Mexico has opened natural gas transportation, storage, and distribution to private capital. What that means depends on Mexico.
The move came by way of change to a 57 year old constitution that prohibits private ownership of Mexican oil and gas reserves. That's significant. But does it mean that Mexico might soon abandon the nationalistic armor with which it defends itself against economic progress? Probably not. Economic desperation has yet to jar Mexican voters loose from their sentimental attachment to unproduced hydrocarbons. Until that changes, Petroleos Mexicanos will continue to monopolize oil and gas reserves on behalf of the state, too broke to invest in resource development on a scale sufficient to achieve full production potential and create the wealth Mexico needs.
EXPANSION OPPORTUNITIES
The constitutional change-passed in the Senate by a strong margin but as late as possible in the legislative session-creates opportunities, nevertheless. Mexico needs to expand its gas transportation system. Most of its domestic gas supply is associated with oil production in the southern half of the country. Most gas markets are in the north, which has dry gas potential but no way to move production to market. There are potential markets in states such as Baja California and Yucatan, which now have no gas service at all.
What's missing are the pipelines, storage facilities, and distribution systems to move gas from supply centers to all the places that can use it. What the constitutional change says is that the government need no longer be sole investor in projects of those kinds. And what's uncertain is whether the government will let this limited step toward privatization work.
Reason for doubt comes partly from the privatization accomplishments of Mexico's electric power generating industry. To be brief about it, there aren't many. The government changed laws and regulations governing the industry in 1992-93 in hopes of attracting private capital. Despite strong signs of interest by Mexican and foreign companies, projects haven't moved beyond the negotiating stage. The companies charge Pemex and its power utility counterpart with lacking commitment to private power generation (OGJ, Jan. 16, p. 20).
This does not bode well for gas. In addition to suppressing demand in what should be an important growth market, the bureaucratic mire could easily spread to gas transportation and storage. The government that still owns gas at the wellhead can still set the price. While the policy since 1992 has been to index hydrocarbon prices to those in the U.S., the government has made exceptions. And the government can still influence crucial matters such as tariffs and permitting. When potential investors consider gas transport and storage projects in Mexico, they will have to remain wary of official caprice.
PIECEMEAL LEGISLATION
Mexico's piecemeal approach toward legislating privatization does nothing to allay these regulatory suspicions. Continued refusal to submit any of its considerable oil and gas resource to competition for international capital makes the country look less than serious about conducting business with outsiders. While any new welcome to private capital deserves applause and attention, Mexico still offers little more than permission to put money at risk in an uncertain bureaucratic environment on behalf of an incomplete range of opportunities.
Although gas transport privatization moves the country in the right direction, it's half a step. Mexico should expect responses of international investors to be just as measured.
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