Photo credit: When in Mexico, you can’t beat Pemex gas by diaper
Mexico Moment (#MEMO) is being fuelled by structural reforms that promise open markets in telecom, energy, finance and infrastructure. Now all three major political parties, academics and NGOs are publicly discussing their proposals to energy reform, and PEMEX is the centre of the debate. All of them agree that PEMEX needs an overhaul. Thus, we need to talk about PEMEX.
What are the Parties proposing?
President Peña Nieto comes from the PRI (Partido Revolucionario Institucional), which has been the ruling party for most part of Mexico´s modern history. The PRI has declared that will fully Peña Nieto´s bill for a constitutional reform upgrading PEMEX. This proposal pretends to keep PEMEX state-owned, reduce its subsidiaries from 5 to 2, allow production-shared agreements with private companies and reduce its taxes to promote reinvesting.
On the other hand, Partido Acción Nacional (PAN), a centre-right party proposes a constitutional reform, too. In that reform, PEMEX keeps current wells and next ones will be bid, with participation of PEMEX and private companies. This proposal also pretends to open refining, petrochemicals and transport to private companies.
Finally, Partido de la Revolución Democrática (PRD), a centre-left, proposes amendments to secondary legislation only. This proposal pretends to reduce tax burden of PEMEX to allow it become a profitable State-owned company. The taxes paid by PEMEX and the savings would be used for research and development. Technology and services needed for shale and offshore drilling would be contracted with private companies through biddings, as long as PEMEX do not have capacity or technology.
Who owns Lazaro Cárdenas?
On 1938, President Lázaro Cárdenas nationalised the oil industry taking ownership over hydrocarbons. Since then, Cárdenas has been the icon of nationalism and oil independence. Cárdenas, a president from the PRI, is also shared with the PRD, a party that was founded by his son, Cuauhtémoc Cárdenas.
During the debates, both parties have been using Cárdenas legacy to support their own arguments. Cárdenas took decisions based on whole different circumstances and no pressure from globalization of the oil industry, though.
The Odds for Approval
Considering the numbers of the PRI at the House of Representatives (42% of 67% needed) and at the Senate (42% of 67% needed), it would be necessary to get support either from the PAN to secure the Reform, or from the PRD plus other minor Parties. However, it is possible that some congressmen from PAN and PRD vote in favour of PRI´s proposal not following their Parties proposals.
However, if you look closely at the proposed bills for Constitutional Reform and the Hidrocarbons Tax Law, you will find that PRI met both PAN and PRD in the middle, but still, devil is on the details.
Photo credit: Sticker shock by Bev Sykes
While Mexico’s economy has been growing steadily since the implementation of NAFTA and various other free trade agreements with dozens of other countries, the general perception has been that the country’s main trading partners and investors have been the United States and Japan. However, Mexico’s partnership with manufacturing and economic powerhouse China has been gaining steam over the past few years and is showing positive signs of continued and expanding growth.
Mexican President Enrique Peña Nieto, on the evening before his visit to China, in a written interview with Xinhua, China’s top news service, spoke of his pledge to increase ties with China in a way that both countries can enjoy a win-win situation. China should and can be a “strategic partner” to the Latin American country, he said. Remarkable opportunities exist in many sectors, including infrastructure and trade.
“Mexico can be a gateway for China to enter North America, the world’s richest market. It can so be a point of access to several countries in Central America and the Caribbean.” said Peña Nieto. This could very well be of high interest to Chinese companies such as Huawei and ZTE, two telecoms companies who have been effectively shut out of the American telecom market, a market Chinese telecoms have been wanting to crack for quite a long time. While their products may still not get into the U.S. market, both ZTE and Huawei could become involved in the potentially lucrative Mexican telecom sector, where reforms have recently been passed to allow foreign investment.
President Peña Nieto continued, stressing the things that Chinese and Mexican people have in common such as an ancient culture and economic exchanges. After mentioning the above points of what Mexico can offer China, he spoke of what China can offer Mexico in return.
“For Mexico, China represents an opportunity to increase its productive investment, and multiply and diversify its export capacity. China’s economic dynamism, the size of its market and its high demand for goods, turn China into an attractive market for Mexico.” he said.
In order for an economic partnership to be long-lasting and beneficial for both sides, the Mexican head of state mentioned that friendship and cultural understanding are key. The expansion of China’s Confucius Institute in the Spanish-speaking country would be a very effective way for Mexicans to learn about China’s traditions and learn Mandarin, while Mexico can increase the awareness of Mexican culture in China by the means of Spanish-language courses and showing Chinese people “the opportunities that Mexico can offer them”.
