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Guest Post: Energy Reform in Mexico

by Michael Levi
July 12, 2012

Mexico’s recent elections made headlines around the world. In this guest post, my colleague Shannon O’Neil examines Mexico’s President-elect Enrique Peña Nieto’s promises to reform the oil industry, and the likelihood that Peña Nieto will be able to accomplish what his predecessor could not. Check out her blog, Latin America’s Moment, to read more about Mexico’s recent elections or its energy sector.

Though legal battles are sure to continue, Mexico has chosen its next president. Enrique Peña Nieto will take office on December 1, and his party, the Institutional Revolutionary Party, or PRI, will dominate both houses of Congress.

Domestic and international audiences are now looking to the next government to pass the structural reforms needed for Mexico to become more productive, more competitive, and grow faster. This starts with the state-owned energy sector. Enshrined in Mexico’s Constitution, oil reserves are property of the state, and managed by Petróleos Mexicanos, or PEMEX, which retains full, control over exploration, processing, and sales. A modest 2008 energy reform pushed on the margins of this arrangement, allowing Pemex to offer incentive-based service contracts to private firms. These new rules so far have disappointed, with few foreign oil companies substantially upping their foreign direct investment or bringing in the technological know-how needed to unlock potential reserves and boost long term production.

Though notoriously a political third rail in Mexico, during the campaign Peña Nieto promised to open up the sector to private investment, à la Brazil’s Petrobras. In a 2011 interview with Financial Times he claimed that Pemex “can achieve more, grow more and do more through alliances with the private sector.” He reaffirmed this position just this week when talking with the press—saying he was convinced that the PRI could reach an agreement on energy through “much negotiation ” between his party and the opposition.

Can Enrique Peña Nieto open up the energy sector? Possibly. One consideration is the PRI’s legislative heft. The party gained a plurality, but not majority, in both houses of Congress. Many commentators see this is worrisome for an ambitious reform agenda, predicting a weaker president, and continued gridlock . But energy reform was always going to require a coalition to create the necessary two-thirds constitutional majority. The lack of a majority may make the PRI more willing to come to the bargaining table (and more willing to negotiate in other areas, such as political reform). If they come, they may find a willing partner in the outgoing National Action Party, the PAN.

The PRI also has the advantage of counting on the PEMEX union as a political ally rather than an opponent. In fact, the union’s leader, Carlos Romero Deschamps, was just elected to the Senate on the PRI’s proportional representation list, as was the union’s treasurer, Ricardo Aldana. Their presence, rather than stymieing negotiations, may help smooth the process, enabling a Nixon in China moment for Mexico.

Another pressure for reform is the reality of Mexican oil exploration and production. Mexico has huge potential, but increasingly recognized limits on PEMEX’s ability to realize these riches. Since 2004 oil output has dropped by roughly a quarter (stabilizing in 2010). Under the status quo many expect further declines, which are worrisome not just for the economy; oil revenues account for a third of the government’s budget. Even if production remains stable Mexico will likely become a net oil importer during Peña Nieto’s tenure. For a party that aspires to remain in power, unleashing additional revenues is vital.

In 2008 Mexico passed a more moderate energy reform (many say that behind the scenes Peña Nieto himself blocked a more comprehensive bill). Though disappointing in terms of its reach, it did put energy reform on the table—bringing politicians from across the spectrum, interest groups, and society at large together to debate, discuss, and successfully revise a once sacred cow of Mexican politics. This precedent created the space for contemplating a comprehensive reform today.

The path to true change will require serious negotiations both within the PRI and with other parties—most likely with the PAN but perhaps also with members of the Party of the Democratic Revolution, or PRD (some of whom voted for the 2008 reform).  In these few days since the election, both the president and his chief of staff, Luis Videgaray, have repeatedly placed energy reform as top of the agenda. Both know the challenges ahead. But, as the president elect says, “I’m optimistic.”

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