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: Lightbulb Series 1 – 04 by Thomas IceSabre
A new energy reform proposal suggested by the President of Mexico could open up the market to foreign investment, if approved. President Nieto has presented a new bill which involves the restructuring of Pemex and proposes the end of the company’s monopoly. This state owned Oil Company has controlled the energy market in Mexico for almost seventy five years. However, it will require dramatic change to the constitution and significant restructure of the inefficient and controversy ridden Pemex.
Pemex has been firmly in their own comfort zone for many years will access to oil fields which were easy to tap. However, these oil fields are now drying up and the company lacks the technology, skills and equipment for exploration of deep water reserves or exploiting shale gas. Pemex’s output has been steadily decreasing over the last decade with production estimated at less than 75 percent of previous figures.
The company has struggled to run effectively and has been forced to use capital to pay annual tax burdens rather than investing in new technology, training or equipment. Unless new methods of production can be brought online quickly, Mexico may find herself in the position of becoming a net energy importer.
Foreign investment seems to be the key to resolving this issue, but it is a very risky political move. Mexico’s oil industry was nationalized in 1938 and many feel foreign investment may compromise Mexico’s independence. The new proposal has not suggested direct investment in the oil fields, but proposes private companies be permitted to bid for Pemex profit-sharing contracts. This approach could allow foreign investment into refining, transportation and petrochemical production, allowing them to work with Pemex rather than in competition.
Many believe this new proposal will allow the private sector to contribute to the energy sector and allow price reductions. This could further boost Mexico’s economy without releasing full control of her assets. Major foreign producers including Repsol, Chevron and Exxon have already expressed an interest in participating in this scheme.
The energy reform proposal needs congressional approval but it would represent a significant change in Mexican attitudes. Many experts believe that Pemex is struggling with outdated technologies and management issues which are severely limiting their potential. Investment capital from foreign companies could provide the opportunity for dramatic improvement which would be of great benefit to the Mexican economy.
This proposal represents a large political gamble for President Peña Nieto. He will require the support of both his party and the National Action Party in order to facilitate the plan going through Congress. Peña Nieto also wants the left wing to come. It would then need approval in at least seventeen of the thirty two state legislatures of the country. There is already significant opposition from two political parties and may struggle to convince the general population.
The Mexican people take a great pride in their nationalized energy industry and many will be against private investment especially from foreign companies. Peña Nieto has assured the people repeatedly that his plan does not involve privatizing the industry but will merely allow private companies to share a percentage of the oil discoveries. With the third biggest proven reserves in Latin America, this represents a significant investment opportunity.
Many experts believe that Pemex or Petróleos Mexicanos the state owned oil monopoly is the jewel of Mexico. For years it has funnelled billions into state treasury funds for schools, highways, ports and hospitals. Yet, even with Pemex being credited for building the Mexican nation, officials have acknowledged that the inefficient company is in financial trouble. Officials have been quoted as saying that if the company is not opened up to foreign and private investment Mexico will find itself a net energy importer within the next ten years. This is quite a shocking revelation given that Mexico is currently in the top ten of the world’s largest oil producers.
As Mexico’s new president begins to establish his administration, he is looking set to create plans which will overhaul Pemex and meet with great political opposition. The reason behind this is that many Mexicans believe that the removal of foreign oil companies in the 1930’s allowed Mexico a sense of true independence. Some believe that allowing foreign investment back into the Mexican oil sector will allow greater powers access with their troops.
Experts are anticipating landmark legislation for energy reform, which should include proposals and policies addressing Pemex. Industry experts and government officials believe that advancements in technical expertise which will come from outside investment and companies is the only way to retrieve reserves of gas and oil from shale rock and deep water formations. These sources are estimated to contain over half of Mexico’s reserves totaling over seven billion barrels.
However, Pemex is currently not allowed to choose their associations which would reduce risk levels of deep water exploration. Pemex executives believe that the company needs flexibility and budget autonomy to be able to form joint ventures. This would require significant changes to the constitution and will be a politically sensitive battle for the government to instigate. Even mention of parties agreeing to reform by President Peña Nieto sparked fierce debate and argument about Mexico’s ability to remain independent from foreign interference.
However, even opponents of reform cannot deny the legendary problems associated with Pemex. The company’s past history of poor management decisions, corruption, huge union demands and inefficient corporate structure, it provides a business model of how an oil company should not be run.
