Shannon K. O'Neil

Latin America's Moment

O'Neil analyzes developments in Latin America and U.S. relations in the region.

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Mexico’s Energy Reform: Few solutions, but better conversations

by Shannon K. O'Neil
October 31, 2008

Mexican President Felipe Calderon (L) and his Energy Minister Georgina KesselThe Mexican Congress approved a long-overdue energy reform on Tuesday October 28 following 6 months of debates, referendums in 8 Mexican states and Mexico City, and numerous public demonstrations from both sides. While some newspapers tout the government got 80% of the reforms it asked for, Calderon started with an already limited proposal, rejecting any foreign investment in production, which would have required substantial changes to the 1938 constitutional amendment governing Mexican oil. The shared risk/shared reward bargain present around the world, and with other state-owned oil companies such as PETROBRAS in Brazil and PDVSA in Venezuela, was never on the table in Mexico. Even so, the “20 percent” that the President conceded to the PRI and PRD in Congress was an important part. The final bill , and soon law, prohibits private companies from operating refineries and transporting oil within Mexico. It allows Pemex, Mexico’s state-owned oil company, to contract with other companies for some (but not all) types of desperately needed investment in exploration and production, leaving out in particular difficult deep water explorations. The approved reform also sets up disincentives to contracting with Pemex at a time when capital and credit are limited. It mandates that contracted companies must be paid in cash and forbids paying them based on the amount of oil found, produced, or sold by Pemex, although it does offer bonuses for early completion of projects and transferring technology to the Mexican oil company. While the reform does give Pemex more financial autonomy and greater flexibility – allowing it to keep more of its profits so that it can use them for investment in technology and exploration – the company’s employees currently lack many of the necessary skills to realize these new opportunities. So, in the end, production will continue to decline.

Despite these limitations, the reform process was positive for Mexico’s solidifying democracy at work. Once a political third rail, politicians, interest groups, and society at large discussed and approved an oil reform, through successful negotiation and compromise between the Executive and Legislature, and within Congress. The PRI and the PRD played an important role in toning down the reform, which was then passed by an overwhelming majority in both the Senate and the Chamber of Representatives. The reforms exposed the deepening division within the PRD. While many of their colleagues voted for the reform, other PRD representatives attempted to block debate , forcing the Senate vote to take place at an alternate venue and the Chamber vote to take place at a makeshift podium, away from the flag-waving and horn-blowing occurring in the usual space. Yet these anti-democratic tactics were unable to sway the workings of Congress — a good sign. Democracy worked.

Given the importance of oil revenues for the government — it funds nearly 40% of all public spending — further debates and reforms will happen again — perhaps sooner than later. What this round of reform shows is The that the “sacred cow”? of oil is no longer that. This itself is good for Mexico.

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