Most importantly however, the Mexican president stated how an economic partnership would be beneficial to both countries in the energy and infrastructure industries. China is a country that imports much of its energy, and Mexico has massive reserves of oil and gas; the country’s oil industry needs an overall upgrade, which Chinese companies could very well provide if reforms to Mexico’s energy sector go through.
Furthermore, the president mentioned that when it comes to trains: “China is, without doubt, an excellent model on the issue” he said. “We have much to learn from its successful history in railway infrastructure.”
The Communications and Transport Ministry of Mexico has recently implemented a five-year plan to build new railways; an expanding trade relationship could mean that Chinese companies may be consulted or involved.
A quick response by the U.S. government could mean American companies could access Mexico’s vast hydrocarbon resources, which look like they could be opening up thanks to reform proposals from Mexico’s governing Institutional Revolutionary Party (PRI).
Mexico, according to an article from the smartplanet.com website and other sources, owns “a gold mine of oil”; however, country’s state-owned hydrocarbon monopoly Petróleos Mexicanos (PEMEX) has a heavy tax burden, and doesn’t have the infrastructure or technology needed to extract it. President Enrique Peña Nieto’s proposed reforms, while keeping PEMEX a state-owned company, would allow foreign investment and limited participation in the oil industry but would still ensure that oil would remain in Mexican hands.
In April of 2012, then Secretary of State Hillary Clinton made an agreement with former president Felipe Calderón allowing joint oil exploration in the Gulf of Mexico, which would give the U.S. access to Mexico’s well-known oil riches. Interestingly, while the deal was approved with lightning speed in the Mexican Senate (where opposition to privatization is quite strong), the current Obama administration in the United States has delayed finalizing the off-shore drilling deal. According to Republican lawmakers and industry experts, a quick response is essential and foot-dragging could have disastrous consequences for Americans interested in accessing Mexican oil.
The reason why consequences could be disastrous according to industry experts is that Mexico could very easily change its mind and call off the deal: public opinion on any foreign investment in the country’s hydrocarbons sector generally tends to be negative and politicians could very well submit to the will of the populace.
Rep. Jeff Duncan (R-S.C.) spoke to The Hill recently after a House Foreign Relations committee hearing. Speaking about energy deals with Mexico, he said: “It’s time for the administration to act. All they have to do is send the enacting legislation over here and let us act on it, because we’re sitting on ‘go.’”
If action by the U.S. government is not prompt, as mentioned above, Mexico may cancel the deal. Mexico, for decades, has been totally closed to foreign investments and the Transboundary Hydrocarbons Agreement, which was negotiated by Clinton and Calderón last April, offers U.S. investors a foot in the door. According to experts, if action isn’t taken by June or July of this year, Americans could very well lose the opportunity to invest in Mexico’s oil industry forever if the proposed PEMEX reforms do not go through.
One of the reasons that my hinder a prompt response from the United States government is that the administration is deciding whether to consider the agreement as a treaty, which would require the approval of the Senate, or as a simple agreement, which would only need a courtesy approval in Congress.
In Mexico, policy makers and industry experts understand that the election which took place last year in the U.S. is partially responsible for the delay; however, they are hoping for a speedy resolution and are said to be growing impatient. Duncan Wood, who is an energy reform advisor to the Mexican government and director of the Mexico Institute summed up the issue by saying the finalization of the deal “will be seen as a very positive step forward and will encourage the process of energy reform in Mexico. Any further delay is risky. It will send exactly the wrong message. Those people who are opposed to opening the sector in Mexico would be able to look at this and to say, ‘see, the United States all they want is access to our oil – it’s not about what’s good for Mexico.’ ”
Photo credit: Oil Pump Jack by Paul Lowry
Mexico could very well see an oil boom in the very near future; the country has posted oil gains for the second year in a row and the current government is seriously proposing reforms in its exclusively state-owned hydrocarbons industry.
Mexican President Enrique Peña Nieto, who recently celebrated the 75th anniversary of the state-owned Petróleos Mexicanos (PEMEX), marked the occasion by announcing that the country’s oil reserves had increased by 0.4 per cent over the previous year, up to 13.86 billion barrels. Last year’s increase was only 0.1 percent, but the year’s increase was the first year of growth in more than a decade.
