies, Mexican companies, other international players, but financial institutions as well. And so how do 

we work together to create the environment that is a win-win for 

Mexico, the United States, and the international community? 

And in keeping the Mexican Congress on that higher plane, recognizing that they are doing something which is good for Mexico, 

the Mexican people, and not giving away Mexican assets is going 

to give the government the kind of space they need to be able to 

look strategically and tactically at these issues and make some of 

47

the kind of surgical changes that are necessary to improve the competitive bid terms. 

Mr. MCCAUL. Right. And I am concerned if this is viewed as a 

failure on the part of the Mexican people, that there are parties, 

and I won’t name, we all know which party, will exploit that for 

political purposes and then reverse the course of all the gains that 

they have made, I think, to go in the right direction. 

But, Dr. Tunstall. 

Mr. TUNSTALL. And it is important to note that while the legislation that was passed and the secondary laws that have been approved was a significant undertaking in and of itself, the real 

legwork is going to occur in the implementation. And so I would 

say that in a lot of ways the ultimate success of energy reform in 

Mexico is by no means assured, and implementation will be key. 

But just the briefest possible response to what they need to do 

to make these auctions a success is to make the terms more attractive. And they clearly were not attractive to the energy companies, 

and that is going to have to change. And hopefully that mindset 

can be changed in Mexico with the key officials that make those 

decisions. 

Mr. MCCAUL. Thank you. 

Dr. Payan. 

Mr. PAYAN. Thank you, Congressman McCaul. It is a pleasure to 

see you again. 

Let me just say something that I think has to be recommended 

to the Mexican Legislature that I think it is important to consider. 

Driving this vehicle of energy reform is the Treasury Department 

in Mexico. They determine a lot of the terms and conditions of the 

contracts and the profit and the capping of the profits. They need 

to step away. The law needs to be changed so that it is the technicians, CNH, the Hydrocarbons Commission, that makes the decisions. 

Another particular seat is occupied by the Secretary of Energy. 

I don’t think the Secretary of Energy has any business in doing 

this. They have to plan and think about the future of the energy 

in the country. 

But to me the fact that the number one actor on this whole scenario is the Treasury Department, specifically Mr. Videgaray and 

his shop, it means that it is all about revenue. It is all about the 

Mexican Government trying to get the most out of these companies, 

get them to invest, and get the most out of it and cap what they 

can do. They need to let the market work. They need to really, 

truly change the entire structure of the agencies that are leading 

this process. 

And I want to reiterate something you said because I think it is 

really very important. They also need to legislate property rights 

into this. They essentially ran over landowners. In Mexico, I know 

Article 27 in the Constitution clearly says that you own the use of 

the land, but you are not really the owner of the land and certainly 

not the owner of the minerals in the land. And there is a certain 

amount of profits from the bottom line capped for landowners, and 

they will be forced to negotiate. And if they don’t negotiate with energy companies, landowners will be forced to cede the land in servitude. 

48

Well, I think this is inappropriate. They need to really, truly respect landownership and the rights of these owners, and they need 

to compensate them duly for ceding their land, selling it, or for participating in the particular projects. They need to give them priority. 

If energy reform fails—and Mexico has not been the most successful country when it comes to privatization because it has a history of monopolies after privatization. And this will be an opportunity, a political opportunity for that 33 percent of Mexicans who 

are very angry about this. And in the plurality system in Mexico, 

33 percent is enough to win an election. And we know that there 

are political parties that can come together and could potentially 

win an election in 2018, and then there will be a lot of uncertainty, 

even for those contracts that will have already been concluded. 

Mr. MCCAUL. That is my concern as well. I have met with some 

of those parties in my office and you can already see them ginning 

up this argument. 

May I ask Mr. Farnsworth as well? 

Mr. FARNSWORTH. Just very quickly. And first of all, let me 

thank you for your leadership, Mr. Chairman, on these issues, and 

they are making a meaningful contribution. 

You know, nothing succeeds in my view like success. And working together, the two legislatures, just like the two governments, 

we are feeling each other out a little bit, we are learning each other 

in terms of how each party does their business, and I think that 

is appropriate. 

But I think there are ways to collaborate, for example, on joint 

research and development projects toward common goals that will 

benefit the North American community. And by the way, let’s bring 

Canada into this as well. Canada has great expertise on a number 

of these issues. 

