Will Mexico be able to reform its energy sector this year?
BY LATIN AMERICA ADVISOR
Nearly 5,000 members of Mexico's PRI, the Institutional Revolutionary Party, voted unanimously at their national convention last month to remove language in the party's platform that for years had opposed injecting private money into the sector, the Associated Press reported. National oil monopoly Petroleos Mexicanos, or Pemex, will remain in state hands however, party officials insisted. What does the platform change say about the chances for meaningful energy reforms passing Mexico's Congress? Does President Enrique Peña Nieto have the right plan for improving the country's energy sector performance?
David Shields, independent energy consultant based in Mexico City: The PRI's overhaul of its statutes will give party lawmakers freedom to make decisions on energy reform and it gives President Enrique Peña Nieto the status of party leader. It may not be entirely auspicious for Mexico's democracy for the president to also be the leader of the ruling party, as it implies concentration of power in one person. However, it may well be vital to energy reform because the decision to get foreign and private investment involved in a more competitive, open Mexican oil industry is very much the president's. The country's political establishment is fickle and fragmented on this issue and it is still not clear just what form reform will take and who will support it. So if Peña Nieto does not put his full weight behind it, the reform may not happen in any meaningful way. Even the PRI may not be united in supporting the changes, but its lawmakers are certainly more likely to back it now that the party's statutes are no longer steeped in nationalistic, protectionist rhetoric. Ahead lies a complex debate on just how best to improve the energy industry's performance, but it seems clear that if the key goal is to increase crude oil production, then Mexico will have to welcome major flows of foreign investment into the industry. Curiously, this opportunity arises at a time when Latin America's other major oil-producing nations are sending less favorable signals to foreign investors, so let's see if Mexico can make changes that will whet investors' appetite.
Ricardo Falcón, senior research analyst for Latin America energy at IHS CERA: The PRI is adding further momentum to Peña Nieto's plans for reforming the fiscal and energy sectors. With the modification of its internal statutes, the ruling party not only shows a knack for pragmatism, but also fully endorses the president's policy agenda. PRI legislators will now be able to vote on initiatives that extend the value-added tax to food and medicines and allow greater private investment in the oil industry. These changes will be critical for the government in the face of rising public spending and lower tax revenues from the continued decline in oil output. Thus, with its platform change, the party sends a positive signal to international markets that it is willing to unlock structural reforms in areas that were previously seen as untouchable. This move is already bearing fruit as confirmed by S&P's recently improved outlook on Mexico's sovereign credit ratings. It also reaffirms Peña Nieto's political capital by strengthening his bargaining position in Congress, where the PRI holds roughly 42 percent of the seats. The likely support of both the Green Party and the pro-market PAN would let the administration push for legal and constitutional amendments that could suffice for a meaningful energy reform package. Still, any such amendments would hardly represent a quick fix or a dramatic improvement to the oil sector's performance. Implementation would take time, and the PRI has made it clear that, by all means, the state will keep control of Mexico's hydrocarbons resources. Although the government may pave the way for more flexible business conditions for private investors, it is yet to define a viable strategy to improve Pemex's investment decision and risk allocation capabilities. The congressional ratification of the National Energy Strategy in late April will be the first real test for the new government's mandate in energy policy.
George W. Grayson, professor of government at the College of William and Mary in Virginia: While playing their cards close to their vests, President Enrique Peña Nieto and Pemex Director Emilio Lozoya have declared that Pemex will be 'modernized'-probably, with the introduction of foreign and or/private capital in deep offshore drilling that the monopoly has neither the technology nor the equipment to perform. Lozoya has held talks with representatives of Brazil's Petrobras and Norway's Statoil, but domestic corporations may be involved when the new approach crystallizes. In the past, the STPRM oil workers' union fought opening the petroleum sector hammer and tongs. While giving lip-service to the shibboleth '¡El petróleo es nuestro!', union chief and PRI senator Carlos Romero Deschamps, 70, will play ball with the government this year. Otherwise, he would not be flaunting his Midas-like riches in a way that sparked the recent jailing of his friend, the teachers' 'moral leader' Elba Esther Gordillo. In mid-2011, the union borrowed $40 million from Pemex supposedly for 'worker housing.' The Facebook page of Romero Deschamps' daughter Paulina, a modestly paid Pemex employee, revealed that she enjoys $722 a bottle wine, sports $12,000 Hermès handbags, and jets around the world with her English bulldogs Keiko, Boli, and Morgancita. Earlier this year, Romero Deschamps gave his son Juan Carlos a $2 million Ferrari to tool around Miami's palm-shaded avenues. Messianic nationalist Andrés Manuel López Obrador (AMLO) poses the most serious challenge to the modernization. He abhors market-oriented policies and is desperate for a cause to launch his 2018 presidential contest. Moreover, he is a past master at mobilizing hot-headed students, rabble-rousing debtors and those who excoriate the running dogs of capitalism. Assuming the necessary legislation is enacted, Peña Nieto will have to deploy the armed forces, the Federal Police and local law-enforcement agencies to prevent the sit-ins, blockades and sabotage that the self-righteous AMLO is certain to unleash.
John D. Padilla, managing director of IPD Latin America: The PRI's vote eliminating the prohibition of private investment in refining, petrochemicals and hydrocarbons transportation is meaningful on a number of fronts. Among other things, the unanimous vote provides momentum for the administration's stated desire to undertake a broad-based energy reform. Although not specifically addressed, it is important to recognize that an energy reform that permits joint ventures between Pemex and other companies in specific upstream projects, including deep-water, did not require changes to the PRI's recently modified basic documents. Energy reform is clearly being pursued via a two-stage approach: restructuring, which is anticipated to be rolled out in early April with the objective of making Pemex competitive; and energy reform, which is expected to be introduced in the fall in an effort to attract foreign capital and know-how. Pemex's restructuring only requires the approval of the company's board. Therefore, explicit negotiations with Congress will not be required, meaning that the political noise will be reduced. Although the administration's strategy appears to be moving in the right direction, the devil will be in the details. It is too early to know what specifically might be included in the proposed energy reform; intentional ambiguity has been the strategy thus far and with good reason given how polemic the topic can easily become in Mexico. But if Pemex's restructuring is announced in ...April as anticipated, we may start to get a glimpse of where the administration is headed with its energy reform proposal.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor