Marc Schryer – May 4, 2014
Changes to Mexico’s constitution last September have the potential to open up the country’s 76 year-old energy monopoly under Pemex to private business, stimulate significant economic growth, and attract foreign and domestic private investment. Congress’s approval of secondary legislation, presented just before the legislative body adjourned for recess on April 30, is needed to enact those constitutional changes made to the energy sector. Reports indicate that special sessions of Congress will convene this month for a vote on the legislation.
International investors and petroleum companies are taking notice, as large fossil fuel reserves are becoming potential business opportunities. However, there has been concern that the reforms are not being pushed through Congress fast enough. Peña Nieto had hoped that these reforms would have passed before April 30, when Congress moved into recess. If extraordinary sessions of Congress are not held and the proposed reforms aren’t passed until September, foreign investors may lose interest. ExxonMobil and Royal Dutch Shell, alone, could bring billions of dollars in private investment to Mexico.
The government hopes to increase the domestic production levels, which have fallen from 3.4 million barrels per day to 2.5 million. The plan includes the hope that private production will account for at least half a million barrels per day within four years. Indeed, this increased non-Pemex production will help to support these goals.
Much of this increased production could come from the drilling of new wells using hydraulic fracturing technology in northern Mexico near the Texas border. Private companies or semi-private partnerships with Pemex will negotiate leasing contracts and licenses directly with private landowners. Under current Mexican law, private drillers may not own the land or the underlying oil and gas.
The legislation is a collection of 21 individual laws, aimed at reforming the tax regime, improving credibility of oil and gas contracts, and strengthening regulation of energy production and distribution. In order to increase transparency, the proposed law requires publication of regulatory decisions, project information, and bidding information on energy projects. The electricity grid will remain under government control, while generation operations will be opened up to foreign and private companies through contracts and licenses.
The breakup of the Pemex monopoly includes freeing up the import, production, and sale of oil and gas in Mexico. These changes are seemingly aimed at creating a competitive market in the coming years. Beginning in 2017, private companies will be able to sell gasoline and diesel without purchasing franchise contracts from Pemex. In addition, import restrictions on petroleum will be lifted in 2019, when private companies will be able to import petroleum products alongside Pemex, which is currently the only authorized importer.
However, Pemex will retain certain powers and privileges. Pemex’s tax burden will be decreased from 79 to 65 percent of revenue, as private and foreign oil companies enter the market. Additionally, Pemex will have at least a 20 percent stake in any cross border extraction operations. While it is clear that Pemex is opening the market, how exactly competitiveness in the oil and gas industry will be guaranteed and who its beneficiaries will be remains murkier.
Opposition to the reforms in Congress comes mostly from the left, from the PRD, as the PAN and PRI are united in its favor. Major concerns include the privatization or ‘selling out’ of Mexico’s natural resources to foreign entities and the lack of meaningful debate in Congress. However, opposition has failed to gain much political traction, as the two main parties have largely ignored it and organized protests have failed to materialize.
In an unusual move for a Mexican celebrity, famed Mexican director, Alfonso Cuarón, has voiced concern in a high-profile open letter to President Peña Nieto, demanding answers to 10 questions about the energy reforms. The letter voices concern over social and environmental impacts, how and when the energy reforms will be implemented, and how corruption will be mitigated.
In response to Cuarón’s letter, Peña Nieto released a document intended to dispel the director’s concerns. The rebuttal includes promises of increased oil production, increased economic growth, environmentally responsible exploitation of natural resources, transparency to reduce corruption, protection of the democratic process from the interests of multinational big oil companies.
Energy Secretary Pedro Joaquin Coldwell forecasted that gasoline and electricity prices would begin to fall within two years as a result of the reforms. Mexican companies would be given preference in contracts over foreign owned companies when all else is equal. The position of domestic firms within the oil and gas sector will be strengthened by the goal of attaining 25 percent of ‘local content’, i.e., materials and labor, in energy projects by 2025.