Let’s work together, as mentioned already by one of the panelists, in terms of Central America, the export of natural gas, and 

in the Caribbean Basin where the energy resources are generally 

not very clean, they are highly expensive, and in many of the countries are actually dependent on countries that aren’t favorable toward the United States. So the energy diplomacy angle could be an 

area of cooperation as well. 

We could think in terms of joint recognition of licenses, for example, welders. I mean, welding is a skill that is transferrable. You 

can be licensed in Mexico, but you can’t practice in the United 

States. Why does that matter? It matters because in an industry 

as integrated as energy you have to be able to deploy your resources in a way that is most effective in terms of developing the 

business and the industry. 

So these are some things that maybe aren’t highly political necessarily, but they are important, and they help develop a growing 

consciousness on a bilateral and trilateral agenda. 

Mr. MCCAUL. Good recommendations. 

Thank you, Mr. Chairman. 

Mr. DUNCAN. When your chairman on another committee needs 

a little more time, you kind of let him have that and ask him to 

remember that down the road. 

Mr. Yoho from Florida. 

49

Mr. YOHO. I wasn’t going to say anything about that. 

I appreciate you all being here, and you guys covered pretty 

much all my questions. 

Dr. Payan, you were talking about the drug cartels, the corruption and all that. And I don’t want to beat a dead horse, but I am 

a veterinarian so I probably have more right to than you guys. 

Where would you start, if you were going to counsel the Mexican 

Government, if they came to you and said, ‘‘What would you do? 

What would you tell us we need to fix first? Do we need to go after 

the rule of law, property rights, things like that, go after the corruption or go after the drug cartel?’’ What would you say would be 

the most important thing to have that perception going out to a 

company that wants to invest into Mexico, into the energy market. 

Mr. PAYAN. Thank you, Mr. Yoho. I am going to answer your 

question and direct my comments also to Congressman McCaul, because he and I have talked about this before, both in Houston and 

here in Washington. 

Look, the rule of law is very weak in Mexico. This is a major 

problem. And I think that the Merida Initiative, which focused almost exclusively on fighting the cartels and strengthening the police, arming the police—a lot of it was in terms of—was granted to 

Mexico to arm the military and the police—has worked to some extent, but then it had the consequence of polarizing organized crime 

in Mexico, and you have a much more chaotic and difficult landscape. 

Mr. YOHO. About 60 to 80 groups, you were saying? 

Mr. PAYAN. Sixty to 80 groups operating throughout the country 

in very difficult conditions, and you don’t know who is who, who 

is allied with whom, and who is doing what. 

And the corruption of the police in Mexico seems to have been 

exacerbated, even worse now than it used to be, because the large 

cartels used to corrupt specific police forces that they needed. You 

now have a lot of different groups corrupting different bodies. 

And so I think the Merida Initiative needs to be expanded, and 

Mexico needs to be pushed into judicial reform, to finish implementing judicial reform. I don’t think it will be ready by 2016, as 

they promised. It needs to be pushed in terms of cleaning out the 

election process. I think the elections in Mexico are not fair and are 

not even. I would not think that Mexico is a democracy, a full developed democracy in that sense. 

So we need to include those efforts in any future negotiations 

with Mexico, and of course institutional strengthening. So we need 

to pay attention to the police system, the judiciary system. 

And then get the military off the streets. The latest reports of the 

military in Mexico firing on civilians in the State of Mexico, in the 

State of Michoacan are not good. And the military does not want 

to be held accountable, and Mr. Pena has essentially defended the 

military, even as they fire against civilians. 

This is not looking very good, and it brings a lot of uncertainty. 

I think it is time to engage Mexico on a broader dialogue about its 

institutions’ corruption. 

And one more thing to finish. A lot of governors and mayors in 

Mexico are extremely corrupt and are waiting for the opportunity 

to take advantage of this opening to enrich themselves by creating 

50

partnerships. Unfortunately, we contribute to that because the 

United States becomes the place where many of these corrupt politicians launder money, they buy apartments in cities, they invest 

in the United States, they keep their money in bank accounts as 

much as the bad guys. 

And so I think that we need to engage the financial system to 

deprive both the bad guys, but also corrupt politicians and deny 

them access to the United States and deny them access to the 

American financial system. We need to get into that. 

Mr. YOHO. I appreciate that. 

Dr. Tunstall, do you think it would be possible, if we made a consortium of sorts between Mexico, the U.S., and Canada, that we 

could have a strong enough force that we could stabilize oil price 

outside of the Middle East with the production that we could 

produce? 

