This month, Mexico’s Congress is debating the long-anticipated reform of Pemex, the country’s state-owned oil company.
This reform comes at a critical moment for Mexico’s energy industry, as oil production has declined steadily since 2004, and Pemex will need to more than double its investment to reverse the trend. The latest energy reform legislation in Congress would ease the financial pressure facing Pemex (which currently supplies one-third of the government’s annual budget), and would allow for some form of foreign investment in Mexico’s energy development.
If the bill passes, however, the results will be neither immediate nor guaranteed.
Even if Mexico’s Congress scrapes together the necessary votes to pass the bill in the coming days, the energy legislation rollout is likely to take several years. Any constitutional reform must be approved by half of Mexico’s 31 state legislatures. This process will likely take several more months, and may not be complete until the middle of 2014. At this rate, a substantial increase in foreign investment cannot be expected before 2015 or even 2016.
Then, the all-important ley secundaria (secondary legislation) will be decided, with significant implications for the types and levels of investment that the reform will produce.
Mexican President Enrique Peña Nieto revealed a set of reforms to the country’s energy sector on Monday which would open Mexico's energy sector to foreign investors and allow private firms to access profit-sharing contracts with state-run oil monopoly Pemex. The reform package will be presented to the Congress this week and—if enacted—it will mark the largest private sector opening of Mexico’s energy sector since the industry was nationalized in 1938.
Mexico is the world's 10th-biggest producer of crude oil, and has the third largest oil reserves in Latin America after Venezuela and Brazil. For the past 75 years, the industry has been dominated by state oil firm Pemex, which supports about one third of the government’s income. As a result, the industry’s capacity to invest in new exploration projects has been limited and domestic production has dropped from nearly 3.4 million barrels per day in 2004 to 2.5 million barrels per day in 2012. If new projects cannot be developed, Mexico might become an energy importer by 2020.
The reform plan proposed this week calls to amend two key articles in the constitution that make oil, gas, petrochemicals and electricity the sole preserve of the state. Though private companies can currently be awarded service contracts within the oil industry, the reform goes further by allowing them to take part on the risks and profits of developing new fields, and offering permits in association with Pemex to refine, transport and store hydrocarbons and petrochemicals.
According to experts, the liberalization of the Mexican oil industry could double foreign investment in the country and improve growth. However, the plan has faced severe political opposition, and a survey revealed that 65 percent of Mexicans oppose private investment in the sector. Peña Nieto has stressed that “Pemex is neither being sold nor privatized,” and the industry will remain under government control. Though able to appease some of the critics, this has raised concerns among investors as the bill does not allow for production-sharing concessions—a scheme that is possible in Colombia and Brazil.
Watch an interview with COA Vice President Eric Farnsworth on the significance of the reforms for the Mexican economy.
Mexican President Enrique Peña Nieto’s plan to reform state-owned Petroléos Mexicanos (PEMEX) has attracted the attention of many analysts. Since President Lázaro Cárdenas nationalized the oil sector in 1938, no president has been able to push for reform to allow for foreign ownership of petroleum assets.
Peña Nieto sees allowing foreign investment to be critical to turning around PEMEX, which has suffered from declining production in recent years. PEMEX was producing 3.4 million barrels per day in 2003 and production slipped to 2.5 million barrels per day in 2012.
While the debate for energy reform continues, an oil auction for six blocks in the Chicontepec basin is set to take place on July 11, with multinational oil companies such as Repsol, Schlumberger and Halliburton set to make bids.
This is possible due to a 2008 reform that allows for limited private investment in the sector through incentive-based contracts. When it passed, then-President Felipé Calderón was quick to accompany the reform with a firm disclaimer: “I want to make clear that oil is and will continue to be exclusively Mexican property. PEMEX is not being privatized. Oil is a symbol of the nation’s sovereignty.”
Top stories this week are likely to include: Cubans re-elect President Raúl Castro in one-party elections; Argentine Foreign Minister Héctor Timerman travels to London; Paraguay investigates the death of Lino Oviedo; Argentina reacts to the IMF after being censured; Mexican authorities conclude rescue efforts after PEMEX explosion.
Parliamentary Elections Begin in Cuba: Cuba’s nearly 8.5 million voters went to the polls yesterday to elect 612 national assembly members and members of the country’s 15 provincial assemblies in the country’s one-party elections. Eighty-six year-old revolutionary leader Fidel Castro—who had not been seen in public since October—made a surprise appearance at the polls on Sunday to cast his vote in Havana’s El Vedado neighborhood. His brother, Cuban President Raúl Castro, was re-elected for a second five-year term—his last, if the president’s decision last year to introduce two term limits is upheld. "This parliament will be in place at an important time in the history of the revolution; though they likely will not have the power or diversity to positively affect the course of reforms or leadership changes," says Christopher Sabatini, Editor-in-Chief of Americas Quarterly.
