Mexico proposes reform to the energy sector
The government’s plan to reform Mexico’s energy sector could open up the industry to the private sector by allowing international oil companies (IOCs) to participate in upstream oil-and-gas contracts, although importantly it stops short of permitting production-sharing contracts.
According to BP’s 2013 “Statistical Review of World Energy”, production of crude oil in Mexico peaked at 3.83m barrels per day (bpd) in 2004 before sliding to last year’s average of 2.91m bpd. The downward trajectory has been in large part due to a steady decline in output from Cantarell field, a shallow offshore field in the Gulf of Mexico operated by state-owned Petróleos Mexicanos (Pemex), where production has fallen nearly 80% from its 2004 peak to 388,000 bpd.
As easy-to-extract oil and gas deposits are exhausted, Mexico’s unconventional deepwater and shale resources will play an increasingly important role in the sector. However, Pemex lacks the technical skills and capital to tap into these reserves, in part due to budgetary constraints. While the state-owned oil company’s revenues hit a record $126.6bn in 2012, the government allocated $1.1bn less than the $26.5bn Pemex had requested for its 2013 capital expenditures budget. Part of the oil company’s difficulties stem from the fact that it accounts for about a third of the government’s revenues.
Allowing IOCs into the market would provide additional capital and shore up technical expertise. However, the constitutional reform proposed by President Enrique Peña Nieto in mid-August was disappointing to many foreign players, in large part because it is limited to profit-sharing agreements with the state, rather than production-sharing contracts. Moreover, there is a lack of clarity – as is the case with the president’s broader programme of reform, many important details have been left to the drafting of the secondary laws, which will be carried out by parliament.
History suggests that it could be difficult to bring meaningful changes to the industry. Attempts by previous administrations to reform the oil business and boost participation by the private sector have traditionally been met with little success. The process is highly politicised, as state ownership of oil is a source of national pride and a symbol of Mexican independence. Private companies have been barred from holding ownership rights to oil and gas deposits since 1938, when then-President Lázaro Cárdenas nationalised the industry, an event that is still celebrated today.
While much attention has focused on reform to exploration and production, changes have been proposed to downstream segments, including refining and petrochemicals. The government also seeks to allow for private firms to participate in the electricity market through power generation, although control of the national grid would remain in the hands of the Federal Electricity Commission (Comisión Federal de Electricidad, CFE). Again, the magnitude of these changes to their respective industries will only be clear upon the approval of secondary legislation.
To build up public support for the reform, Nieto invoked Cardenas’s words in his August national address, noting that the former president had confirmed that Article 27 of the Mexican constitution – which guarantees Pemex’s privileged position – “does not prohibit the possibility of allowing for private sector collaboration within the sector.” He also clarified that neither Pemex nor the CFE would be privatised, while instead suggesting that they would be strengthened by the reform.
Successful models for blending state capitalism with private sector participation can be found in Colombia’s oil and gas industry, such as with Ecopetrol, and Mexico’s latest reform measure could indeed spark a revival of the sector. However, in trying to satisfy both the private sector by allowing for its participation via profit-sharing and the public at large by not granting production-sharing oil concessions, the administration runs the risk of pleasing neither.