[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]





  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

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                      COMMITTEE ON FOREIGN AFFAIRS

                 EDWARD R. ROYCE, California, Chairman
CHRISTOPHER H. SMITH, New Jersey     ELIOT L. ENGEL, New York
ILEANA ROS-LEHTINEN, Florida         BRAD SHERMAN, California
DANA ROHRABACHER, California         GREGORY W. MEEKS, New York
STEVE CHABOT, Ohio                   ALBIO SIRES, New Jersey
JOE WILSON, South Carolina           GERALD E. CONNOLLY, Virginia
MICHAEL T. McCAUL, Texas             THEODORE E. DEUTCH, Florida
TED POE, Texas                       BRIAN HIGGINS, New York
MATT SALMON, Arizona                 KAREN BASS, California
DARRELL E. ISSA, California          WILLIAM KEATING, Massachusetts
TOM MARINO, Pennsylvania             DAVID CICILLINE, Rhode Island
JEFF DUNCAN, South Carolina          ALAN GRAYSON, Florida
MO BROOKS, Alabama                   AMI BERA, California
PAUL COOK, California                ALAN S. LOWENTHAL, California
RANDY K. WEBER SR., Texas            GRACE MENG, New York
SCOTT PERRY, Pennsylvania            LOIS FRANKEL, Florida
RON DeSANTIS, Florida                TULSI GABBARD, Hawaii
MARK MEADOWS, North Carolina         JOAQUIN CASTRO, Texas
TED S. YOHO, Florida                 ROBIN L. KELLY, Illinois
CURT CLAWSON, Florida                BRENDAN F. BOYLE, Pennsylvania
SCOTT DesJARLAIS, Tennessee
REID J. RIBBLE, Wisconsin
DAVID A. TROTT, Michigan
LEE M. ZELDIN, New York
DANIEL DONOVAN, New York

     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     ALBIO SIRES, New Jersey
ILEANA ROS-LEHTINEN, Florida         JOAQUIN CASTRO, Texas
MICHAEL T. McCAUL, Texas             ROBIN L. KELLY, Illinois
MATT SALMON, Arizona                 GREGORY W. MEEKS, New York
RON DeSANTIS, Florida                ALAN GRAYSON, Florida
TED S. YOHO, Florida                 ALAN S. LOWENTHAL, California
DANIEL DONOVAN, New York
















                            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

 
  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 National 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.
    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.
    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.
    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 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 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 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 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.
    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.
    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, 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.
    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 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 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 self-interest. 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 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 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 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.
    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.
    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 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 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.]
                                     

                                     

                            A P P E N D I X

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                   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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