PEMEX Reform: The Final Frontier

James Stranko, Advisor to the Clinton Global Initiative and author of Avenida America on the major reform everyone is wondering if Mexico will make. 

Changes on the way"

Changes on the way?

Uttering the word “PEMEX” to any Mexican is likely to provoke a reaction. Tell a taxi driver and he’ll complain about creeping price rises at the pump. Tell a leftist and risk an hour-long diatribe on the history of imperialism and the Mexican Revolution. Tell an economist and she’ll embark on a long discussion of how over-dependent the state’s finances are on oil resources.

This is why the reforms proposed by the Peña Nieto administration are so important. Just putting the words “reform” and “PEMEX” in the same sentence in Mexico is already a type of reform.

Up until recently, the thought was unthinkable.

Today, 75 years after the country nationalized its oil exploration and production by taking control of a host of U.S. and British-owned assets in the country, Mexico is faced with dwindling production numbers, a fall in proven reserves in its showpiece Cantarell field, and increasing demand in its growing industrial economy. Through in an energy renaissance north of the border that threatens its largest export market and suddenly times are ripe for change.

Now, as Mexico builds a framework for opening up foreign participation in the country’s oil industry, politicians, citizens, and hydrocarbon companies are vying to direct reform in Mexico, and, more importantly, who will net the largest share of the reforms.

Even the most partisan PEMEX supporter will admit that the country needs foreign oil expertise to unlock more challenging fields through advanced drilling and surveillance techniques. This is why the government and private oil companies from the US and farther afield have changed their often frosty relations over the past several years into a more engaging discussion of how and when, rather than if.

The Felipe Calderón administration (2006-2012) recognized this reality in 2008, when it passed reforms that allowed external companies to assist in new exploration offshore. Because they remain hamstrung on investment possibilities by broader constitutional constraints, they haven’t produced any major upstream operations.

Any glasnost will involve increased foreign participation in exploration, rather than outright privatization. Mexicans across the political spectrum would likely bristle at the possibility of its oil fields in foreign hands. Beyond nationalism, the constitutional reform necessary to divorce the state from Mexico’s oil markets would be a herculean task.

And the new oil monopoly goes to...

And the new oil monopoly goes to…

Still, Reform is not inevitable.

Serious roadblocks include citizen opposition, pressure within opposition parties to not hand such a juicy victory to the PRI, and the nitty-gritty fights behind constitutional reform. Another fight that transcends party lines concerns how resources will be distributed in a post-PEMEX federal budget.

Mexico’s public budget relies heavily on oil revenues, and oil royalties from PEMEX in recent years has comprised between 35-50 percent of total spending. This is a vast public policy challenge for Mexico, and over the past several years the government has paid dearly for oil price hedges that guaranteed a price floor per barrel for Mexican oil.

El País published an excellent article this week summing up the challenges ahead for President Peña Nieto:“En las próximas semanas, el Gobierno del PRI deberá concretar su propuesta de modernización de la petrolera más allá de su voluntad de abrirla a la inversión privada y de ambiguas declaraciones sobre la necesidad de modificar la Constitución para que la reforma sea real y no cosmética. Para esto último, el PRI, al no tener mayoría en el Congreso, necesitará los votos del Partido Acción Nacional (PAN, centro derecha) que, de momento, se deja querer y no opone serios obstáculos a la iniciativa.”

In the next few weeks, the PRI government must offer a concrete plan to modernize PEMEX. They will have to transcend vague overtures to “open up the oil company to private investment” or to “make the necessary amendments to the constitution” to drive real reform.

On the point of constitutional reform, given that the PRI does not have a majority in Congress, it will need the votes of former President Calderón’s center-right PAN party. The PAN, for its part, appears open to discussing reform, and has not put any serious obstacles in the way of Peña Nieto’s initiative.

I’m bullish on the prospects of energy reform

…for the same reason that I’m bullish on Mexico. Beyond the macro winds that have shifted in favor of Mexico (including a US recovery and rising labor costs in China), the discussion of oil revenue comes at a time when Mexico’s economy is more diverse than ever. Heavy manufacturing is booming thanks to the US recovery.

A closer North American union and rising labor costs in China have converged to make the Mexico’s tech, textile and light manufacturing industries competitive again. And brisk internal demand for consumer goods and construction materials makes Mexicans less sensitive to the idea that all their energies are focused on exports.

Certainly there are a number of improvements that would make pumping crude even less central to the country’s livelihood, such as investments in refining that would move its exports up the value chain (rather than exporting crude to Texas to be refined).

