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Mexico’s Energy Reform: Lessons from Colombia and Brazil

In the early 2000s, Colombia’s oil industry was weakening. There had been a decrease in new discoveries, followed by a decline in production from a peak of 800,000 barrels per day (b/d) in 1999 to nearly 550,000 b/d in 2004. Exploration and production had moved to increasingly remote areas with higher security risks and risky geology, requiring more capital and technology. As such, the Colombian government remained dependent on Ecopetrol, the state oil company, which represented the entirety of the Colombian oil industry.

Today, Mexico’s oil industry stands in a similar state of decline, as described by a recently released Americas Society/Council of the Americas white paper, “Mexico: An Opening for Energy Reform.” Oil production in Mexico as a whole has fallen from 3.8 million b/d in 2004 to 2.5 million b/d in 2013. Production of the Cantarell oil field, the most lucrative of Mexico’s shallow water reserves, peaked in 2003 at 2.1 million b/d, and is now producing less than one quarter of that.

Just as in Colombia, the problem in Mexico does not lie in a lack of resources, but rather in a lack of capital and technology. Mexico in particular maintains extensive shale deposits that remain largely untapped. The roots that bind Petróleos Mexicanos, or Pemex, and the Mexican government run even deeper than those that once bound Ecopetrol and the Colombian government. Mexico’s state oil enterprise pays for approximately 40 percent of the country’s budget—and since the government acts as both a regulator and an owner, transparency and accountability suffer.

Eleven years ago, Colombian President Álvaro Uribe initiated a process of liberalization and privatization within the oil industry. In 2003, the Colombian government incorporated Ecopetrol as a public company, and by 2006, Uribe’s government created a mixed-system public company, offering 20 percent of the stock to the public. The Colombian reforms were modeled in part after a set of reforms begun in Brazil during the late 1990s to liberalize the state-run oil company Petrobras. The Brazilian reforms opened up the energy sector to private capital while the state maintained control of at least 50 percent of the company’s stock.

Mexican President Enrique Peña Nieto’s energy reform proposals today can be compared to Colombia and Brazil’s. Mexico’s energy reforms could not only help restore Mexico’s energy industry, but improve the country’s competitiveness.

The secondary legislation to implement the reforms, approved by Mexico’s lower house on Saturday, includes modifications to thirteen existing laws and the establishment of eight new laws. The laws govern the process by which the energy industry will be opened to private participation. This will occur in three main ways: profit-sharing agreements, production-sharing agreements, and licenses. While the industry will be opened to private participation, the hydrocarbons in the subsoil will remain the property of the Mexican state.

The liberalization of Pemex, and the secondary legislation that will regulate it, has the potential to open immense new investment opportunities for foreign companies. However, the success of this venture is in part dependent on increased transparency and accountability within the Mexican oil industry. The governments of Colombia and Brazil recognized the necessity of such transparency—and by liberalizing their energy industries, they were able to prioritize corporate governance.  

Mexico’s energy reforms seek to improve regulation. According to the secondary legislation, the Ministry of Finance will no longer control Pemex’s budget, and the board will be reduced to ten members, with the oil workers’ union losing its five seats. This shift away from governmental influence will allow Pemex to set its own agenda and budget, while beginning to develop a more accountable and transparent regulatory framework. 

The success of the Mexican energy reforms promises to transform the country into a destination for energy investment, just as liberalization has done in Colombia and Brazil. However, the development of a regulatory framework conducive to fulfilling Mexico’s potential will remain a challenging hurdle that must be prudently navigated.

*Christian Gómez, Jr. is a contributing blogger to AQ Online. He is director of energy at the Council of the Americas. Follow him on Twitter at @cgomezenergy.

*Sophia Sciabica is a contributing blogger to AQ Online and is a policy intern at Americas Society/Council of the Americas in Washington DC.

Any opinions expressed in this piece do not necessarily reflect those of Americas Quarterly or its publishers.
Tags: Mexican Energy Reform, Colombia, Brazil

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