Politics, Business & Culture in the Americas

The Outlook for Pemex Reform

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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.Oil companies are hoping that it will include the opportunity to obtain licenses securing their access to oil resources and allowing for more operational flexibility than production-sharing contracts.

However, opposition leaders in Congress will push their power as far as possible to try and block this measure. Investors will also look to see how unconventional resources such as shale and deep-water exploration are addressed, and what types of regulations are set up to keep corruption in check.

Throughout the entire process, a significant popular movement could derail parts of the legislation. Partido de la Revolución Democrática (Party of the Democratic Revolution—PRD) leaders who abandoned the Pacto Por México (Pact for Mexico) over this issue insist on the importance of public consent for reform.

And according to a July 2013 survey by the Centro de Estudios Sociales y de Opinión Pública (Center for Social Studies and Public OpinionCESOP), 54 percent of Mexicans oppose private investment in Pemex. Given the deep importance of Mexican oil for Mexico’s national identity, legislators will have to balance the wishes of the Mexican public with Pemex’s economic realities.

Both Pemex itself and Mexico’s broader economy stand to benefit from energy sector reform. The Instituto Mexicano para la Competividad (Mexican Institute for Competitiveness) projects that an effective reform could maximize oil revenues, create energy security and boost the country’s industrial and technological development. Standard and Poor’s predicts that the reform could boost economic growth by 1.54 percent.

Getting the bill passed will require political maneuvering and bargaining—and benefits are far from guaranteed—but significant legislation would mean an optimistic future for Mexico’s energy sector.

Tags: Mexico, Mexico energy reform, Pemex
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