According to a study from 2011, Pemex revenues per employee is a fraction of the oil giant BP and approximately half of the part state owned Oil Company from Brazil Petrobras. Even Pemex executives acknowledge that Mexico is decades behind industry standards regarding deep water exploration. They haven’t had the pressure to pursue riskier searches since there was an abundance of inland and shallow water oil. This meant that the engineers have not kept up with the technological advancements which are commonplace with competitors.
Mexico has a wide array of sources of energy which is almost as diverse as the United States. However exploiting them is too overwhelming for one single company. There is much speculation as to how the Mexican constitution could be amended to allow production sharing agreements, or if secondary laws will allow other opportunities of cooperation, or whether taxation will be reduced to allow investment and make Pemex more efficient, but until the discussion is not focused on solving the problems of Pemex, the obstacles are too great.
Photo credit: Walmart de Mexico renewable wind energy by Walmart
Today, Mexican President Enrique Peña Nieto officially presented its proposal to reform energy sector (oil and electricity). Here is a quick preview of the hard debate to come:
- Constitutional reform will allow production sharing agreement with private companies.
- There will be a new tax regime of PEMEX. Currently PEMEX is taxed with 70% over profits.
- PEMEX will be compacted. It will go from 5 bodies to 2 Exploration and Production; and Industrial Transformation.
- There will be more transparency in PEMEX management.
- “National Content” rules will apply for suppliers and infrastructure constructors. Should Mexican subsidiaries from Foreign Companies are included? Are there caps?
- Private companies can generate electricity under better business structures. Currently, generation is allowed but has limitations.
- State shall keep exclusivity over the National Electric System (Grid) for transmission and distribution, and for guaranteeing access to producers.
- Comisión Federal de la Electricidad (CFE) gets more operational flexibility.
- Energy Regulator (CRE) gets more authority on planning and directing energy sector.
- Reform promotes clean energies.
Peña Nieto appears to have enough support to pass this reform on Congress. Let´s follow this Bill.
Photo credit: Chinese Money by Steve Parker
Mexican President Enrique Peña Nieto visited China in April with an eye on a more balanced trade relationship, and Chinese President Xi Jinping visited Mexico earlier in June of this year with the same objective in mind; increasing commercial and cultural ties between the two nations.
As it stands at the moment, Mexico exports about $5.7 billion in goods including copper, minerals, oils, cotton, and car parts to China, but Mexico imports $57 billion worth of goods from China. These goods include plastics, toys, furniture, and electronics.
Before Xi’s arrival in Mexico City, Mexican Foreign Minister Jose Antonio Meade stated: “With China, the second-most important economy in the world, Mexico has a relationship that is far from the importance it should have. Mexico’s presence in China is well below its potential, as is China’s in Mexico.”
Peña Nieto is focused on making economic prosperity the “cornerstone” of his presidency, and he believes improved ties with China are of upmost importance. During his trip to China, he made an agreement to send China 30,000 barrels of oil a day, an amount he hopes will increase. President Xi also mentioned the possibility of a free trade agreement between the two nations.
It appears as though oil will present one of the largest opportunities for Chinese companies in Mexico: if legislation passes allowing foreign investment in the country’s oil sector, China could very well be the nation that could modernize the aging, outdated infrastructure and provide the know-how needed for deep water oil exploration. China would benefit greatly: China is an energy hungry nation and it needs to secure energy resources from as many sources as possible.
However, oil is not the only sector where opportunities exist for Chinese companies. During his visit to China, the Mexican president spoke of the expertise the Chinese have in the field of national infrastructure and how Mexico could benefit greatly from Chinese companies investing in and building much needed public transportation infrastructure. The telecommunications industry is also opening up to foreign investment; Chinese investment could be crucial in the Mexican drive to provide affordable, high quality telecommunications to all of its citizens.
Furthermore, during Xi’s visit, the Chinese were seeking to sign over a dozen agreements in trade, tourism, energy, science, and technology; these agreements weren’t signed, but interestingly, deals were made on commercial defence, access for Mexican tequila, and for Mexican pork to the Chinese market.
Rafael Valdez Mingramm, who promotes trade with Asia in general and China in particular, is an entrepreneur in Mexico and author of a book detailing the last four decades of Mexico-China relations and ties. He wrote: “China must be perceived, not as a threat, but as a great opportunity for Mexico and Latin America.”