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Mexico: A Light Energy Reform?

Although too light for many foreign oil companies, the proposed reform of Pemex is a smart effort by President Felipe Calderon at this point.


The speculation is over. With a thirteen minute address to the nation last Tuesday, April 8th Mexico's President Felipe Calderon announced, and in turn submitted to Congress, a detailed five point energy reform plan. It is now, to borrow from Churchill, officially the "end of the beginning." And, as to be expected, the dissection is well under way with the punditry weighing in quite vociferously from Mexico City to Houston to New York to London and many arguing that the package lacks vision and is too "light" to affect the changes that PEMEX (and Mexico) truly need. Yet, is it accurate and useful to continue using the qualifier "light" as the debate unfolds? Moreover, is the proposal really a vision-less effort that will have no impact on the current energy woes facing Mexico? 


Not surprising given the several hundred page package itself, there is no short answer to these or the myriad questions surrounding the debate. Indeed, President Calderon's proposal seems to be a classic piece of legislation in that it offers a little something to everybody. For the fervent nationalists, Calderon repeated many times PEMEX will not be privatized. For the business community and private investors he suggested the possibility of building and operating refineries on behalf of PEMEX and investing in downstream transportation infrastructure. For PEMEX management, the proposal appears to respond to the cries for an opening toward greater financial and strategic autonomy. Lastly, and perhaps most importantly from a public affairs vantage, through a creative concept called "Citizens Bonds," the proposal offers all Mexicans the ability to truly own a piece of PEMEX and gain economically from a successful PEMEX. 

Mexico's oil woes are a well documented tale: production is in decline and, equally alarming, reserve replacement is well off, particularly in comparison with international oil companies. Meanwhile, these oil business issues occur against the larger backdrop of the government's reliance on PEMEX for almost 40 percent of the Federal budget. Thus the increasing emphasis at PEMEX to reverse the drastic decline of the massive Cantarell oil field is more than just a business issue, it is fiscal balance matter.  And it is within these confines that President Calderon has introduced the reform proposal. 


The most pertinent portion of President Calderon's reform package focused on the need to create a more modern, agile PEMEX.  The aim is enhanced and increased autonomy through a major re-write of the Organic Law governing the company, including a revamped Board of Directors that would count four highly experienced independent members. This is a particularly welcome idea as to date the PEMEX board has seemed unable to comprehend PEMEX's needs and requirements as one of the world's largest oil companies - and what it takes to maintain that status. Instead, to be blunt, their focus was to ensure PEMEX remained the golden goose: provider of cash to the government and jobs to the PEMEX union.

Meanwhile the proposed modifications and "opening" of the downstream sector seems to have important upsides, not the least of which is addressing PEMEX's - and Mexico's - fuel imbalance.  Unclear, however, is how enthusiastic the private sector would be in investing in Mexican refineries.


One of the more surprising and interesting elements of the measures before Congress is the intention to create a mechanism for Mexicans to invest in PEMEX.  The so-called "Citizens Bonds" is a clever form to encourage popular capitalism and allow the Mexican populace to have an increasing sense of ownership over their cherished national oil company. The cry since 1938 has been that "oil belongs to the people." It is one thing to say that as President Calderon repeatedly has, yet it is another case altogether when the people directly own a piece of the national oil company and stand to benefit financially if the company does well. Call it a new paradigm, Pocketbook Nationalism. 

Perhaps the most intensely scrutinized element of the current proposal is with regards to PEMEX service contracts, with revisions to allow PEMEX to offer incentives for efficiencies (lower costs). The dissection of this part of the proposal is not without reason as the previous efforts by PEMEX at multiple service contracts for natural gas were underwhelming. Indeed, it is this part of the reform proposal that apparently comes up shortest in the eyes of the industry - see "reform light." Many industry observers were disappointed that there was not a stronger signal from Mexico to entice interest in what has been described as one of the greatest prizes in the oil industry.  PEMEX chief Jesus Reyes Heroles seemed to be hedging his bet on this part of the reform package when, in response to who would be interested in these contracts he said "Maybe not Exxon Mobil, but other companies."  

On the other hand, local industrial groups seem content with what has been proposed, perhaps aware of the historic role of PEMEX as a tool for domestic industrial development. Not surprisingly, the left is fervently opposed to these reforms and continue to twist this very aspect into their prior and ongoing campaign to fight any effort toward the "privatization of PEMEX." 


Mexico's energy reform does not have to please everyone but it also cannot ignore the risks of the status quo. By focusing first on improving PEMEX's fiscal state and operating efficiency, revitalizing the Mexican Petroleum Institute and defining a long term energy strategy, the reform could achieve more than many critics expect and move past the status quo. As PEMEX grows more confident in its own capabilities, it may also become less difficult for the Mexican population to accept their national oil company partnering with foreign companies which would be eager to share their expertise in order to access Mexican oil. There is simply no reason why PEMEX cannot be as successful as other national oil companies such as Petrobras, Statoil or Petronas. Central to this change is the need to develop a long term vision for Mexico's energy sector, one which would not emphasize the rentier nature of oil, but instead focus on Mexico's long term development goals. The modernization of PEMEX and Mexico's oil industry vis a vis Mexican development has always demanded an incremental approach.

Reaching consensus on energy reform is a Sisyphean task, but most agree that the key to any reform is to provide a more certain future for PEMEX. The disagreement has always been on the "How."  This reform package will not completely settle the argument but all in all it should rate a smart effort by Calderon at this point. The old axiom is you need to crawl before you can walk and while PEMEX will not be running marathons anytime soon, they should be able to knock off a few 10K's - at a nimble pace - if the proposed changes are adopted.

Jeremy Martin is director of the energy program at the Institute of the America. Roger Tissot is an independent energy consultant. They wrote this column for the Latin Business Chronicle. 

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