Latin American Energy Specialist Christian Gómez on Mexican President Enrique Peña Nieto plans to reform PEMEX
This afternoon Mexican President Enrique Peña Nieto outlined his administration’s eagerly awaited proposal for energy reform in an address that was broadcast live to both a domestic and international audience. Speaking from the presidential residence, Peña Nieto introduced a bill that would encourage international investment in the country’s energy sector while ensuring that Mexico’s energy sector is not being privatized.
Many of the key aspects of the bill had been mentioned before by various interlocutors of the Peña Nieto administration, and there were few surprises in his speech. Nevertheless, Peña Nieto delivered his vision for energy in Mexico, basing his reforms on the need for stable, affordable supply.
Peña Nieto did not offer many details, focusing instead on how the quality of life of all Mexicans would improve following the reform. He also mentioned another PRI President, Lázaro Cárdenas (1934-1940), who nationalized the Mexican oil sector 75 years ago, framing his reforms as in line with the popular Mexican president that first brought hydrocarbons under the state’s control.
In fact, the first bullet point of the reform, which would change Article 27 of the Mexican constitution, was framed by Peña Nieto as reverting back to the original wording of the article. Therefore, the focus of the speech shifted away from the profit-sharing contracts that are being considered, and back toward the Mexican Constitution as Cárdenas had envisioned it.
Nevertheless, the profit-sharing contracts remain the most notable aspect of the reform. Previously, legislation in Mexico allowed for private participation only through incentive-based contracts, which pay the company a fee for a service, but the company does not earn a portion of the profits.
Under the new plan, however, the profit-sharing contracts imply that Mexico will maintain ownership of all reserves, but companies are given permission to undertake exploration and production. Once oil is discovered, these firms would then recover their costs and share a portion of the profits.
This type of agreement exists throughout the world, notably in the Middle East and Central Asia.
For companies evaluating their investment prospects in Mexico, the Peña Nieto administration’s reform offers a compelling entrée into a country with much yet to explore. Mexico is considered to have massive shale deposits (fourth in the world according to the EIA), but little has been exploited to date.
The Peña Nieto government would benefit from the technical expertise of major international oil companies, who would be able to bring the hydrocarbons out of the ground, while at the same time ensuring that PEMEX and all energy remains in the hands of the Mexican state.
The presentation of the reform bill was not all oil and gas.
Peña Nieto framed the reform of the electricity sector in a similar manner – allowing for private participation in the sector yet ensuring that the state remains in control of the system. The Peña Nieto bill would strengthen the national electricity commission while also promoting renewable energy such as solar and wind power.
Peña Nieto argued that the reform would positively influence all aspects of the Mexican economy. He contends that the cost of energy would decrease, that 2.5 million new jobs would be created by 2025, and that 2 percent of GDP would increase by 2025. These lofty goals rely on improvements in Mexico’s energy sector, and thus the reform is being cast as the backbone of Peña Nieto’s broader reform agenda.
The success of this agenda will hinge on upcoming negotiations with the two other main parties in Mexico – the PRD and the PAN. Peña Nieto will need some bipartisan support in order to secure the bill’s passage through Congress. Nevertheless, this reform offers arguably the best chance since 1938 for a fundamental restructuring of the sector, and it could well attract the investment required to develop energy resources for the maximum benefit of Mexico.
Christian Gómez, Jr. is the Director of Energy at the Council of the Americas. Check him out on twitter at @CGomezEnergy
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