Argentine Foreign Minister Declines to Meet with Falkland Islanders: With little over a month before Falkland/Malvinas Islanders vote in a March 10 referendum on their island's political status, Argentine Foreign Minister Héctor Timerman has arrived in London to make the case that the disputed islands belong to Argentina. Timerman will make a presentation at the Argentine Embassy in London to discredit the upcoming referendum, in which the islanders are expected to affirm that they are British. Timerman had originally planned to meet with British Foreign Secretary William Hague in a bilateral meeting, but he declined the invitation after Britain insisted that representatives of the island’s government also be present.
Paraguay Investigates Death of Presidential Candidate Lino Oviedo: Paraguayan President Federico Franco has declared three days of national mourning after third-party candidate Lino Oviedo was killed along with his pilot and bodyguard in a helicopter crash late on Saturday. The cause of the crash, which witnesses say was accompanied by an explosion, has not yet been determined, but authorities have called the death an accident. However, members of Oviedo’s Unión Nacional de Colorados Éticos (National Union of Ethical Citizens—UNACE) party have demanded an investigation into whether the politician was assassinated. Oviedo was a retired general who helped overthrow Paraguayan dictator General Alfredo Stroessner, and was also charged with organizing a failed coup in 1996 against former Paraguayan President Juan Carlos Wasmosy, for which Oviedo served time in prison.
Argentina's Next Steps After IMF Censure: Last Friday, Argentina became the first nation to be censured by the International Monetary Fund (IMF) for its widely-disputed inflation data, which the national statistics agency reports at 10.8 percent. Argentine Minister of the Economy Hernán Lorenzo reacted to the fund’s decision by saying that his country is being punished for “protecting national industry and jobs, financing itself without the markets, and saying ‘no’ to vulture funds.” According to the IMF, Argentina must address "inaccurate data" by Sept. 29, 2013 to avoid suspension. If the country fails to comply with the IMF by implementing remedial measures such as creation of a new consumer price index, Argentina faces further sanctions, which could include suspension of voting rights or expulsion.
Investigation of Thursday's Pemex Blast Continues: Mexican authorities will continue to investigate the cause of the blast that killed at least 36 workers at a Pemex office complex in Mexico City on Thursday. The death toll rose on Sunday as rescue workers found three more bodies over the weekend, but it now appears that rescuers are concluding their efforts to search for survivors—though one woman who worked as a secretary at the office remains missing. Mexican Attorney General Jesus Murillo Karam declined to say on Friday whether the explosion was an accident, due to negligence, or part of an attack, but he added that there should be more information available in the coming days.
A Brazilian government spokesperson announced yesterday that President Dilma Rousseff will visit Mexico in early 2013, likely in March, to build on “the very good impression” made by President Enrique Peña Nieto when the then-president elect visited Brasilia in September. The visit will focus on further reversing the tensions sparked over Brazil’s imposition of quotas in early 2012 as well as on sharing the Petrobras model, Brazil’s state oil company, with Mexican counterparts who are looking at how to reform the Mexican state oil company Pemex.
Plans are already underway for a follow-up visit where Pemex executives will travel to Brazil to learn first-hand how Petrobras functions.
Relations soured between Latin America’s two largest economies when Brazil, in response to an escalating trade deficit with Mexico, imposed import quotas on Mexican vehicles. Brazilian government officials have more recently hinted at the possibility of opening up discussions around the current automobile quotas.
Rousseff’s visit to Mexico may be largely symbolic, but the Mexican business community is awaiting concrete actions. Luis de la Calle, the former undersecretary of international business negotiations at the Mexican Ministry of Economy who actively negotiated the 1994 North American Free Trade Agreement said that it was “sensible to maintain a certain level of skepticism. At the end of the day, it comes down to interest and what is best for both Brazil and Mexico as a much more open trading relationship.”
In 2008, in the midst of the debate over oil reform, Mexican President Felipe Calderón promised to build a new refinery. Now, one year down the road, the refinery’s location and a $9 billion investment have finally been chosen in a process that was the victim of a slow-moving bureaucratic machine.
Whenever it had seemed that the final decision will at last be announced, some other delay appeared. The process to pick a spot, secure land and actually begin the construction has revealed many of the inefficiencies of the Mexican state, including the lack of a trustworthy land registry and the inability of both federal and state governments to move forward with their decisions.
Calderon's choice—or failure to make one—surprised quite a few. Instead of keeping the old Mexican tradition of vertical orders, he started a contest for the refinery. States who felt they could manage the facility were to send proposals and studies to Pemex (the state oil company), and technicians in the company would then decide for the president. After months of bitter debate in the media between governors and pundits, oil experts announced the winner, or rather a winner and a half, on April 14. The state of