Mr. TUNSTALL. Well, the question I often get asked is—well, first 

people often ask, will all of the shale oil production? Because we 

have gone from producing 5 million barrels a day in the U.S. to 

north of 9 million barrels per day. And they ask about U.S. energy 

independence. And the reality is we consume, what, 18 million barrels per pay? 

Mr. YOHO. Eighteen to 20. 

Mr. TUNSTALL. So the United States alone can’t produce enough 

oil to service its own needs, but if you factor in Mexico and Canada—and Canada, by the way, has the third-largest oil reserves in 

the world, 175 billion barrels, second only to Saudi Arabia and 

Venezuela, I believe. 

So the three together, which is where the Keystone XL comes 

into play, I think could constitute certainly independence. Now, as 

far as controlling the price, that is kind of a different. I mean, oil 

is one of the few commodities any of us or anyone presumes to be 

able to control the price of. 

Mr. YOHO. Well, not so much control the price, but stabilize the 

price; and not so much energy independent, but energy security for 

this Nation or for the North American region, so that we are not 

beholden to a Middle Eastern, the exports coming in and the spikes 

that we had before. 

And if we could come together and had that consortium, that 

would help Mexico, I would think, project. Because what I see, it 

looks like short-term projection down there. We are going to open 

up these leases and hope for the best. And you have got round one 

that was a disaster, it sounds like. But if we say we have got a 15-

, 20-year plan and this is what we are going to do, these reforms 

are going in. 

And that is why I asked you, reform one, two, three, four, and 

they are on a timeline, and we are projecting out 50 years, it would 

bring stability to that. And then it would tell the rest of the world 

these guys are working together and they are going to bring a stable supply of oil to the world that is going to bring stability and 

more security to freedom-loving countries like ours. 

Mr. TUNSTALL. I think that is a real prospect. 

And another twist on the shale development that isn’t necessarily understood yet at this point is the fact that it is a new 

technology. These unconventional techniques are still in many 

51

ways in their infancy. They haven’t applied Big Data, logistical 

techniques, other seismic imaging. There is a whole host of things 

that have yet to be sort of perfected, if you will. 

There is one school of thought that suggests that in the next few 

years shale development in the U.S. Will get so cost competitive 

that we might actually be able to compete head on with Saudi Arabia in terms of cost per barrel to bring a barrel of oil out of the 

ground. 

So there are a lot of things that are underway that bode well for 

that scenario. 

Mr. YOHO. We are hoping to create the demand, because we are 

going to introduce a Caribbean crude export ban lift just for the 

Caribbean Basin and Mexico for the exports of petroleum products 

and increase that demand so it will increase more people hoping, 

wanting to explore and develop. 

Mr. Chairman, I yield back, and I appreciate it. Thank you. 

Mr. DUNCAN. You saw the conversation up here. They are getting 

ready to call votes any second now. So I am going to go ahead and 

wrap up. I have some more questions. We may submit those in 

writing. 

Your testimony covered a lot of what the questions I had were. 

So I want to thank you for your valuable testimony. 

I heard today words like opportunity and optimism, and I think 

that sums up what I see happening in Mexico. There is a heck of 

a lot of opportunity. Mexico can get this right. Private investment 

can get involved. We can have rule of law that secures the investment. 

I talked earlier about North American energy independence, but 

I honestly like to think in much broader terms of hemispheric energy independence and Mexico playing a big part, Venezuela oil 

coming online, U.S., Canada, Mexico, U.S. gas. If you think about 

providing Central America with natural gas, maybe through Panama, but Venezuelan and Mexican oil and U.S. Oil providing the 

needs for Colombia, Paraguay, Chile, and really all throughout the 

region, opportunity gets to be a much bigger word. 

So I want to thank the gentlemen. I look forward to working 

with you as we move forward to pursue this. I want to thank the 

ranking member. 

And with that, we will stand adjourned. 

[Whereupon, at 3:37 p.m., the committee was adjourned.] 

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A P P E N D I X 

MATERIAL SUBMITTED FOR THE RECORD

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MATERIAL SUBMITTED FOR THE RECORD BY THE HONORABLE JEFF DUNCAN, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF SOUTH CAROLINA, AND CHAIRMAN, 

SUBCOMMITTEE ON THE WESTERN HEMISPHERE


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