But this first step towards meaningful foreign participation in Mexico’s oil sector couldn’t come at a better time for the country. Politically, a reform seems much easier to swallow when times are good than when a government is desperate for revenue.

Reform: Easy as one, two, PRI

In a way, the fact that the PRI is spearheading reform in Mexico makes it more credible to Mexicans across the political spectrum.

A party borne of the Mexican Revolution and built around strong national icons, managing state assets in a way that isn’t entirely oligarchic falls within the little moral authority that most Mexicans give them. Add in the recent “Pact for Mexico“, a tripartite pledge to reform Mexico’s fiscal state of affairs, and Peña Nieto can be credited with establishing a credible agenda.

What remains to be seen is who benefits most from the reforms.

Oaxaca 045

Recently by James
Of Dictators and Democrats
Gay Rights in Latin America: Francis Called It
The Venezuelan Economy: Three Myths and Three Truths

No Se Mancha Covers Mexico
Mexico: What Local Elections mean for the Peña Nieto Sexenio (Theodore Kahn)
Mexico – China Relations: Flipping the Script? (Theodore Kahn)
The Ghost of Artemio Cruz (Samuel George)

This entry was posted in Mexico + Central America and tagged , , , . Bookmark the permalink.

16 Responses to PEMEX Reform: The Final Frontier

  1. Pingback: PEMEX Reform – The Final Frontier | Avenida América

  2. Pingback: Eike Batista: The Symptom or the Cause? | No Se Mancha


  4. Pingback: Latin America News Flash | No Se Mancha

  5. James,

    I completely agree with your conclusion. What outsiders to the region are missing, even The Economist, is that this time the PRI actually wants the reform. The key for my bullish position here is the politica”mini-acts” that we have seen in the last months. The strategic withdraw of PRI support to Castro Trenti in Baja California so that the PAN could win the election, thus strengthening Madero’s position as the party president, etc.

    Then you had the PAN basically proposing the liberalizing of the whole value chain so that anything that the PRI proposes is more “nationalistic” than their reform. If that means that we will have production sharing agreements on shale gas/oil, deepwater, Chicontepec, instead of concessions so be it. Fundamentally they are both quite similar. You could have a round zero in which Pemex could pick their producing assets just like Petrobras did in 95 and there you go.

    I don’t know if you read Spanish but in case you do, you should take a look at his document we prepare at COMEXI.

  6. Pingback: Enrique’s PEMEX Plan | No Se Mancha


  8. Pingback: Mexico’s Energy Reforms—We Ain’t Seen Nothing Yet | No Se Mancha

  9. Kathryn was a finalist in the Gather-Borders-Mitch Albom contest:
    “Times My Mom Stood Up for Me:” My Mom Stood Up for Me During the Last Days of
    My Childhood. Not to mention, their evening aerobatic
    sessions are a whole lot of fun to watch. During the winter
    when the bats are hibernating, try not to disturb them.

  10. Whats up this is kind of of off topic but I was wondering if blogs
    use WYSIWYG editors or if you have to manually code with HTML.

    I’m starting a blog soon but have no coding know-how so I wanted to get advice from someone with experience.
    Any help would be greatly appreciated!

  11. The great thing about Brandy’s camp is that the children try both, but in a safe environment.
    The back arm should also form a letter “L”, with the elbow facing down.
    The key is to find the balance and that is when having
    an “attitude of gratitude” plays a key role.

  12. term plan says:

    Greetings! I know this is kinda off topic however , I’d figured I’d ask.

    Would you be interested in trading links or maybe guest authoring a blog article or vice-versa?
    My website addresses a lot of the same topics as yours and I believe we could greatly benefit from each other.
    If you happen to be interested feel free to send me an email.
    I look forward to hearing from you! Great blog by the way!

  13. Whenever you want to buy or build a bird house you have take into account a
    few factors like whatever your plans, always use raw wood to make a birdhouse.
    The majority of the time, when your ex boyfriend texts you,
    it is with the pretense of casual, innocent conversation.
    One of the best ways to do this is to pick up key points as a person speaks and remember
    them because you share a similar experience or have knowledge about the subject.

  14. Hi there! Would you mind if I share your blog with my myspace group?
    There’s a lot of people that I think would really enjoy your content.
    Please let me know. Thanks

  15. Hello There. I found your blog using msn. This is a very well written article.
    I will make sure to bookmark it and come back to read more of your useful info.

    Thanks for the post. I’ll definitely return.

  16. Billy says:

    There appear to be quite a few groups operating on coordinated action.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s