Mexico cracks open the door with energy reforms
President Enrique Peña Nieto is hoping to transform the country’s energy sector
Mexico's president Enrique Peña Nieto has proposed historic reforms to his country’s energy sector aimed at luring new foreign investment and technology into the deep-water and shale fields that could reverse the declining industry’s fortunes. If passed, the package of reforms would herald the most dramatic change in the industry since it was nationalised in 1938.
The most significant, and politically difficult, aspect of the reforms calls for rewriting articles 27 and 28 of Mexico’s constitution, which codify the state’s monopoly over the oil and gas industry. Peña Nieto wants to rewrite those articles to allow the government to award concessions for new projects to private companies. Although Peña Nieto hopes to open the sector, he has reaffirmed that Mexico will remain the sole owner of its oil and gas reserves. It has been clear that Peña Nieto saw giving up the state’s direct control over its oil and gas resources as a step too far. “I must insist the state will own hydrocarbons in Mexico, it will own oil. But we need to expand Pemex's capabilities,” he said in a speech delivered during a visit to London in July. Offering direct ownership in Mexico’s oil and gas reserves would have left Peña Nieto open to charges from the left that he was giving away Mexico’s resource wealth, a potent line of attack in a country that takes enormous pride in the independence of its energy industry.
Peña Nieto’s Institutional Revolutionary Party (PRI) and the right-leaning National Action Party (PAN), which supports reform, are expected to have the votes to push through constitutional reform. Polls, though, show that the government still has much work to do to win over the public. A widespread pubic backlash led by the Party of Democratic Revolution (PRD) could yet derail the proposed changes.
To avoid that, Peña Nieto has proposed a contract structure that will allow the state to retain ownership in the oil and gas reserves themselves, but gives companies a share in the profits of oil sold. That will disappoint many potential investors. The profit-sharing model has been used with little success in countries such as Ecuador and Bolivia.
But Peña Nieto’s administration appears to be aware that profit-sharing contracts on their own would probably not be enough to lure the kind of deep-pocketed foreign investors Mexico needs.
The government has said it will push for a second wave of major regulatory changes after constitutional reforms have been passed. Crucial to that effort will be structuring the contracts and Mexico’s legislative framework in a way that allows foreign companies to book reserves on their balance sheets under US stock market regulations.
“I must insist the state will own hydrocarbons in Mexico, it will own oil. But we need to expand Pemex's capabilities”
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