Second phase critical in Mexico’s energy reforms, officials say

Mexico moved quickly once politicians there decided to adopt energy sector reforms, but the process’s second phase, which begins Feb. 1 and should be completed in 2 years, could be critical, an official of national oil company Petroleos Mexicanos (Pemex) said.

“The reform which was approved was much more liberal than what President Enrique Pena Nieto proposed last summer,” Fluvio C. Ruiz Alercon, an independent director at Pemex, said in remarks during a Jan. 16 discussion at the Brookings Institution. “It was quite fast-tracked. There are deadlines now for Congress to legislate the second law, and some of the terms might change.”

The reforms’ main provisions, which will let the country’s oil and gas and electric companies work with the private sector for the first time since they were nationalized in 1938, probably won’t change much, he indicated.

“There will be profit-sharing from oil production for the first time,” Ruiz said. “All the production chain links will be totally open. Private entities will participate too. Contracts which used to be offered by Pemex now will be offered by the Mexican government.”

Mexico’s natural gas pipeline network and electricity grid will be centralized while subsidies, “particularly on gasoline,” will be phased out, he added.

“While the state will continue to have a major role, there will no longer be just a single operator in Mexico,” Ruiz said. “Pemex will need to change from a public entity to a productive state enterprise.” Because it would be subject to heavier regulation, it would need budget autonomy so it can manage its finances and focus on the most profitable areas and hold onto its talent, he said.

Possible reintegration

“I believe this secondary legislation will give Pemex the ability to hire, enter into contracts, and do research and development,” Ruiz said. “This may lead to its reintegration. I believe the division, which occurred in the 1960s, has served its purpose. It will be vital to improve its technological competencies if Pemex is to remain competitive. It will need to form partnerships with companies from other countries.”

Diana Villiers Negroponte, a nonresident foreign policy senior fellow in Brookings’s Latin America Initiative, said that Mexico’s people still will own the actual oil and gas subsalt resources under the reforms, but anything that happens once the resources reach the surface can be competitive now.

“Pemex, as it becomes a profit-making national oil company instead of a government agency, will be able to enter into partnerships,” she explained. “It won’t have to pay such high taxes, but it will need to keep enough of its revenue to reinvest in new wells.”

A referendum to undo the reforms that opponents are mounting will give the government the opportunity to educate voters that the changes are good and should remain in place, Negroponte said. “In any case, I doubt that any international company will be ready to invest until after that referendum,” she said.

Arturo Sarukhan, who held several positions in Mexico’s Foreign Affairs Ministry before become chairman of a consulting firm, Global Solutions/A Podesta Co., said the current government’s ability to build coalitions puts Mexico on the verge of its biggest economic victory since the North American Free Trade Agreement.

“This will have profound economic and social impacts on Mexico,” he maintained. “But it also could help Mexico play a different global role with an improved energy sector.”

Moved quickly

When the US and Mexico reached a transboundary agreement in 2012, Mexico worked to conclude negotiations in a record 11 month and its Congress approved the treaty promptly, Sarukhan said. “The integration and addition of more Mexican energy coming on-line not only will change US imports, but also open possible sales to countries which are forming the Trans-Pacific Partnership,” he said.

The change will allow Pemex to think more globally and start working in other countries, according to Ruiz. But the most urgent need for outside capital will be domestic, where gas and electric infrastructure need to be built, he said.

“There will be challenges,” said Sarukhan. “One will be making sure the victory which has been won can be translated into public opinion. Privatization still is a dirty word to many people. It will be necessary to demonstrate that what has been a government monopoly won’t simply become a private one. The devil will be in the details, which will be worked out in the next few months.”

Ruiz said, “It could be difficult to win public opinion over in the short and medium term. That’s why it will be important to achieve a political consensus during this second period.”

Mexico’s Treasury Department could pose a problem since it stands to lose substantial direct revenue from Pemex, he warned. It will hard to maintain the national budget without the national oil company’s 40% contribution, he said.

“We can say Pemex can invest where it wants,” Ruiz said. “But Treasury ultimately may decide.”

Contact Nick Snow at nicks@pennwell.com.

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