Mexico’s hydrocarbons industry was nationalized in 1938, and while output expanded by an average of 6% per year until 1971, a gap between demand and production has been increasingly steadily. Peak production occurred in 2004, and in the following years, production dropped around 25 percent. According to U.S. Energy Department’s Energy Information Administration, the decline was due to natural maturation. The fact that reserves have increased is very good news for PEMEX; because of legal constraints in the country’s constitution, foreign investment has been, until now, not allowed and PEMEX is the body responsible for reversing declines in both the reserves and production.
The increase in reserves is due to the PEMEX discovery of oil in a deep-water field in the Gulf of Mexico; further discoveries were made in the state of Tabasco.
Mexico could be on its way to an oil boom; along with the increase in reserves, the current governing party of Mexico, the Institutional Revolutionary Party (PRI) has been aggressively proposing reforms in its hydrocarbons sector. While it will keep PEMEX as a state-owned company which will continue to enjoy a monopoly, the government will allow foreign investment, participation and limited partnerships if the reforms are approved. The only caveat is that the oil will remain in Mexican hands. While this may not be ideal for many foreign oil companies, it is far more than what has been offered before, which was nothing at all. Several companies will be eager for the chance to access Mexico’s vast oil reserves, even if it means they will only be working in a consulting role to help Mexico modernize its antiquated oil infrastructure.
One deal which got quick approval in the Mexican Senate was the Transboundary Hydrocarbons Agreement; the deal will allow joint oil exploration in the Gulf of Mexico. Experts in the energy sectors of both countries state that if the U.S. acts quickly, American companies will have a head start over other foreign companies in accessing Mexico’s oil. If the deal is not acted upon by the summer of this year, Mexico could likely renege on the deal due to public disapproval, again shutting its energy industry off from much-needed investment.
Mexico has a “gold mine” in oil; reserves are on the rise, but the country needs help with equipment modernization and extraction technology for a true “boom” to occur. Industry reforms could cause foreign capital to pour in; companies that are willing to share information and act in a consulting role rather than ownership role will find that plenty of profitable opportunities will exist.
Mexico’s current government is strongly pushing through plans to overhaul the country’s hydrocarbons sector. While there are many protesting the move to allow a certain amount of foreign investment, those involved in the industry feel that Petróleos Mexicanos (PEMEX), the ailing state-owned oil company which enjoys a monopoly, desperately needs investment in order to modernize its outdated infrastructure and extract its untapped reserves of oil and gas.
What must be stated is that while the governing party, the Institutional Revolutionary Party (PRI), is pushing for PEMEX reform, it is still insisting that it will remain a state-owned company and will not be privatized. In a nutshell, this means that if reforms are approved, foreign oil companies will essentially be working for PEMEX, not for themselves. However, this does not necessarily mean doom and gloom for international oil companies. Just to give some hints on the coming events, PEMEX has just signed a memorandum of understanding with Exxon Mobil to start negotiating collaboration for the future.
At the present time, PEMEX could be considered as a “hobbled” company; the nation’s oil industry is suffering. While the country is sitting on massive resources, decades of non-profitable management, a heavy tax burden and a lack of infrastructure reinvestment have taken their toll. Output has declined by a whopping 25 percent in the past 9 years; peak production was reached in 2004 and was recorded to be 3.4 million barrels per day. Industry analysts say that even then, the peak production could and should have been higher.
As the situation stands now, the constitution of the country states that hydrocarbons are the property of the state and only the state has the right to exploit them. Private companies are incredibly limited and can only play the role of service contractors or consultants to PEMEX. The industry is closed to the type of investment it desperately needs to modernize.
The Mexican government emphasizes and warns that if reforms are not made, Mexico, which is currently the top supplier of oil to the United States, will actually need to import oil in less than five years’ time to meet its growing energy demands.
Recently, in the city of Salamanca, Guanajuato, President Enrique Peña Nieto stated in a speech: “The transformation of PEMEX is indispensable to free up Mexico’s great economic potential.”
The reform proposals include the restructuring of PEMEX and would open the industry to foreign investment in the fields of refining, shale gas exploration and petrochemicals. Furthermore, the reforms would allow foreign companies limited participation in deep water projects. However, this does not mean foreign companies could “set up shop”: the hydrocarbons would have to remain in Mexican hands. While a reform timeline has yet to be established, experts say that they will need to be approved and implemented quickly or else the industry could die out.
But what does this mean for investors and foreign oil companies? Profitable opportunities will certainly exist, but they will be in the consulting arena. If the reforms go through, PEMEX will most likely be in a mad dash to find companies with expertise in infrastructure modernization, shale oil and gas exploration, and deep-water projects.